By Lowtax Editorial
11 February, 2016
To describe Andorra as an offshore jurisdiction in the legal sense is misleading. This is because Andorra has never had a separate "offshore" regime catering for international business like, say, the Cayman Islands and the British Virgin Islands. In fact, Andorra hasn't needed to create an offshore economy, because, until recently, there was no income tax to speak of.
However, in common with much of the offshore world, Andorra has moved with the times, introducing a simple, low rate of income tax to buttress the Government's finances, and sate the international demands for more tax transparency. At the same time however, the Government has taken steps to ensure that the jurisdiction remains very attractive to international investors.
Where Is Andorra?
The Principality of Andorra is located at high altitude in the Eastern Pyrenees, landlocked between France and Spain. Its total area, 467 sq km, is slightly smaller than that of New York city. The landscape is mountainous with narrow valleys in between. The highest point is Coma Pedrosa at 2,946 m. The capital is Andorra La Vella, and the country is divided administratively into seven parishes. The country's natural resources are hydropower, mineral water, timber and iron ore.
Montferrer Airport, located in Spain just 11km south of Andorra, was reopened to commercial traffic in July 2015 after a 40-year hiatus, and is the Principality's nearest airport, serving short-haul destinations, mainly in Spain. Cities in France, Belgium, Germany, the Netherlands and Italy will be served when Andorra Airlines begins operations from Montferrer in April 2016.
Barcelona and Toulouse are about 2 hours and 2.5 hours away respectively. Road connections to both France and Spain are good.
A Potted History Of Andorra
Charlemagne made Andorra Independent in 748, but in practical terms Andorra became independent in 1278. For the next 715 years, Andorrans lived under a unique co-principality, ruled by French and Spanish leaders (from 1607 onward, the French chief of state and the Bishop of Urgell). In 1993, this feudal system was modified with the introduction of a modern, constitution; the co-princes remained as titular heads of state, but the government transformed into a parliamentary democracy.
Government and Law In Andorra
Andorra is an independent European state with a democratically elected parliament; the titular heads of state are represented locally by officials called vergeurs. The uni-cameral legislature (the Consell General de las Valls) with 28 members is elected every 4 years, half directly by the parishes, and half through a national constituency list. The co-princes appoint a Cap de Govern (Prime Minister) on a recommendation from the Consell General, and the Prime Minister then appoints an executive cabinet.
The legal system is based on the French and Spanish civil codes, with an independent judiciary under the 1993 Constitution.
Introduction to Andorra's Economy
The growing financial services sector represented about 15 percent of the economy in 2006, but Andorra's excellent skiing in the winter ensures a year-round tourist trade, and tourism is by far Andorra's biggest earner, accounting for more than 80 percent of GDP.
Andorra is a prosperous place, and GDP per capita was estimated at USD37,200 at purchasing power parity in 2011. However, with limited natural resources and only a fraction of the mountainous landscape able to support agriculture, Andorra must import the majority of its food and finished goods.
Also, with Andorra's economy tied closely to the fortunes of France and Spain, economic growth has tailed off in the years following the financial crisis, as tourist numbers from those countries dipped. Periods of recession have also caused successive budget deficits, and recently the Government took the brave decision to introduce income tax (see below), with the twin aims of putting its finances on a stable footing, and satisfying the demands of the OECD and the EU.
Andorra is a member of the EU Customs Union and is treated as an EU member for trade in manufactured goods and as a non-EU member for agricultural products. Therefore, it applies the common external tariff of the EU for non-agricultural goods.
Until recently, Andorra had no official currency as such, and a wide range of currencies were accepted internally, the main one being the Euro from 2002. But on June 30, 2011, Andorra signed a monetary agreement with the EU and has thereby adopted the Euro as its official currency.
Foreign Investment in Andorra
Until recently, foreign investment into the financial services sector was highly circumscribed, and foreign involvement in domestic business was limited to minority stakes in most sectors. However, with the introduction of the Foreign Investment Law in November 2008, foreigners were permitted to hold 100 percent of a business in one of the 200 designated economic sectors. This reform was viewed by the government as an important step in Andorra's programme of reforms which are aimed at opening, modernising and diversifying the national economy.
In a move to attract investment into the country following the global financial crisis, a new law came into force in 2012. The Foreign Investment Law of July 2012 allows 100 percent ownership of any company or trading enterprise by foreign residents and non-residents alike. Any investment which is less than 10 percent of the capital or voting rights may be made freely and does not require approval by the authorities. Investments of 10 percent or above require permission from the Ministry of Finance and a decision should take no longer than six weeks to be obtained.
However, non-resident property development companies are not permitted to develop property in the country. Furthermore, non-resident companies are only permitted to buy property intended for their own business use, such as warehousing etc.
Tax in Andorra
Until 2011 there were no taxes in Andorra for resident companies or individuals other than modest annual registration fees, municipal rates, property transaction taxes, some minor sales taxes and a sliding scale capital gains tax introduced in 2007.
In the words of Andorra's Foreign Minister Gilbert Saboya Sunyé however, the global crisis forced the territory to implement "courageous reforms," and, crucially, to construct a completely new tax system.
Legislation providing for a corporate income tax, initially on non-resident entities, at a rate of 10 percent came into force as of April 1, 2011 and non-resident companies are now subject to tax on local-source income at a rate of 10 percent. Resident companies and individuals engaged in business activities are subject to a 10 percent tax from January, 2013 (the tax was introduced on January 1, 2012, at a rate of 5 percent).
A concessionary corporate tax rate of 2 percent is available for companies engaged in international trading and holding activities, and the management of intangibles such as patents, copyrights, brands and trademarks.
To claim the concessionary rate of corporate tax, international trading companies must ensure that goods are traded outside of Andorra, or if the company's products are merchandized from Andorra that they are not exported from or imported to the jurisdiction.
Companies involved in the international management of intangibles must also fulfil certain conditions to obtain this special rate of tax, including that the company ceding the intangible assets is tax resident in Andorran tax resident, and that the assignee for the rights is tax resident in another jurisdiction.
A company must maintain an office of at least 20 metres square and employ at least one part-time employee to qualify for the special reduced rate of tax. This concession makes Andorra an ideal European base in which to locate an international trading company.
A tax on individual income in Andorra (IRPF) was introduced on January 1, 2015. The IRPF tax is levied at a flat rate of ten percent on global income exceeding EUR40,000. A concessionary five percent rate applies for earnings between EUR24,001 and EUR40,000. There is a tax-free allowance of EUR3,000 for interest income, and tax reliefs for families, for incapacity and for the acquisition of a primary residence.
Consumption taxes have also been phased out in favor of a system of value-added tax (VAT), which was introduced in January 2013. It is imposed on a broader range of goods and services at a standard rate of 4.5 percent, with a higher rate of 9.5 percent imposed on banking and financial services. A reduced VAT rate of 1 percent applies to certain essential goods and services such as food, water, books, newspapers and educational services.
Andorra's Tax Agreements
In March 2009, just prior to the G20 London summit, Andorra's Government committed to the internationally-agreed standard for exchange of information in tax matters, which led to the approval by the territory's legislature in September of that year of a law lifting domestic banking secrecy for exchange of information purposes. The Law of Exchange of Information in Tax Matters on Request came into force on September 21, 2009.
The Government has subsequently sought to actively expand its network of information exchange agreements and has signed 20 tax information exchange agreements, all but one of which (with Liechtenstein) adhere to the international standard.
In December 2015, Andorra became the 75th jurisdiction to sign the OECD's Multilateral Competent Authority Agreement (MCAA). In joining the MCAA, the jurisdiction commits to automatically exchange tax information with other nations' tax authorities under the OECD's new tax information exchange standard, the Common Reporting Standard. Andorra will begin sharing information from 2018, with data collected from 2017.
Significantly, Andorra has also signed double tax avoidance agreements with France, Spain, Portugal and Luxembourg.
Forming A Company in Andorra
A number of company formats are available in Andorra, including the Societat Limitadad (SL), the Societat Anonima (SA), the Societat Colectiva, partnerships, and sole proprietorships. Branches are available only to insurance companies. The two main types of company are the SL and the SA.
The Societat Limitadad (SL) is commonly used for local trading and requires a minimum paid up share capital of EUR3,000, with a minimum of two shareholders. In order to set up an SL, the first step is to obtain approval of the proposed name (some generic words are banned). The name, once approved and registered, will have local protection.
The company's Memorandum and Articles ('estatuts' and 'rao social') are then presented to the Government ('Andorra Govern') in a petition ('suplica') for incorporation. This step is straightforward when a holding company is being created for local assets, but if local trading or complex external financial situations are involved, the process might become more bureaucratic.
Once the Government's approval is given, the capital can be deposited and a notary will formalise the incorporation, along with the 'nominee' paperwork.
If there is to be actual trading or other tangible activity in Andorra, the company will need to apply via a 'suplica' to the Commercial Register in the appropriate commune for a trading license, or 'Registre de Comerc' permission. Finally, the Commune has to approve the premises proposed to be used, which requires further paperwork. Once everything is in place, the Government must approve the formal opening of the business.
The Societat Anonima is usually created for larger types of company, or those with many shareholders, and must have a minimum paid up share capital of EUR60,000. The formation procedures for an SA are generally the same as for a Societat Limitada.
Obtaining Residence in Andorra
The New Law on Residency was introduced in 2012 and applies to all applicants from June 27, 2012. From this date onwards, four categories of residency have been introduced:
Category A: This has the same requirements as the previous 'passive residency' and requires a "top up" investment of EUR400,000. Applicants must commit to spending a minimum of 90 days per year in the country and the principle applicant must deposit a bond of EUR50,000 for him/herself and EUR10,000 for each dependent with the Andorran Institute of Finance. The bond may be deducted from the required investment of EUR400,000 and will be returned should the applicant return the permit. All applicants must produce proof of real estate rental or ownership, provide legalised police certificates and have private medical insurance.
Category B: Essentially a business permit. The permit will be granted to businesses who conduct at least 85 percent their activity outside Andorra. Instead of the "top up" investment, category B permit holders are subject to a 10 percent tax.
Category C: A "Cultural Permit" for musicians, artists and the like. Individuals must carry out at least 85 percent of their activities outside Andorra and must be able to provide proof of their international achievements. A refundable deposit of EUR50,000 for the head of household and EUR10,000 for each dependent must be paid to the Government.
Category D: The "Active Director Permit." This permit is designed for those intending to form a company and work in Andorra. The Category D permit entitles the holder to reside in Andorra as long as they own at least 10 percent of a company incorporated in Andorra and exercise an administrative post within that company. One advantage of an Active Director Permit is that there is no requirement to make a minimum investment or deposit. Applicants must show proof that they have purchased or are renting a property in Andorra. Spouses are entitled to apply for a Category D permit if both the husband and the wife own 50 percent of a company. Spouses with no ownership interest in a company can apply for residence as a dependent of the main applicant under the family grouping rules after 12 months. The 12-month rule does not apply if the spouse is a director of the company, or owns at least 10 percent of its shares.
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