Contributed By Fintax Andorra
In Andorra it is not compulsory to conduct a business by means of a legal entity, but it is normally more efficient to do so, in terms of the deductions applicable to legal entities over individuals, who have more limitations for deductions or exemptions.
Andorra only regulates two kinds of companies:
The main difference between the two corporate forms is that the SL requires a minimum share capital of EUR3,000, whilst the SA requires at least EUR60,000 equity to initiate its commercial operations. The SA is intended to be more accessible to foreign investors, whereas the SL is aimed to be restrictive towards the entrance of new shareholders.
The main entity used for investments is regulated by the Andorran Financial Authority (Autoritat Financera Andorrana – AFA) under the form of a SICAV (Collective Investment Vehicle). There are different classes of SICAV in relation to the investment policy but, from a corporate point of view, all of them are incorporated as SAs. The key advantage of these entities is the tax treatment: although they are subject to Corporate Income Tax (CIT), the tax rate is equal to 0%.
A new relevant law was approved by the Andorran Parliament on 19 January 2023 (published in the Official Gazette on 8 February 2023), which introduced a new regulation on transparent entities or “Controlled Foreign Entities”. This law considers profits originated by a passive subsidiary located in a jurisdiction with less than 40% of the Andorra tax rate to be attributable to the mother company.
The residence of a company is determined according to whether the company:
The general tax rate for CIT is 10%, although taxpayers benefit from a reduction of 50% of the taxable base in the first financial year. However, SICAVs are subject to a 0% rate. If individuals receive proceeds because of an agreement to distribute dividends, they would also be fully exempt, according to law.
Accounting profit is very close to tax profit, since the Andorran system does not regulate many adjustments to the accounting result, with the following exceptions:
There is a specific regime for investments in intangible assets, provided that the following requirements are fulfilled:
The application of this regime must be requested from the government, which shall authorise it expressly.
A special treatment is applied to new investments carried out after the CIT entered into force. The treatment is more than a deduction or relief, and applies different criteria for the amortisation of those assets.
Previous tax losses that arose when the CIT was in force can be offset against the profits arising during a maximum term of ten years.
Andorra imposes a maximum of 30% or EUR500,000.
Consolidated tax grouping is an option: a group can be taxed globally if all the companies, directly or indirectly, hold at least 75% in other companies of the group.
Capital gains are taxed at 10%. There is a full relief applicable to gains arising from the sale of shares of subsidiaries if, at the time of the sale, the parent company held at least 5% of the shares during the previous 12 months, and the subsidiary is subject to CIT of at least 4% (40% of the general corporate tax rate in Andorra).
VAT is applicable, at a rate of 4.5%. Real estate transfer tax is applicable, at a rate of 1%. Other activities (such as gambling, insurance or the commercialisation of special products) may be subject to special taxes.
Incorporated businesses must consider the fees of the notary and a flat stamp duty tax payable to the government. Companies must also pay a registration and maintenance fee to the Andorran Companies Registry (Registre de Societats) and apply for a commercial licence for the development of an economic activity, which also triggers annual maintenance expenses.
Normally, all businesses and entrepreneurs carry out business using a corporate form (either SL or SA). Alternatively, entrepreneurs can develop an economic activity as self-employment.
The corporate tax rate is 10%, with taxpayers benefiting from a reduction of 50% of the taxable base in the first financial year.
Non-corporate businesses shall be taxed by means of Personal Income Tax, at the following rates:
There are no tax incentives for accumulating earnings for investment purposes. However, investments in fixed assets in Andorra generate a tax incentive of 5% of the total invested amount, provided that certain conditions are met.
Dividends are fully exempt if they have been distributed by Andorran companies to individuals who are resident in Andorra. Capital gains are exempt if, before the sale, the seller held up to 25% or had maintained the shares for more than ten years. Otherwise, the capital gain should be subject to tax at a rate of 10%.
If investments in listed companies do not represent a participation quota higher than 25% of the share capital of the company, the capital gain is exempt. Otherwise, capital gains would be subject to a flat tax rate of 10%.
Only royalties are subject to withholding tax, at a rate of 5%, so there is no particular area where local tax authorities are particularly determined to apply withholding taxes.
The primary tax treaty countries used by foreign investors to make investments in local corporate stock or debt are Spain, Portugal, France and Luxembourg.
To date, local tax authorities have never challenged the use of treaty country entities by non-treaty country entities. However, the Andorran tax authorities could well challenge such cases, since Andorra is a BEPS jurisdiction and is complying with all the duties arising from BEPS. In this case, the authorities are obliged to check that a transaction is carried out in a normal way, avoiding artificial structures with the aim of avoiding or minimising the tax payable (treaty shopping).
Linked transactions must be carried out at a fair market value. Taxpayers are obliged to request a valuation report from an independent expert, evidencing that the transaction has respected the standards of the market. There are no specific obligations to document the transfer pricing transaction, but this would be necessary in the case of a tax audit.
To date, the tax authorities have not challenged the use of related-party limited risk distribution arrangements for the sale of goods or the provision of services locally, but there is a risk they could, because the law is clear in this regard.
Andorra’s policy towards local transfer pricing rules is the same as that established by the OECD, and those parameters have been incorporated into the law.
The tax authorities have confirmed that there have been no international transfer pricing disputes in Andorra resolved through double tax treaties and mutual agreement procedures.
The tax authorities have not been very active in challenging transfer pricing matters, so it is hard to know how they would act in such scenarios.
The tax base for local branches of non-local corporations and local subsidiaries of foreign corporations is calculated through the same system, with the common flat tax rate being 10%. However, the local branches have certain limitations on deducting expenses related to the parent company.
Capital gains arising from the sale of stocks in local corporations by non-residents are taxed at a rate of 10%, although the capital gains will be exempt if the seller has held less than 25% of the company during the last 12 months. The treatment of capital gains from real estate assets has certain particularities, according to the new law just approved (see 1.2 Transparent Entities).
Andorran regulations do not provide for change of control provisions.
Any formulas used to determine the income of foreign-owned local affiliates selling goods or providing services are normally determined by an independent expert, who drafts the master file determining the market price of the transaction.
Transfer pricing rules apply to transactions related to management and administration expenses.
Related-party borrowing by foreign-owned local affiliates paid to non-local affiliates is subject to the same rules as apply to other linked transactions. The new law limits the deductibility of financial expenses to 30% (capped at EUR500,000).
The foreign income of local corporations is not exempt from corporate tax per se, but the withholding at the source, if that is the case, is deductible up to a certain limit (effective taxation in Andorra on this income). Controlled foreign company (CFC) rules are applicable to subsidiaries located in a jurisdiction with a tax rate lower than 40% of the general Andorra tax rate.
Andorran regulations do not provide for non-deductible local expenses.
Dividends from foreign subsidiaries of local corporations are exempted from tax by applying the participation exemption principle, under certain conditions (ie, minimum participation, length of participation, and effective taxation or the existence of a double tax treaty).
Intangibles developed by local corporations can be used by non-local subsidiaries in their business without incurring local corporate tax, provided that the foreign company pays the linked company a fair market price. The profit for the transferor is taxed at a rate of 5% if the transfer is considered a royalty, or at 10% in all other cases, except for other dispositions under double tax treaties.
Andorra has incorporated CFC rules through Act 5/2023, of 19 January. The basis is that all the profits originated by a subsidiary fulfilling the requirements and not distributed to the mother company should be included in the profit and loss account of the mother company, if those profits have not been distributed.
The key criterion for substance relates to the consideration of a passive entity for the purposes of the CFC rules. A passive entity is a company that makes 50% or more of its income from non-business activities.
Capital gains are taxed at 10%. There is a full relief applicable to gains arising from the sale of shares of non-local subsidiaries if, at the time of the sale, the parent company held at least 5% of the shares during the previous 12 months, and the subsidiary is subject to CIT of at least 4% (40% of the general corporate tax rate in Andorra).
Andorra has a set of anti-avoidance provisions in the General Tax Act, with the most important provisions being as follows:
Audits are carried out without any prior notice, and there is no regular cycle for non-regulated SLs or SAs. However, financial entities shall be audited. An auditing company can be appointed for a maximum period of four years, which may be renewed without exceeding an overall total of eight consecutive years.
All the BEPS recommendations have been implemented. It should be noted that the new tax reform has introduced a general limitation in Andorra on the deduction of net financial expenses, equivalent to 30% of the corrected positive accounting result; in any case, EUR500,000 may be deducted. This measure takes up one of the recommendations of the BEPS project – specifically Action 4, relating to limitations on the deduction of financial expenses.
It is also important to highlight the introduction of a new specific article in the Corporate Income Tax Act relating to fiscal transparency. To this end, taxpayers are obliged to include income obtained through the following in their corporate income tax base, which is also extended to personal income tax:
Both provisions meet an essential objective, which is to avoid possible abusive tax deferral practices through the interposition of Andorran or non-Andorran entities that allow the taxpayer to accumulate profits that enjoy a low level of taxation, abstracting them from Andorran fiscal sovereignty.
Andorra is fully compliant with BEPS, and the government agrees 100% on the spirit of BEPS in order to avoid fraud or artificial transactions with the sole aim of reducing or eliminating taxation in the most expensive jurisdiction.
For this reason in particular, a comprehensive overhaul of the Andorran tax system has finally taken place, especially with regard to direct taxation, culminating in a reform of corporate taxation as well as other taxes in the Principality.
International tax has a high profile in Andorra. Andorra did not have any experience in tax matters before 2011, and consequently needs the guidance of the OECD and countries with many years of experience.
The tax pressure is likely to increase with the adoption of a competitive tax policy, but this decision has been implemented very slowly and the new tax reform has taken several years to take place, precisely in order to avoid internal conflicts.
The recent tax reform in Andorra has been carried out on the basis of very clear guiding principles and objectives covering the following:
Andorra is following the timeframe agreed with the OECD to implement BEPS, and is fulfilling the changes at the due time. To date, Andorra has not implemented the item related to hybrid instruments, but the government has a timeframe within which to approve the relevant laws.
Andorra does not have a territorial tax regime. Income is taxed following the principle of worldwide income for residents, and, in certain cases, non-residents are subject to real taxes when making transactions with real estate properties.
In order to provide Andorra with a transparent tax regime, the new tax reform introduces the obligation to include in the corporate income tax base, which is also extended to personal income tax, income obtained through controlled foreign entities which, although subject to lower taxation (less than 50% of what they would have been taxed in Andorra), do not carry out a substantial economic activity and obtain certain categories of passive income.
All the double tax conventions are the same in terms of following the OECD model and, in some cases, the UN model.
The transfer pricing rules are very clear in the law, and no relevant changes in this regard are expected.
The proposals for transparency and country-by-country reporting are essential for tax justice and a more efficient distribution of tax resources among countries.
Andorra has introduced a new deduction for projects that promote digitalisation, with the aim of encouraging the digitalisation of Andorran companies. This is in line with economic policy measures aimed at promoting competitiveness, including the recent approval of the Digital Economy Act and the creation of new types of residence permits for digital nomads.
Andorra fully supports the proposals made by the OECD, as well as the digitalisation of Andorran projects and companies, offering deductions of 2% in these cases.
All the provisions regarding the taxation of offshore IP that were originally included in the law have been abolished because of the amendments introduced to the law following the BEPS recommendations.
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