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Overview - Monaco: True Allure

The Principality of Monaco has time and again been accused of facilitating tax avoidance and wrongfully branded as an offshore tax haven. The country's laws, however, do not encourage unlawful evasive activities, and authorities are determent to change that inaccurate image.

By Anas Almasri.

Contrary to widespread belief that Monaco's main economic strength resides in it being a tax haven, the small city-state, home to some 36,000 residents, is not a shelter for tax evasion.

International financial services, global commerce and tourism make up the country's major economic sectors. Its resorts and grand casinos as well as its pleasant climate are what constantly attract tourists. Monaco also benefits from a well developed and niche oriented industrial sector, which is founded on a number of small scale, high value added and nonpolluting industries.

The country is bordered on three sides by its much larger neighbor and economic partner, France and is situated on what is known as the French Riviera, near France's borders with Italy on the Mediterranean Sea. Due to its close proximity to France, the two countries have established full customs integration; through which Monaco is indirectly part of the EU market system, although not a EU member itself. As with non-EU members San Marino and Vatican City, the official Monegasque currency is the Euro.

For almost a decade, Monaco's economy has witnessed a string of impressive growth rates until the financial crisis hit. Even then, it recorded a $6.1 billion GDP in 2009 according to World Bank estimates.

Distinguishing fact from claim.

The country's relaxed personal tax system and advanced banking secrecy is often cited as the basis for claims launched against Monaco for being an offshore tax haven. Monegasque nationals and foreigners residing in the Principality are exempt from local income tax, unless their revenue is earned in France, and fromany type of inheritance tax on state-based assets between husband and wife or children. It is these regulations that have prompted many of the world's high net worth individuals to opt for Monaco as their residence, and hence earned the country its share of criticism from the world community. After all, what government wouldn't be irritated at losing tax revenue from its wealthy in these economic times?

The city-state, however, is not a tax-free zone. The government collects a 19.6 percent VAT on all goods and services sold within its borders, through a common VAT system with France. In fact, the VAT represents almost half of the state's governmental revenue, a large sum for an alleged tax haven. It also levies a 33 percent corporate tax on business profits, unless companies can prove that three quarters of their revenue is derived locally. Such a business tax structure is almost the opposite of what some offshore jurisdictions have in place, namely higher taxes on local activities - if at all allowed - and minimal rates on international revenue streams. Monaco, unlike other rightly dubbed offshore tax havens, does not offer businesses "offshore financial services", nor does it encourage the registration of corporations with the purpose of avoiding their tax liabilities in other countries or regions.

In accordance with the EU Savings Directive, the Principality introduced a withholding tax rate that has been set at 35 percent as of June 2011. That tax is imposed on interest payments going to non-residents of Monaco, who are residents of an EU member state.

Catering to the rich.

The Principality's private banking services traditionally targeted rich Monegasque residents and paid little attention to potential overseas clients. This has drastically changed over the past decade or so. Monaco's role as an international banking center has been cemented over the years through several factors. The country's secure legislative framework, which has its routs in French banking laws, proved to be a highly reassuring element of the stability and security of the financial sector for international clients. Local banks follow the same guidelines and are subject to the same rules as French credit institutions. Additionally, and as a result of numerous agreements between the two countries, the Bank of France undertakes the supervision of Monegasque banks and is the main responsible body for regulatory oversight in the sector.

Another major reason behind Monaco's private banking success story was the absence of withholding tax on interest payments, which led to a rush of wealthy individuals escaping tight domestic tax structures. The country's banks recorded a large number of Italian clients, for example, until 2005 when Monaco joined the EU savings directive.

Building on Monaco's specific features and advantages, many Monegasque financial institutions solely focus on asset management and private banking, especially as the city does not have a stock market. As the needs and requirements of international clients reach a higher level of sophistication over time, Monaco has impressively maintained its strong reputation as a leading global banking center. Roughly 85 percent of the Principality's banking clients are non-residents, while the latest figures value its banking turnover at more than €2 billion with assets under management topping €78 billion.

At a time when governments are scouring the world to collect lost taxes from their citizens residing abroad, banking secrecy is one of the top priorities for many of the world's wealthy.  Monaco ensures confidentiality in banking services under the Monaco Criminal and Company Law, and there are no requirements on reporting of worldwide income or assets to any out-of-state agency. Account secrecy and protection is extremely advanced in the Principality, although French residents are not offered the same level of confidentiality as other nationals.

Setting the record straight.

The Monegasque authorities have taken several initiatives aimed at changing the mistaken view that many around the world hold about their country as an offshore tax haven. By the end of 2009, Monaco was removed from the Organization for Economic Cooperation and Development's (OECD's) grey list of tax havens and added to its famed white list of jurisdictions that have substantially implemented internationally agreed upon tax information exchange standards. It achieved that feat when it signed the 12th tax information exchange agreement, although many critics pointed out that a good number of those agreements were signed with small countries, some of which were tax havens. Monaco now holds similar agreements with around 20 countries including Germany and the US but the omission of Italy among its signatory partners, a country with known links to the Principality, continues to represent an issue for its slate on the European stage.

Monaco recently launched even more efforts in reaction to criticism at the OECD Global Forum Peer Review in September of last year. The summit concluded that Monaco's legislation included elements that might not be in complete conformity with global best practice on prevention of tax evasion. The government subsequently enacted a new draft law this year, which aims to remove bearer shares from the country's registration practices and replace them with registered shares holding specific shareholder identity information. The law will also introduce a new compulsory bookkeeping requirement on trusts and civil companies (non-commercial companies) registered in the country to maintain accounts and accounting records.

The Principality of Monaco is steadily approaching full integration with global standards on investment regulations and tax information exchange. Whether it can continue doing so while safekeeping its sacred banking confidentiality will be instrumental inensuring its continued success as an international banking center.