In the years already gone, the establishment of offshore companies was an easy and cost-effective task for entrepreneurs. Suffice it to say, it offered them enticing advantages like tax exemptions, minimal maintenance fees, and access to foreign banks. However, quoting the famous singer Bob Dylan, things have changed. In 2024, this process is a lot more intricate and expensive, with offshore company setup being only the first step. The rest of the road to overcome consists of stages like opening a bank account, maintaining accounting records, and establishing economic substance abroad. Please note that to achieve the latter, you will have to rent or purchase an office and hire local personnel in the target jurisdiction.
Due to escalating costs and heightened risks, the allure of offshore companies has waned by now. What is more, jurisdictions with zero-tax policies are transitioning to imposing global tax rates on businesses as of 2024. In this context, it is a potentially beneficial solution for foreign company owners grappling with these challenges to relocate their offshore company and personal tax residence to Andorra.
Andorra’s commitment to international cooperation
The compact European country offers a host of advantages tailored for international entrepreneurs.
The principality has actively engaged in fostering international cooperation. For the above purpose, it has signed Tax Information Exchange Agreements (TIEAs) with over 30 countries, including major economies like the US, the UK, Germany, France, and Spain. Andorra has also implemented the Common Reporting Standard (CRS) and the Base Erosion and Profit Shifting (BEPS) project under the OECD.
Corporate taxes in Andorra: Impost de Societats and more
For individuals and companies considering Andorra as a hub for their businesses, understanding corporate taxes in the country is extremely important. The corporate tax, known as Impost de Societats (IS) in Andorra, is paid at the rate of 10%. Mind that it can be substantially reduced through various deductions and exemptions. Key features include the tax base being the net profit, the option for a different fiscal year, and a 10-year carryforward period for tax losses.
Exemptions for dividends received from Andorran companies and those paid to non-residents are among the other notable aspects of the corporate tax regime in this jurisdiction. Furthermore, capital gains from the sale of shares or participations in Andorran or foreign companies are generally exempt from tax unless tied to real estate or companies heavily investing in Andorra real estate.
The corporate tax system in Andorra operates on a calendar year basis, allowing companies the flexibility to opt for a different fiscal year if needed. Tax returns and payments are due within six months after the end of the tax period. Noteworthy features include a 10-year carryforward period for tax losses and exemptions for dividends received from Andorran companies as well as those paid to non-residents, except in low-tax jurisdictions.
Objective tax: Andorra’s vision for fair taxation
One of the significant changes implemented not so long ago is the introduction of a new tax, Impost Objectiu (IO). Effective since January 1, 2023, it aims to replace the current effective corporate tax rate of 0% for foreign companies operating in Andorra.
The IO is a minimum tax of 3% on the net profit of foreign companies, regardless of applied deductions or exemptions. This shift is intended to prevent the erosion of the Andorran tax base and ensure a fair contribution from foreign entities to the country’s public finances.
Certain activities are deemed to have significant economic substance and value creation in Andorra, exempting them from the Objective Tax. These include agriculture, services (administrative and ancillary), arts, culture, education, healthcare, construction, hospitality, IT industry, scientific and technical activities, manufacturing, logistics, and more.
Foreign companies established in double tax treaty countries may also be exempt from the Objective Tax if they meet specific conditions related to turnover, employees, and assets. These conditions are designed to ensure that foreign companies have a genuine and effective presence in Andorra, discouraging the use of the principality as a conduit for tax avoidance.
The introduction of the Objective Tax aligns Andorra’s tax system with international standards and recommendations of the OECD and the EU. This major move underscores Andorra’s commitment to transparency and cooperation as far as international taxes are concerned.
Active and passive residency for foreign companies in Andorra
Foreign companies seeking tax residency in Andorra have two primary avenues to choose from, and these are active and passive residency.
Active residency means conducting economic activities through incorporating a company in Andorra. To attain this, the company must meet specific requirements, including official incorporation, depositing EUR 3000 in share capital in an Andorran bank, obtaining a trading license, providing a work permit for shareholders, and paying healthcare and social security (CASS) contributions. The company needs to stay in the country for a minimum of 183 days and adhere to a nominal corporate tax rate of 10%, which can be reduced to 0% through various deductions and exemptions. Effective January 1, 2023, the new provision mandates a 3% minimum tax on net profit, unless the company engages in specific activities with substantial economic substance and value creation in Andorra or is established in a double tax treaty country meeting specific conditions related to turnover, employees, and assets.
Passive residency, conversely, doesn’t require economic activity but demands a deposit of EUR 600,000 to the Andorran Financial Authority (AFA), with EUR 100,000 non-refundable and the rest invested in Andorran assets. Similar to active residency, the company must stay in the country for at least 183 days, adhere to a nominal corporate tax rate of 10% (reducible to 0% through deductions and exemptions), and comply with the new 3% minimum tax on net profit starting January 1, 2023. This option provides flexibility for companies not actively involved in economic pursuits but still seeking tax residency in scenic Andorra.
If you are a foreign company owner considering Andorra as your base for international operations we recommend you carefully assess the implications of these changes. Interested in relocating your foreign company’s tax residence to Andorra or seeking to register a new company in the country? Without a shadow of a doubt, reach out to our International Wealth team! We will respond quickly and help you with any needs.