date | theme

23. October 2020 | Liechtenstein – Saving Taxes at ESt & KSt and IP Boxes & Foundations

15. March 2021 | Isle of Man: legal status as crown property and tax law

06. April 2021 | Taxation in the Channel Islands (Jersey Guernsey Alderney)

17. May 2021 | Tax law in Austria: ESt KöSt VAT & real estate income tax

20. December 2021 | San Marino – no sales tax in the oldest republic in the world (this contribution)

Income (in EUR) | Tax Rate

up to 10,000.00 | 9%

10,000.01 – 18,000 | 13%

18,000.01 – 28,000.00 | 17%

28,000.01 – 38,000.00 | 21%

38,000.00 – 50,000.00 | 25%

50,000.01 – 65,000.00 | 28%

65,000.00 – 80,000.00 | 31%

over 80,000.00 | 35%

Assets | Type of economic activity for which depreciation or reserves are possible (annual instalments)

Industrial production | Crafts | Trade | Services | Agricultural enterprises

Buildings | 3% | 3% | 3% | 3%

lightweight structures | 12% | 12% | 12% | 12% | 12% | 12%

Machinery / Industrial plants | 18% | 18% | 15% | 15% | 15%

Operational and business equipment | 15 % | 15 % | 16 % | 15 % | 10 %

electronic office equipment including electronic aids | 20% | 20% | 20% | 20% | 20% | 20% | 20%

Other operating aids | 20% | 20% | 20% | 20% | 20% | 20%

Vehicles | 20% | 20% | 20% | 20% | 20%

intangible assets | 20% | 20% | 20% | 20% | 20%

Many know San Marino as a small country that lies as an enclave in Italy. Few people know that San Marino is the oldest republic in the world. And only a very few know that San Marino boasted for a long time of generating annual budget surpluses, so that it could do without a budget deficit. However, this is already a few years ago. At the same time, San Marino was long considered a tax haven on its own doorstep, especially among wealthy Italians. Because there you could transfer assets undetected to secret bank accounts. After all, San Marino is neither an EU nor EEA member state. In addition, in San Marino sales tax is levied only on the importation of goods. Locally produced goods and services, on the other hand, are available without VAT. Taxation of income is also comparatively cheap. The top tax rate is 35 %. And only 17% of corporate tax is earmarked for companies.

The Repubblica di San Marino is a small country that, like many other small countries in Europe, acted as a tax haven. In particular, Italians lured San Marino as a place of secret banks, where for a long time assets could be safely stored before taxation by the Italian state. This is of course also due to the geographical location of San Marino. So it is enclosed by the Emilia Romagna and the mountains of the Apennines and is located not far from the Adriatic coast.

Notable is San Marino both for its small land area of only 61.2 square kilometers and for the small number of its inhabitants (there are just under 34,000 people living in San Marino). What is even more astonishing is that despite its small size, it has been able to maintain its sovereignty for so long. While, by comparison, the many small royal lands, principalities and cities of the Middle Ages consolidated into ever larger forms of state in the course of German and Italian history (thanks to Napoleon Bonaparte), San Marino has remained independent for almost exactly 720 years. Although there was always a certain dependence on its neighbours, as nowadays on Italy, in the past independence was also used to enact its own laws. And this has also been used for their own advantage in international tax competition.

But more on that later. First, we look at the tax law in San Marino. In the next chapter, we will discuss the most important taxes in detail.

San Marino has an unlimited tax liability for natural persons. It applies to all those who have a registered residence or habitual residence or a vital interest as a center of life in San Marino most of the time within an assessment period. With regard to vital interest as the center of life, San Marino tax law defines the existence of economic, financial, social and family ties and interests. All this sounds quite familiar, because even in Germany these criteria are decisive for the unlimited tax liability of natural persons.

Entities can also be subject to unlimited taxation as legal entities in San Marino. In the case of corporations, more than half of the time their business is either registered in San Marino or the actual management takes place in San Marino.

In San Marino, the principle of world income applies, which we also know in Germany. For this purpose, San Marino taxes all income accruing in the form of capital income, income from the use of land or buildings, earnings from work or pension entitlements arising therefrom, business income and other income.

In addition to this unlimited tax liability, San Marino also has a limited tax liability. It concerns all those natural and legal persons who earn income in San Marino without being subject to unlimited taxation.

In the case of income tax, the tax law in San Marino provides for a differentiation of tax rates according to the amount of income. The lowest level is 9% for income below EUR 10,000 and the highest is 35% for income above EUR 80,000. For this purpose, the following table may give the exact structure:

It is noticeable that there is no basic allowance for low incomes.

Nevertheless, there are other exceptions. Thus, one knows there a withholding tax on dividends, which to a certain point resembles the German capital gains tax. Only the 5% tax rate is much lower in San Marino. On the other hand, the tax rate is only 3% if an unrestricted taxable person receives dividends or similar capital income from abroad. The tax applies to the net amount already taxed abroad, unless there is a double taxation agreement.

A 13% withholding tax also applies when a company pays interest to other companies or individuals as lenders. Excluded are interest on loans from a credit institution resident in San Marino. And if capital gains are related to bonds and similar bonds of the Republic itself, which are subject to a maturity of at least 36 months and actually accrue only after this period, then the tax rate falls even to 10%.

When taxing companies, the dwarf state generally follows internationally widespread patterns. However, he sets his own accents in detail, with which he wants to distinguish himself from other tax regimes, in particular the large neighbouring country Italy. Here too, a distinction is made between taxation on partnerships and on companies with capital. But there are many differences in detail.

Before we subdivide further, however, let us take a brief look at the sometimes quite advantageous possibilities for depreciation of assets. The rules for this are very simple compared to those in Germany. Although a distinction is made in principle according to the type of activity, the depreciation rates are quite uniform. This also applies to possible reserves to the same extent. The following table illustrates this:

2.3.1. Personnel companies

In San Marino, as in many other countries, the rule applies that in partnerships, the shareholders pay the taxes as natural persons as part of their income tax assessment. In the case of sole proprietors, entrepreneurs pay the taxes in the form of income tax anyway.

2.3.3. Corporate income tax

Similarly, corporations pay their income taxes in San Marino as corporate tax. And the fact that distributed dividends lead to a capital gains taxation in the context of income taxation is also familiar to us from Germany and many other tax regimes. However, San Marino only charges 17% of corporate tax. When distributing dividends to its shareholders, the corporation retains 5% as withholding tax (see above).

In addition, there is no trade tax in San Marino, although this applies to most countries in the world and Germany is an exception in this respect. The low corporate tax rate of 17 % is therefore all the more positive.

2.3.4. Taxation of licence fees

License fees are subject to taxation only if they flow to taxpayers abroad. In this case, a 20 % retention is provided for in San Marino.

2.3.5. Incentives for investors

San Marino also provides other incentives for businesses. For example, newly created sole proprietors, partnerships and corporations pay only half of their taxes in the first five years of their existence. However, the prerequisite for this is that it is an actual new establishment. This means that entrepreneurs or the shareholders involved in a newly founded company may not have led a comparable company in the twelve previous months. At the same time, the fee for granting a company license in the year of its establishment (EUR 1,700) and in the three following years (EUR 650) is also waived. In addition, there is a freedom of choice which makes it possible to postpone the date of the first application of the halved tax rate to the third assessment period after the establishment of the company at the latest.

There are some other requirements for corporations that involve hiring a full-time managing director within six months of granting the company license and at least one other employee within 24 months.

Recently, San Marino has also introduced incentives to attract high technology companies. For this purpose, the legislator has defined three categories depending on the time of company formation, which open up different tax advantages. There is no corporate tax in the first three years. In the following four years, the tax rate will be 4%, followed by 8% in the next five years.

These tax advantages are accompanied by easements in the settlement of shareholders, employees and their families. And here too, further tax advantages can attract, this time with regard to personal income tax.

San Marino goes its own way when it comes to sales tax. Basically, there is only one import tax for imports. Thus, a real sales tax according to the nature of our excise duty is missing. Because the identification of a sales tax, as consumers in all EU countries know, is searched for there on bills in vain. The regular rate of this import tax, known as monofiscal duty, is 17 %. However, there are also reduced tax rates. For example, many plant foods and dairy products, articles for agricultural use (equipment, fertilisers, pesticides), medical aids (for example, for the physically disabled) and certain printed matter account for 2%. On the other hand, 6% of taxes are levied on live animals and animal foods and on other plant foods.

Further reductions are available on operating assets. The tax rate is generally only 1%. In the case of operational vehicles, a tax of 7% and 3.5% respectively applies to imported new and used vehicles. Vehicles that were previously registered for at least six months and have a mileage of at least 6,000 km are considered to be used. In addition, some restrictions generally apply to the recognition of an operating vehicle and to the number that a company may own under these tax-advantageous conditions. For example, for cars for both operational and private use, at least five seats are required, with no convertibles allowed. In addition, the displacement of diesel vehicles is limited to a maximum of 3,000 cm2 and 2,000 cm2 for cars with petrol engines.

On services, however, there are generally no excise duties.

First of all, we point out that foreigners in San Marino can acquire at most two properties. Any further acquisition requires state approval. An acquisition via a lease contract is generally excluded. Companies founded in San Marino, on the other hand, have a regular limit of ten real estate purchases.

If you compare the German real estate transfer tax with the taxation of the purchase of real estate under San Marino law, you see some differences. So San Marino basically levies three different taxes on such an acquisition. On the one hand, a levy of 5 % is incurred, another more than 0,4 % of the purchase price goes to the land registry office and 1 % is incurred for copies of documents for the transfer of acquired real estate. When acquiring commercial buildings in certain locations, other specificities may be taken into account. This is especially true for real estate in so-called, legally established historical centers.

In total, one can expect taxes in the amount of about 6.6% of the purchase price.

Furthermore, San Marino exempts 50 % of the capital income if shareholders of a real estate company registered in San Marino obtain it from such a shareholding.

A one-time, extraordinary taxation of real estate assets took place in 2020. It was also possible to defer the tax. Whether there will be further extraordinary taxation of this kind in the future is uncertain.

A taxation of assets exists in San Marino, although only on a small scale compared to other tax regimes in Europe. This includes taxation on the transfer of property by inheritance or gift.

A special feature of inheritances in San Marino concerns inheritance law. It reflects the origins of the small state as well as its roots dating back far into the past. For inheritance law is still today directly based on Roman law, the ius commune.

Compulsory social security contributions are also required in San Marino. A division takes place. Some of this is done by employers. This amounts to 30.9% of the gross salary for health insurance costs, which includes, among other things, costs related to pregnancies. Employees take on a second share, which accounts for 8.3% of gross salary.

Until about 2009, San Marino was considered a tax haven, which was very attractive due to its geographical location, especially for wealthy Italians. In fact, there were a dozen banks and many trustees who had specialized in doing business with this clientele. Thus, the banks in San Marino were considered as concealed as it was known from Swiss banks.

But this was by no means hidden from the Italian Treasury. For a long time this behavior was tolerated. But eventually Italy put San Marino under considerable pressure. San Marino was now on a blacklist of tax havens. In addition, Italy issued a general amnesty for tax evaders, but at the same time also bought tax data from Italian tax evaders who had parked their untaxed black money in bank accounts in San Marino. This eventually led to San Marino taking and implementing all measures to bring the fight against money laundering to an international level.

However, this was accompanied by enormous economic losses. The economic strength of San Marino shrank by a third, the banks lost an equally large part of their deposits. Even though Italy honored these efforts with a bilateral economic agreement, it was clear that much had to change in San Marino. Thus, there were cuts in the previously very generous social system. At the same time, taxes were raised. However, this would hardly have been enough without an economic reorientation to stabilize the country. For this reason, San Marino went on the offensive and introduced a whole series of incentives designed to attract foreign investors.

Meanwhile, the economic situation in San Marino has relaxed somewhat. Although the COVID-19 pandemic has brought cuts for San Marino, especially in the tourism industry. After all, up to two million people had previously visited San Marino annually; Many of them were Italians. But San Marino can now also look to the future with hope due to the grandiose vaccination success in Italy.

In the field of taxation, San Marino has reached a number of bilateral agreements in recent years. These include both double taxation agreements and agreements on tax exchange of information (TIEA). Among other things, such an agreement exists with the Federal Republic of Germany. In addition, negotiations are currently underway on a double taxation agreement with Germany. In contrast, there is already a double taxation agreement with Austria and with the Principality of Liechtenstein.