Corporate Tax 2021

Last Updated March 15, 2021

Andorra

Law and Practice

Authors



FINTAX2020 is a very young firm, having been created in September 2020, but is the only law firm in Andorra focused exclusively on tax matters. The firm provides services for many local clients, and also advises foreign companies in relation to investments in Andorra and companies relocating to the country or individuals who want to relocate to Andorra for several reasons. FINTAX2020 focuses on its specialist area of tax, and has an agreement with Spanish law firm Gomez, Acebo & Pombo on a basis of exclusivity. Due to the experience of the partners in international investments, acquisitions and restructurings, the firm has a vast number of clients who are not Andorran residents but want to invest in IT, digital services and related matters.

It is not compulsory to conduct a business through a legal entity in Andorra, but it is normally more efficient in terms of the deductions that apply to legal entities over individuals, who have more limitations for deductions or exemptions, even when they act as business individuals.

Andorra only regulates two kinds of company by law: Societat de Responsabilitat Limitada (S.L.) and Societat Anónima (S.A.). The main difference is that the minimum capital in the S.L. is much lower (EUR3,000) than the S.A., which has a minimum capital of EUR60,000. Also, the S.A. is more open to foreign shareholders whereas the S.L. is very restrictive according to law in terms of the freedom of transferring participations to third parties (non-original partners).

The typical entity used for investments is regulated by the 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 the corporate point of view, all of them are incorporated as Societat Anonima. The key advantage of these entities is the tax treatment: although they are subject to Corporate Income Tax, the tax rate is equal to 0%.

The residence of companies is determined according to three different criteria:

  • if the company has been incorporated according to Andorran laws;
  • if the company has its registered office located in Andorra; and
  • if the company is effectively managed from Andorra (ie, the effective management headquarters are located in Andorra).

The general tax rate is 10%. However, SICAVs are subject to a 0% rate. If individuals receive proceeds as a consequence of an agreement to distribute dividends, they would be also fully exempt, according to law.

The accounting profit is very close to the tax profit, since the Andorra system does not regulate many adjustments to the accounting result. Some relevant adjustments are as follows:

  • permanent adjustments: exemptions, fines, gifts, donations and unjustified expenses, double tax relieves, etc; and
  • temporary adjustments: amortisation and depreciation, provisions, etc.

There is a specific regime for investments in intangible assets if the following requirements are fulfilled:

  • the company must apply those intangible assets to its business activities;
  • the intangible assets can only be used by or destined for the business;
  • the person trying to apply the regime must have all the records and books duly deposited; and
  • the intangible asset must be developed in Andorra.

The application of this regime must be requested from the government, which must authorise it expressly.

A special treatment is applied to new investments carried out after the Corporate Income Tax Act (CIT) entered into force. The treatment is more than a deduction or relief, and applies different criteria for the amortisation of those assets.

Past tax losses that originated when the CIT was in force can be set off against the profits originated during a maximum term of ten years.

Andorra does not impose any limits on the deduction of interest.

Consolidated tax grouping is an option: a group can be taxed globally if all the companies, directly or indirectly, have a minimum percentage of other companies of the group of at least 75%.

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 corporate income tax of at least 4% (ie, 40% of the general 10% corporate tax rate in Andorra).

VAT is applicable, at a rate of 4.5%.

Incorporated businesses must also consider the fees of the notary and a flat stamp duty tax payable to the government.

Normally, all businesses and entrepreneurs carry out business using a corporate form (either S.L. or S.A.).

The corporate tax rate is 10%. The rates of Personal Income Tax are as follows:

  • 0% up to EUR24,000;
  • 5% from EUR24,000 up to EUR40,000; and
  • 10% from EUR40,000 upwards.

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 amount invested (under certain conditions).

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 would be subject to tax at a rate of 10%.

Normally, investments in stock-quoted corporations will not represent a stake of more than 25%, so the capital gain would be exempt in Andorra. If this is not the case, the gain would be subject to tax at a rate of 10%.

Only royalties are subject to withholding tax, at a rate of 5%.

The primary tax treaty countries used by foreign investors to make investments in local corporate stock or debt are Spain, Portugal, France and Luxembourg.

As far as is known, 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, they have the obligation 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.

As far as is known, the Tax Agency has 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 it 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 Agency has confirmed that there have been no international transfer pricing disputes in Andorra resolved through double tax treaties and mutual agreement procedures.

The Tax Agency has not been very active in challenging transfer pricing matters, so it is hard to know how it would act in such matters.

The tax base for local branches of non-local corporations and local subsidiaries of non-local corporations is calculated through the same system, with the tax rate for both 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%. However, if the seller has held less than 25% of the company during the last 12 months, the capital gain will be exempt. However, if more than 50% of the company's assets are made up of real estate assets located in Andorra, a special tax for capital gains arising from the stock transactions applies, which is regressive from 15% in the first year down to 0% if the sale is more than ten years after the acquisition.

This is not applicable in Andorra.

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 on transactions related to management and administration expenses.

Related-party borrowing by foreign-owned local affiliates to non-local affiliates is subject to the same rules as apply to other linked transactions.

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).

This is not applicable in Andorra.

Dividends from foreign subsidiaries of local corporations are exempted from tax by applying the participation exemption principle, under certain conditions (minimum participation, length of participation and effective taxation or existence of 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 the fair market price. The profit for the transferor is taxed at a rate of 5% if the transfer as considered a royalty, or at 10% in all other cases, except for other dispositions under double tax treaties.

Andorra has not yet incorporated any CFC rules into its tax system.

Andorra has not yet incorporated any CFC rules into its tax system.

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 corporate income tax of at least 4% (ie, 40% of the general 10% corporate tax rate in Andorra).

Andorra has a set of anti-avoidance provisions in the General Tax Act. The most important provisions are as follows:

  • transactions must be carried out for valid economic reasons and not just for tax reasons;
  • transactions with the sole purpose of avoiding the tax applicable to the real business are prohibited; and
  • presumptions or valuations are fixed by law.

Audits are carried out without any prior notice, and there is no regular cycle.

All the BEPS recommendations have been implemented, although the incorporation of CFC rules into the Andorran tax system is still pending, and some other pending items will be implemented very soon. One of the most important amendments that is still pending is the introduction of CFC rules into the Andorran tax system.

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.

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.

It is likely that the tax pressure will be increased, but this decision will be implemented very slowly to avoid internal conflicts.

It could be suggested that the 0% taxation of SICAVs makes no sense and the CFC rules must be implemented as soon as possible.

Andorra is following the calendar 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 they make deals with real estate properties.

As Andorra does not have a territorial regime, the CFC proposals are not relevant here. The next tax reform will target potential evasion by Andorran residents (individuals or corporations) through companies located in countries where passive entities owned by non-residents are not subject to tax.        

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 not implemented any criteria in this matter, but it will follow the relevant recommendations of the OECD.

Andorra fully supports the proposals made by the OECD.

All the provisions regarding the taxation of offshore IP that were originally included in the law have been abolished as a consequence of the amendments introduced to the law following the BEPS recommendations.

FINTAX2020

Avinguda del Pessebre, 52.1.1.
Escaldes-E
Andorra

+376 323 320

jmalfin@fintax2020.com www.fintax2020.com
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Law and Practice

Authors



FINTAX2020 is a very young firm, having been created in September 2020, but is the only law firm in Andorra focused exclusively on tax matters. The firm provides services for many local clients, and also advises foreign companies in relation to investments in Andorra and companies relocating to the country or individuals who want to relocate to Andorra for several reasons. FINTAX2020 focuses on its specialist area of tax, and has an agreement with Spanish law firm Gomez, Acebo & Pombo on a basis of exclusivity. Due to the experience of the partners in international investments, acquisitions and restructurings, the firm has a vast number of clients who are not Andorran residents but want to invest in IT, digital services and related matters.

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