February 12, 2019

How Monaco plans to stay relevant

It’s amazing that a state like Monaco still exists. In the 19th century, there was a century-long shift towards the unification of smaller states into much bigger entities. Somehow, Monaco, Andorra, Liechtenstein, and Luxembourg did not succumb. The latter part of the 20th century going into the first two decades of the 21st saw countries surrender sovereignty on a piecemeal scale over time in large supranational organisations like the EU and treaties like NAFTA.

The current Brexit debate in the UK has been defined by the fear of many who voted to remain about Britain’s importance in and relevance to the world outside such a supranational organisation. To find out why Monaco survived, we must look at its past and how it has dealt with a sometimes hostile world around it. It’s that learned history and experience that will keep Monaco relevant for decades to come as the country is embarked on an ambitious expansion program to keep itself ahead of not only other microstates but ahead of some of the greatest and most powerful nations in the world.

Jake Hall looks at the past, the present, and the future of this little country that punches above its weight.

International deal-makers

The Principality is not only full of international deal-makers. The government itself is also an international deal-maker of some renown which manages to find a middle ground with countries opposed to its tax haven status while not reducing the competitive advantage its tax and banking system offers the world’s wealthiest inhabitants. It’s been like that for centuries.

The Grimaldi family, rulers of the country for the last 700 years have, by design, built a state with the “institutional stability necessary for the transformation of Monaco into a vital centre of international business and trade,” according to the Consulate General de Monaco in New York. He continues that the tradition lives on through the Principality’s Direction de l’Expansion Economique whose aim is “welcoming and assisting all companies and individuals wishing to do business in the Principality”.,

In 1962, it nearly fell out with France, its much bigger neighbour to the North. Then President of France, General de Gaulle threatened the use of force against the Principality. The height of the physical manifestation of this conflict was a rather strange French-imposed blockade involving six buses that created traffic jams on the coastal route. Tensions lasted for a few years afterwards and those tensions caused a depression in the then-booming Monaco pharmaceutical industry.

The dispute itself was over the “nullity of share sales” under certain conditions and, eventually, the Principality’s government backed down (source: Finance Watch).

Simmering resentment from France to Monaco went on for decades after, primarily over the level of income tax paid by French nationals who resided in the Principality. There has been no income tax on residents since 1870 (source: Investopedia). To be considered a resident, a person must reside in Monaco for one day over six months during the course of the year.

Its ability to control taxation is a core function of its identity. Prince Rainier told France Soir that “Direct taxation would harm the very roots of our sovereignty” (source: “Monaco – The Essential Relocation Guide Paperback”, Zsolt Szemerszky, Andre Perry, Charlotte Easterbrook). That sovereignty is most self-evident through the taxation system because micro-states like Monaco must focus on financial flows.

The Principality is “too small to host manufacturing activities or even significant office space. Companies cannot locate activity there…Taxes on capital gains from individuals and corporations have to be very low in order to attract a critical mass”, writes Fabien Hassan, an environmentally-focused economic analyst as Parisian thinktank 2o Investing Initiative. The stand-off between Monaco and Paris eventually ended when it was agreed that French citizens living in Monaco (no matter for how many days during the year) must pay their income taxes to France.

Despite a degree of international pressure on jurisdictions like Monaco since the Great Recession of 2008-2009 and the occasionally-threatening posturing by politicians around the world, states like Monaco are tolerated and will continue to be tolerated because of the huge inflows of capital they generate for their “host” state. Monaco enjoys a very similar relationship to France that the Channel Islands and the Isle of Man have with the United Kingdom. Although the nature of the financial world has changed in the last few decades with the easier flow of capital across borders, asserts Fabien Hassan, these micro-states still have strategic and financial importance to their defacto protective larger country.

“Whereas the tax haven of Jersey is a historical project of the British elites, Monaco is France’s,” wrote Nicholas Shaxson in the Independent in 2012, not long after the OECD declared “the era of secret banking over.” Monaco, as with other states, came under international pressure about its tax reporting obligations to other nations as a result of the historic collapse in the world economy in the latter part of the first decade of the 21st century.

Monaco has learned well from its history, particularly its dispute with France in the 1960s. It has not been listed on any significant international register of tax havens for a long time now. On May 2009, the country was removed from the OECD’s list of uncooperative tax havens. It did not appears on any of the Council of Europe’s “three lists of problematic fiscal jurisdictions” in December 2017. In fact, the nation has signed 33 tax agreements with countries whose populations total “more than 2 billion people” (source: Gouvernement Princier).

Monaco has made all the adjustment it needs and more to enhance its international reputation and to retain good relationships with countries around the world. But staying relevant is more than just about being compliant – there has to be a direction and a sense of purpose behind the management of a country.

So, what are Monaco’s current strengths and what are its plans for the future?

Monaco – a country on the move

There is an extreme shortage of housing in the country so it has embarked on a $2.3bn project to take back nearly 15 acres from the sea to increase its landmass (source: CNN). Monaco wants to grow its population and its economy and plans are underway to do both.

Nearly one-third of the country’s population are seriously wealthy (source: BBC News). According to Nigel Robertson, CEO of the Azurite Property Bond which invests in the construction and refurbishment of luxury property in Monaco, the population would treble if there was the space. Robertson believes that, following a 180% increase in the value of Monaco property in the last 10 years, the price could rise to €100,000 per square metre or more by 2023 from its current price of €48,600.

According to the Consulate, the country is keen to grow its clean industry, R&D, finance, banking, trade, marine, and shipping sectors as part of H.S.H. Prince Rainier’s “bold leadership” to support “an extremely diverse and prosperous Monégasque economy”.

The banking sector continues to cater for international commerce and high net worth individuals. 8 EU banks have a base in the Principality (including France’s top 5 banks) and the sector employs 2,292 professionals, many involved in complex wealth management operations including single family offices and multi-family offices (source: Oxfam).

Monaco seems very well equipped to handle the international political and financial demands of the digital age and beyond.

The Azurite Property Bond

The Azurite Bond is a property bond offering for sophisticated investors and high-net-worth individuals, providing the opportunity to invest in the residential infrastructure of Monaco.

To learn more about the Azurite investment, our brochure is available upon request.

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