French resident in Monaco: are you still taxed in France?

I. The fiction of article 7 and income tax

A. The principle: the French national in Monaco taxed as a French resident

Article 7, paragraph 1, of the France-Monaco tax treaty of 18 May 1963 establishes a fiction of French tax residence. French nationals who transfer their domicile or residence to Monaco, and those who cannot justify five years of habitual residence in Monaco as of 13 October 1962, are subject to income tax in France under the same conditions as if they had their domicile or residence in France. In other words, French nationality stands in the way of benefiting from the absence of Monegasque income tax. This provision, designed to put an end to a form of tax avoidance through settlement a few kilometres from the border, has a very broad scope, since it applies regardless of the geographical origin of the taxpayer before settling in the Principality.

The singularity of this mechanism deserves emphasis. Where international tax treaties ordinarily rest on effective residence and allocate the right to tax between States according to objective criteria, the France-Monaco treaty retains a criterion of nationality to maintain French taxation of individuals. A national of another State settled in Monaco escapes income tax, whereas their French neighbour remains subject to it in France. This difference of treatment, based on nationality alone, is the mark of an exceptional regime that no other treaty relationship of France reproduces.

B. The notion of transport of residence and its limits

The scope of the fiction rests on the notion of transfer, or transport, of residence to Monaco, whose interpretation has fed extensive litigation. The supreme administrative court has held that French nationals born in Monaco and having continuously resided there since their birth do not fall within article 7, paragraph 1, for want of ever having transported their residence from France to the Principality. Habitual residence in Monaco may, in this respect, be established by any means, which opens to the taxpayer an evidentiary debate on the reality and continuity of their settlement.

An old interruption suffices to characterise the transport. Recent case law illustrates the severity of the analysis on this point. A French national who claimed to have resided in Monaco since birth, but who had in fact lived in France with their parents during a few years of early childhood before returning to the Principality, was regarded as having transported their residence to Monaco upon that return. An interruption that was nonetheless old and brief, occurring during childhood, thus sufficed to bring them within the scope of the fiction and to subject them to French income tax. This solution recalls that the boundary between the French national born and always remaining Monegasque, outside the scope, and the one who has, even fleetingly, resided in France, within the scope, may turn on old factual elements that are difficult to reconstruct.

II. Social levies, a distinct logic based on article 4 B

A. The fiction of article 7 does not extend to social levies

A frequent mistake is to believe that liability to income tax in France automatically entails liability to social levies. This is not the case for Monegasque residents of French nationality. The fiction of article 7, paragraph 1, expressly targets income tax alone, and the Conseil d'État has long held that social contributions, such as the general social contribution and the contribution to the repayment of the social debt, are distinct from income tax. The treaty provision, which mentions only the latter, therefore does not, on its own, found liability to social levies.

This dissociation has major practical consequences. A French national settled in Monaco may be liable to income tax in France, by the effect of the treaty fiction, without being subject to social levies, since the latter rest not on the treaty but on domestic law. Everything then depends on the characterisation of the taxpayer's situation under the residence criteria of French law, independently of the treaty fiction specific to income tax.

B. Residence under article 4 B and the centre of economic interests

To determine liability to social levies, one must examine whether the taxpayer must be regarded as tax-resident in France within the meaning of article 4 B of the French General Tax Code (CGI). That article retains several alternative criteria: the home or principal place of stay, the exercise in France of a professional activity on a non-ancillary basis, and the centre of economic interests. The Conseil d'État has clarified, by an opinion and then by a landmark decision, that the France-Monaco treaty does not prevent French nationals settled in Monaco from being regarded as resident in France within the meaning of that article and, on that basis, subject to social levies. The question is therefore referred to a concrete assessment of the domestic criteria.

The weight of foreign-source income. The criterion of the centre of economic interests is often decisive. Recent case law illustrates how it is assessed: where a French taxpayer resident in Monaco receives, in the years at issue, mainly foreign-source income, she cannot be regarded as having the centre of her economic interests in France. Not being resident in France within the meaning of article 4 B, she then escapes the social levies and obtains the discharge of the contributions assessed against her. Conversely, a taxpayer most of whose income, investments or activity remains connected to France may be regarded as resident there and, accordingly, subject to the levies. The composition and location of wealth and income thus become the central parameter of the analysis.

III. Practical consequences and wealth structuring

A. Articulating income tax, social levies and other taxes

The tax situation of a French national settled in Monaco therefore reads on two registers that must be carefully distinguished. For income tax, the fiction of article 7 in principle maintains taxation in France as if they resided there, save in the narrowly assessed cases where the taxpayer never transported their residence from France. For social levies, liability depends exclusively on residence within the meaning of article 4 B, in particular the centre of economic interests, so that the same taxpayer may be liable to one without being liable to the other. This duality, counter-intuitive, is the key to a correct analysis of the situation.

Moreover, the question must not be reduced to these two levies. Gratuitous transfer duties, in matters of inheritance and gifts, obey specific rules in the France-Monaco relationship, and the real estate wealth tax retains its full application to real property located in France, whatever the taxpayer's residence. Settlement in Monaco cannot therefore be analysed as a general exemption, but as a composite regime, tax by tax, each component of which must be examined separately.

B. Practical recommendations: document residence and locate one's interests

Document the reality and continuity of Monegasque residence. Because the fiction of article 7 rests on the notion of transport of residence, and because habitual residence is proved by any means, it is essential to build a file establishing the reality, continuity and longevity of the settlement in Monaco. For the rare taxpayers able to rely on uninterrupted Monegasque residence since birth, the preservation of the corresponding evidence is decisive, so closely are such situations scrutinised and so much can an old interruption suffice to tip the applicable treatment.

Analyse and, where appropriate, adjust the location of economic interests. Since liability to social levies depends on the centre of economic interests within the meaning of article 4 B, a precise analysis of the composition and source of income, as well as of the location of assets, is required. Depending on the taxpayer's objectives, a reflection on wealth structuring may be relevant, in compliance with the applicable rules and without artifice, so that the declared situation corresponds to economic reality. This analysis must be conducted globally, taking into account all the taxes concerned and not the sole pairing of income tax and social levies.

Anticipate before departure and secure over time. The project of settling in Monaco must be prepared in advance, integrating the fiction of article 7, the treatment of social levies, inheritance duties and the real estate wealth tax, as well as, where appropriate, the exit tax on latent capital gains at the time of departure. We assist taxpayers in this overall analysis and in securing their filing situation, so that settlement in the Principality rests on an accurate reading of the law and not on a mistaken belief in absolute fiscal neutrality.