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ANDORRA BANKING
- ANDORRA HOLDING
COMPANIES
It is misleading to
describe Andorra as 'offshore', not because
it is landlocked, which it is, but because
it does not particularly set out to offer
such classical 'offshore' products as trusts
(it doesn't have any), international business
companies (ditto) or specialised tax regimes
for insurance, banking or investment funds.
It doesn't need to, because there isn't any
income tax anyway, for individuals or companies,
indeed hardly any taxes at all except for
customs duties, local property taxes, and
corporate registration fees. Insistence on
Andorran majority ownership of all business
and trading activities is the key factor in
understanding the development of the Andorran
corporate sector, and accounts for the fact
that, successful as Andorra is at attracting
private client business for its banking sector,
there is very little foreign involvement in
financial services.
So
all business in Andorra is low tax, and in
Offshore Business Review we examine two ways
in which investors can take advantage of the
Andorran low-tax environment.
For details of taxation of Andorran entities
(or lack of it) see Offshore
Legal and Tax Regime.
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Andorra
Banking
Banks and other financial institutions in Andorra
are regulated by the Andorran National Financial
Institute (INAF) under the Law Regulating the
Financial System 1993.
Until
recently, Andorran banks (of which there were
seven in 2006) were, at least in theory, owned
entirely by Andorran interests, although in
practice some French and Spanish banks have
minority shareholdings, often in connection
with the marketing of asset management or investment
products. The Andorran Government has however,
talked about admitting four foreign 51%-controlled
banks, under stringent conditions, which will
have Andorran chief executives. In addition,
a number of separate asset-management firms
have recently been licensed, some of which are
subsidiaries of international fund management
companies. These moves do not by any means imply
that Andorra intends to develop a substantial
foreign-owned financial services sector.
While
the Andorran banking system has significant
links to Spain, these links have decreased.
With the sales of BBVA’s participation
in the Inter-Mora bank to the Andorran shareholders
in early 2006, only three of the seven banks
authorized to operate in Andorra have Spanish
participation. These banks account for about
45% of assets and deposits of the banking system,
down from around 71% in 2001. In September 2006,
La Caixa announced the sale of its shares in
Credit Andorra to the Andorran shareholders
of the bank, meaning that only one Spanish Bank,
amounting to about 4% of assets and deposits
of the banking system will remain operating
in Andorra.
Andorran
banks are all members of the Agrupacio de Bancs
Andorrans, which operated a system of self-regulation
until the regulatory law was passed in 1993.
The banks have very conservative policies, and
high solvency ratios: depositors' funds are
guaranteed under a 1997 law; but only one banking
institution has failed in Andorra, Sobanca in
1968, and the remaining banks stepped up to
honour its liabilities in order to preserve
the confidence in the system.
The
over-riding characteristic of Andorran banks
that attracts foreign depositors and investors,
apart from the absence of taxes, is secrecy.
Numbered accounts, made available only to top-quality
clients, are said to be known only to 'the customer,
the banker and God'. General accounts, also
secret under the law, are highly protected as
well.
In
June, 2004, however, Andorra was obliged to
accept the EU's Savings Tax Directive, and as
from July, 2005, is imposing a withholding tax
of 15% on returns on savings paid to citizens
of Member States of the EU, of which 75% is
remitted onwards to the States concerned.
While
the EU Savings Tax Directive seems to have had
little negative impact on the Andorran banking
system so far, a report by the IMF in February
2007 noted that the prospect of higher taxes
has encouraged EU customers of Andorran banks
to seek alternatives to savings instruments
by moving into other financial instruments,
including life policies offered by life insurance
companies controlled by Andorran banks. As a
result, life insurance premiums grew from 61
million euros in 2004 to 1.8 billion euros in
2005, according to the IMF.
In
response to international concern over money-laundering,
Andorra introduced the 'Law of Protection of
Banking Secrecy and of Prevention of Laundering
of Money or of Assets Deriving from Crime' in
1995. This law requires financial institutions
to report any suspicious money movements to
the INAF; and the INAF is then entitled to pass
on such information to foreign countries if
an Andorran judge orders it. However, this will
only be done if there is prima facie evidence
of a crime (which in Andorra definitely does
not include tax avoidance or evasion), and even
then is only permitted to countries which have
banking secrecy laws, thus excluding, for instance,
the UK and the US. In most circumstances, the
effect of the law is to strengthen secrecy,
not weaken it.
In
August, 2001, a Department for the Prevention
of Money Laundering (Unitat de Prevenció
de Blanqueig - UPB) was established. The UPB,
which is equivalent to a Financial Intelligence
Unit under Egmont Group rules, is authorized
to carry out unannounced inspections and hands
information to the public prosecutor's office
or to the government.
Since
2002, the UPB has been permited to enter into
cooperation agreements on criminal matters with
foreign authorities. Subsequently, the UPB has
signed agreements with the corresponding anti-money
laundering authorities in Bahamas, Belgium,
Dutch Antilles, France, Luxembourg, Monaco,
Peru, Poland, Portugal, Spain, and Thailand.
It has cooperated with foreign authorities to
detect and prosecute criminal activities and
freeze accounts in various occasions. It has
also shared information and cooperated with
other Egmont group members.
The
governing council of the UPB consists of two
financial officials who are appointed by the
Minister of Finance, a judge nominated by the
Consell Superior de Justícia, and two
police officers who are appointed by the Minister
of the Interior.
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Andorra Holding
Companies
The rules for Andorran majority participation
and the absence of tax treaties with other countries
mean that Andorra is not a suitable place in
which to base international trading operations.
That said, the absence of taxation, the high
levels of secrecy (for companies as well as
banks), and the liberal business environment
in Andorra make it a good place in which to
collect the proceeds of legitimate international
business activity; and this is especially true
if the ultimate beneficiary is living in Andorra.
A
typical structure is triangular: trading, licensing
or investment operations in high-tax countries
are carried out from a jurisdiction which has
reasonable double taxation treaties, but low
withholding taxes on ongoing payments (eg Malta),
and the proceeds are remitted to an Andorran
company, which pays no tax at all. There are
numerous permutations, and there are in fact
many tens of thousands of Andorran companies
formed for this type of purpose.
There
is talk within Andorra of weakening the local
ownership rules, which effectively limit Andorra's
international business to small-scale operations
which can tolerate a degree of legal uncertainty;
but it is not thought likely that the powerful
and very rich interests that dominate Andorran
commercial life will be willing to accept much
diminution (as they would see it) of their prerogatives.
Draft legislation was published in March, 2004,
which would allow 100% foreign ownership in
certain sectors, including
audio-visual production and marketing, technological
and scientific research, production of medicines,
E-commerce, and broadcasting.
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