MONTE CARLO – From this Shea butter and “emulsifier” storage room on the sixth floor of a building, there is view on a real prince’s palace.

We are far from the usual clichés about Monaco. It is here, in this industrial building in Fontvielle – a neighborhood built on reclaimed land – that the Aspeta laboratories have decided to set up their operations.

The small company employs 120 workers, all of whom work in this six-story building, inventing and creating its moisturizers and anti-aging creams. Inside “the Hive” as it is called here, white coats and hygiene caps are mandatory for employees – safety measures are very strict.

This is not what you think of when you think of Monaco, its billionaires, yachts and casinos. Asepta’s neighbors are just as unglamorous: the Foundry of Monaco and professional coffee machine manufacturer Conti, and others.

This is a new concept: the principality is proud to show that industrial companies are sprouting on its territory, like suncare company Lancaster and aerospace sub contractor Atoms. “One hundred and one in total,” says François-Xavier Le Clerc, assistant head of the Monaco Business Office. Most of these companies are old, family-owned firms.

Since Monaco – a two-square-kilometers jewel on the French Riviera – suffers from lack of space to accommodate new manufacturing companies, its goal is to attract “smart” companies: research and development centers, engineering offices.

A lot has been achieved during Monaco’s “normalization process.” Until 2010, the principality was on the OECD’s “non-cooperative” tax havens list, and it is having a hard time getting rid of this image, despite its efforts to win the respect of the big international institutions.

But the new image of Monaco, which was for a long time considered a black sheep because of its lack of transparency, is still clouded by its very attractive financial legislation. It is a haven for its inhabitants, who don’t pay income tax or inheritance tax. That is, with the notable exception of U.S. and also French nationals, as per a convention signed 50 years ago signed by General de Gaulle.

Yet, Monaco lives off its taxes. “Our budget is financed by the VAT (sales tax), corporate tax and property transfer tax,” explains Michel Roger, Monaco’s State Minister, the equivalent of a prime minister. Today, the principality is neither on the OECD’s list nor on the list of the Financial Action Task Force (FATF) – an inter-governmental body that combats money laundering and terrorism financing. However, it is still listed as a tax haven by organizations like the Tax Justice Network (TJN), a coalition of researchers and activists fighting the negative impact of tax avoidance and tax havens.

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A panoramic view of Monte Carlo - Photo: Scott Anderson

In 2009, right after the financial crisis, when the world powers launched their global fight against tax havens, Monaco sought to adapt to international standards. To exit the “black list” of tax havens, it multiplied agreements on exchange of information for tax purposes. It promptly signed the 12 Tax Information Exchange Agreements (TIEAs) required by the OECD, and today that number has increased to 27. But Monaco is still facing a lot of criticism. Its first TIEAS were signed with countries that share an equally dubious image – such as Andorra, the Bahamas, Liechtenstein, San Marino and Samoa. “Until 2010, the principality did not behave properly. But since then, it has been making a lot of progress,” says Pascal Saint-Amans, director of the OECD’s Center or Tax Policy and Administration. “It takes time to sign agreements with the big countries,” says Roger, who adds that Monaco has agreements with the U.S., Germany, Argentina and India.

A golden ghetto for the rich and famous

The principality has also been trying to erase its image as a golden ghetto for rich tax evaders by promoting its real industries. In Monaco, there are no “mailbox” companies. Each new company has to go through a rigourous process to be authorized. Most companies are from the service sector, with financial services taking up the biggest share. They represent 16% of the GDP, even though this proportion has decreased over the years. Thirty-nine international banks and 51 trust corporations manage about 100 million euros in deposits and investments.

Even though it is pampered and protected, the industrial sector only represents 6.2% of the GDP. The state tries to give the sector little bit of help here and there – for instance to compensate for the high prices of real estate. “The government rents this building to us at a preferential rate,” says Anne-Marie Noir, daughter of one of Asepta’s cofounders and current CEO.

A total of 301 companies were created in Monaco last year, 15% more than in 2011. Attractive tax rates play a central role here as well. Companies do not pay business or property tax. Those who make more than 75% of their revenue in Monaco do not pay corporate tax. A boon for hoteliers, restaurateurs and retailers.

Working in Monaco has its perks for employees as well. The minimum wage is 5% higher than in France. Add to that a 5% “prince’s bonus.” For Monaco it’s essential to stay attractive for employees so as to maintain employment growth.

Although the principality aspires to become more transparent, it is still keeping some things hidden away in the shadows. For instance, it has still not signed TIEAs with the UK or Italy. Since there are about 6,500 Italians residing in Monaco, that represents a loss in tax revenues of up to one billion euros a year for Italy.

The principality has also negotiated exemptions that let foreign nationals with accounts in Monaco to remain anonymous if they wish.

But today pressure is mounting on Monaco. The world powers have launched a new war on tax evasion. During their recent Northern Ireland meeting, the members of the G8 agreed to an automatic exchange of information for tax purposes. The exact terms of this will need to be defined by the powers that be, warn NGOs like Transparency International. Monaco will be forced to abide by these new rules. “Of course we are not opposed to these decisions if they represent the new international standard in terms of information exchange,” says Jean Castelleni, Monaco’s Minister of Finance.

The principality’s situation has become slightly more awkward. In May, Austria and Luxemburg announced that they would abandon bank secrecy if Switzerland, San Marino, Liechtenstein, Andorra… and Monaco did the same. “For now, nothing indicates that Monaco will abide with the automatic exchange of information,” says Saint-Amans.

But ultimately, if it wants its name erased from the “black list” for good, the tiny nation will have to adapt to the new standards.