Monaco's inheritance and donation tax system is widely regarded as very favorable. The main reason for this is that it does not provide for any inheritance and donation tax in the direct line (between ascendants and descendants or between spouses) in the case of property located in the Principality.
However, the definition of direct lineage in inheritance and donations was for a long time narrowly understood by the Monaco legislature. Consequently, in order to be exempt from inheritance or donation tax, it was necessary that the transfer be materially direct between ascendants and descendants or between spouses.
Therefore, the use of a foreign-law trust as a means of transfer of assets prevented the application of this highly advantageous tax model.
After many years of the tax system described above, on July 27, 2022, the National Council adopted Draft Law No. 1049, which changed Monaco's interpretation of the concept of "direct line" in inheritance and donation proceedings.
According to the newly enacted law, the application of the Monaco tax regime allowing exemption from inheritance or donation tax depends solely on the identity of the final beneficiary who acquired the asset.
From a practical point of view, it follows that if the trust is used as a vehicle for the transmission of wealth and the beneficiary is the direct heir of the person who set up the trust, Monaco's tax system will apply.
The new legal regulation applies to foreign law trusts that have not been established or transferred to the Principality of Monaco.
In conclusion, transfer duties will apply to inter vivos or mortis causa donations made to a foreign trust under two conditions:
- These transfers must concern property, rights or proceeds capitalized in Monaco;
- There must be a direct family relationship between the settlor and the beneficiary (i.e. between ascendants and descendants or between spouses).
