Is a prolonged stay in France during the health crisis likely to jeopardise a tax residence in Monaco?
A recent release from the French tax authorities, specifically the Department of Non-Residents Taxation (Direction des Impôts des Non-Résidents - DINR), deals with the case of persons domiciled outside of France who are prevented (or were prevented) from returning home, and therefore would stay or would have stayed in France in 2020 « for an extended period ». The DINR uses the French 1995 « Larcher » case law to conclude that a temporary stay under confinement in France, or due to travel restrictions decided by the country of residence, is not such as to characterise a tax domicile in France within the meaning of Article 4 B of the French Tax Code (FTC).
Can we be so certain that the same approach would be adopted in all circumstances? An analysis of both the French and Monegasque critera for determining tax residence is necessary.
Not to be confused: An individual's tax residence is independent of his/her civil domicile or ordinary residence, or of his/her nationality.
What are the criteria for tax residence (« tax domicile ») under French law?
The rules for determining the « tax domicile » are set out in France by Article 4 B of the CGI, which considers that are fiscally domiciled in France:
a) Individuals with a home or principal place of residence in France
Home is defined as the place where the taxpayer and his/her family normally live. On the other hand, the principal place of residence criterion relates to a time condition (in principle at least 6 months spent in France during a given tax year). However, the criterion of the principal place of residence is ancillary to that of the home and comes into play only if the taxpayer does not have a home in France or if the existence of such a home cannot be determined.
According to the « Larcher » case law (judgment of the French Conseil d'Etat of 3 November 1995, n°126513), in determining the home, no consideration is given to temporary stays outside of France due to the needs of the profession or exceptional circumstances.
b) Individuals who carry out a non-ancillary professional activity in France, whether this activity be a salaried one or not
c) Individuals whose centre of economic interests is located in France
These criteria a) b) and c) are alternative and not cumulative.
What are the criteria for tax residence under Monaco law?
There is no precise legal definition of tax residence in Monaco, however Sovereign Ordinance No 8.566 of 28 March 1986, regulating the issuance of residence certificates, provides that « any person who, in order to complete any formality, is required to provide a residence certificate shall, in order to apply for its issuance:
a) if he/she is of Monegasque nationality, produce a document establishing his/her identity and residence in the Principality;
b) if he/she has any other nationality:
- establish that he/she is the holder of a valid residence card;
- justify owning a dwelling in Monaco by producing a title deed, a rental lease or an accommodation certificate;
- certify on his/her honour, under the penalties laid down in Article 98 of the Criminal Code, that he/she resides in the Principality for more than six months per year or that he/she has his/her principal centre of activities there;
- submit water, electricity and telephone bills relating to the past year, as well as any other document that may serve as a proof of residence.
Persons who have been settled in the Principality for less than six months can only be provided with a residence certificate on presentation of documents justifying an exemption. »
The residence certificate is the legal materialisation of tax residence in Monaco.
Sovereign Ordinance No 6.208 of 20 December 2016, portant application de la Convention concernant l'assistance administrative mutuelle en matière fiscale, de l'Accord multilatéral entre autorités compétentes concernant l'échange automatique de renseignements relatifs aux comptes financiers et du Protocole de modification de l'accord entre la Communauté Européenne et la Principauté de Monaco prévoyant des mesures équivalentes à celles que porte la Directive 2003/48/CE (related to the Common Reporting Standard), provides a definition of the term individual resident in Monaco, which it defines as the « individuals who have their principal place of residence in the territory of the Principality, or their home, or have the principal centre of their activities there, subject to bilateral tax treaties ».
These texts therefore provide useful indications on the criteria for tax residence in Monaco.
Besides, Monegasque case law considers that the assessment of habitual residence is « a question of pure facts which must be examined in light of a set of precise and concordant indicators » (decision of the Supreme Court, 14 February 2017, e. MA. c/ ETAT DE MONACO).
Conflict of tax residences
There cannot be a conflict of tax residences if one has no significant link (preponderant family ties, place of schooling for children, real estate investments, etc.) with a country other than Monaco.
In the event of a conflict of tax residences, bilateral tax treaties are generally applied, so that the set of treaty criteria resolves the conflict and establishes tax residence in a single country.
However, the tax treaty signed between Monaco and France dated 18 May 1963 does not include general criteria that would settle conflicts of residences, with the exception of the specific case of French nationals residing in Monaco from a particular date.
A stay in France is therefore a complex case to which special attention must be paid.
The concept of tax residency is of paramount importance since it is what conditions the tax regime applicable to the taxpayer.
For instance, if one changes his tax residence in year N and set it in France for year N, this implies that he would be liable for French income tax for year N on his worldwide income.
As regards the French real estate wealth tax (IFI), as a matter of principle, if, on 1 January of year N, one is a French tax resident, then the wealth tax does not only apply to his French real estate assets, but also to those held abroad.
In addition to tax reassessments, there will be late payment penalties and surcharges.