Taxes and Corporate Taxation in Andorra
We are pleased to present an exclusive interview with Joan-Francesc Montané Debias, who is the founder and director of Clickand, the business centre made up of tax experts located at Av. del Pont de la Tosca, 11 AD700 Escaldes-Engordany in Andorra. With her experience and expertise in the tax field, Joan-Francesc guides us through the intricacies of the Andorran tax system, providing clear clarifications and insightful advice.
In this interview, we explore various aspects of the tax system in Andorra and we will deal with all aspects about tax and corporate taxation in Andorra. From the basics of the single regime to the attractive special regimes and the anti-evasion rules. Joan-Francesc shares crucial information on how resident and non-resident companies are taxed, while unveiling current trends and possible upcoming reforms in the Andorran tax landscape.
Guided by Joan-Francesc’s expertise, we will discover and better understand the opportunities and peculiarities that make Andorra a major player on the international tax scene.
General cases of corporate tax and taxation in Andorra
From a general point of view, I will ask you for explanations on the details of taxes in Andorra so that readers can easily find their way around according to their case.
How is corporate taxation structured in Andorra? Are there multiple levels of taxation?
In Andorra, the corporate tax system is based on a single system. Despite dividing the country into seven parishes, it is essential to note that these entities do not apply corporate tax. Instead, municipal and administrative fees may be charged, but they remain separate from corporate tax. This simplicity contributes to the transparency of the Andorran tax system, making corporate taxation accessible and attractive.
What taxes are imposed on companies resident in Andorra and what are the applicable rates?
Legal entities resident in Andorra are subject to a corporate tax of 10%, calculated on their profits. An important special feature concerns open-ended funds and investment companies, which benefit from a total exemption from corporate tax, i.e. a rate of 0%. In addition, a small municipal fee, depending on the parish and the size of the commercial premises, may be applied. These nuances are intended to create a fair tax environment while encouraging certain sectors to thrive.
What is the tax base for corporate income tax in Andorra? Is it calculated on income, profits, specific business income, deemed profits, or some other tax base?
Joan-Francesc: In Andorra, corporate tax is based on the profits generated by a company’s global activities. This means that taxation is directly linked to the profits made, providing a clear and straightforward approach to assessing the tax burden of companies operating in our jurisdiction. This transparency is intended to simplify the tax process and foster a healthy business environment.
Is there differential treatment based on the nature of taxable income, such as gains on assets versus business income or dividend income?
Joan-Francesc: In Andorra, all worldwide income is subject to the same tax rate, regardless of its nature. However, it is important to note that there are legal provisions that allow for the exemption of certain types of income, such as capital gains and dividends. This approach aims to ensure tax fairness while providing specific incentives for certain aspects of economic activity.
Is the tax regime in Andorra global, territorial, or a combination of both?
Joan-Francesc: In Andorra, the tax system adopted is global. This means that taxation applies to income generated both domestically and internationally. This approach offers a holistic view of companies’ financial activity, enhancing the transparency of the Andorran tax system.
Can companies in Andorra use and/or carry forward losses for tax purposes, and is there a restriction on the use of foreign losses at the national level?
Joan-Francesc: In fact, in Andorra, companies have the option of using and carrying forward losses over the next 10 years, offering flexibility to mitigate the tax impact. With regard to foreign losses, under certain conditions, Andorran companies are allowed to compensate them at the national level. This provision aims to encourage the financial resilience of companies while promoting a degree of openness to international economic flows.
In Andorra, is there a distinction between the beneficial owner and the legal owner in terms of taxation, or only the named or legal owner of the income is taxed?
Joan-Francesc: In Andorra, the legal system adopted does not distinguish between the beneficial owner and the legal owner in tax matters. This means that taxation is based on the legal or named owner of the income, with no specific consideration for the beneficial owner. This conceptual simplicity contributes to the clarity and predictability of the Andorran tax system.
Do tax rates in Andorra vary depending on the taxpayer’s income or balance sheet size?
Joan-Francesc: No, in Andorra, the corporate tax rate remains constant at 10%, regardless of the size of the taxpayer’s balance sheet. This consistent approach helps to create a fair and predictable tax environment for all businesses, thereby promoting transparency and simplicity in the system.
Are non-corporate entities, such as partnerships or trusts¹, subject to corporate income tax in Andorra?
Joan-Francesc: In Andorra, trusts and partnerships are not an integral part of the legal system. This is due to the fact that the legal owner is indistinguishable from the beneficial owner in our legal framework. Therefore, corporate income tax does not apply to these specific entities. This approach contributes to the clarity and simplicity of the Andorran tax landscape.
¹A trust is a contract by which a person (the settlor) transfers all or part of his or her property to another person (the trustee), who is responsible for acting for the benefit of one or more beneficiaries.
Special Regimes for Corporate Taxation in Andorra
We will now address the particular cases of Andorran taxation, with questions that will address each case.
Are there any special regimes in Andorra for certain entities, such as funds, business zones, or investments in particular sectors such as oil and gas, real estate, or intellectual property?
Joan-Francesc: In fact, Andorra offers special regimes aimed at stimulating certain sectors. In particular, a regime similar to a ²patent box is in place for the development and exploitation of intellectual property. It offers a significant 80% reduction in the tax base, leading to an effective tax rate of 2%. However, it is important to emphasize that specific criteria apply, especially with regard to the type of IP and the use of human and material resources in the country.
Another special regime is aimed at companies that exclusively hold shares in subsidiaries. This regime reduces the requirements for the application of capital gains and dividend exemptions. These measures aim to promote development in specific sectors and strengthen Andorra’s competitiveness on the international stage.
²The Patent Box is a tax regime for the taxation of intellectual property granted to companies to locate their patents, research, etc. in a given country. In particular, this tax regime allows patent income to be taxed at a lower effective rate than current income.
In Andorra, are there any tax relief in the event of a corporate reorganisation or intra-group transfer of companies and other assets? Could you elaborate on any participation plans that may apply?
Joan-Francesc: Yes, in the event of a company reorganization with valid economic reasons, Andorra applies a reorganization regime, also known as the neutral regime. This regime provides for the deferral of potential capital gains, thus aligning Andorran practices with the special reorganisation regime applicable in the European Union. These measures aim to facilitate structural adjustments by firms, providing flexibility in a context of legitimate economic changes.
Is it possible for a taxpayer in Andorra to choose other tax regimes, such as different methods of calculating the tax base, for example according to income in relation to profits or by the cash base in relation to the basis of accounts?
Joan-Francesc: In Andorra, it is not permitted to change the method of determining the tax base. The tax framework is standardised, ensuring a uniform approach for all taxpayers. This limitation is intended to maintain the coherence and simplicity of the Andorran tax system.
How are companies taxed in Andorra whose functional or reporting currency differs from that of the jurisdiction in which they reside?
Joan-Francesc: In Andorra, the euro is the official currency and the one used for accounting and tax reporting. Any currency conversion is done at the end of the year. The potential capital gain or loss resulting from currency translation is treated as taxable income or allowable loss. This approach aims to ensure consistency in the tax treatment of companies operating with different currencies.
How are intangible assets taxed in Andorra?
Joan-Francesc: In general, intangible assets in Andorra do not benefit from any special treatment, unless they fall under the special tax regime of royalties and income generated by the exploitation of specific types of intellectual property. In the latter case, specific provisions may apply, but for other intangible assets, they are subject to standard tax rules.
Are there any company-level deductions for pension contributions in Andorra?
Joan-Francesc: No, in Andorra there are no deductions provided at company level for pension contributions. The tax system does not provide for specific treatment with regard to these contributions in the context of corporate tax.
Are taxpayers in different sectors, such as banking, subject to different or additional taxes or surcharges in Andorra?
Joan-Francesc: No, in Andorra the corporate tax regime is uniform and applies equally to all sectors, including the banking sector. There are no sector-specific surcharges or industry-specific charges.
Are there any other surcharges, such as solidarity surcharge, school tax, corporate wealth tax, or tax on remittances to Andorra?
Joan-Francesc: No, in Andorra there are no other surcharges applicable to legal entities. The corporate tax regime does not provide for additional charges such as the solidarity surcharge, the school tax, the corporate wealth tax or the tax on remittances.
Are there any deemed corporate tax deductions for equity in Andorra?
Joan-Francesc: No, in Andorra there are no presumed deductions from corporate income tax specifically related to equity. The tax system does not make any special provisions for automatic deductions for this category.
How are fixed asset investments treated for tax purposes in Andorra? Does the tax treatment follow the accounts, for example, via depreciation, or are there specific rules regarding the write-off for tax purposes of the investment in fixed assets?
Joan-Francesc: In Andorra, investments in fixed assets follow international accounting rules. Depreciation resulting from these investments is deductible for corporate income tax purposes. The tax treatment is aligned with internationally recognized accounting practices.
Can you provide more details on the special deduction for capital investments, including eligibility criteria and procedures?
Joan-Francesc: The special deduction for capital investments provides a tax credit of 5% on the total amount of the investment. This applies to real property or other capital assets, and eligibility criteria may vary. It would be recommended to consult the specific tax provisions or consult one of clickand’s financial experts for specific advice depending on the nature of the investment.
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Regarding inventory, although you mention that there are no specific tax or valuation rules, can you explain how the value of inventories is generally determined for tax purposes?
Joan-Francesc: In the absence of specific tax rules, the determination of the value of inventories can generally follow international accounting principles. This often involves the use of methods such as weighted average cost or FIFO (first in, first out). The precise details may depend on the nature of the inventory and the accounting practices adopted by the company.
With respect to the tax rules for derivatives, given that there are no specific rules mentioned, do the gains or losses related to these instruments generally follow the standard tax rules for capital gains?
Joan-Francesc: In the absence of specific tax rules on derivatives, gains or losses related to these instruments may be treated in accordance with the general capital gains tax rules. This may include determining when the gain or loss is realized and including it in taxable income at applicable tax rates.
Could you elaborate more on the anti-avoidance rules in Andorra, in particular with regard to the principles of base erosion and profit shifting?
Joan-Francesc: Anti-avoidance rules in Andorra are based on the principles of base erosion and profit shifting. These principles aim to prevent tax evasion and tax evasion by preventing companies from artificially shifting profits to more favourable tax jurisdictions. Anti-avoidance rules may include provisions on transfer pricing, reporting for international purposes, and other measures to ensure fair and transparent taxation.
Can you clarify whether the international reporting of information in Andorra follows the OECD Model Guidelines on Automatic Exchange of Information (CRS) or other international standards?
Joan-Francesc: The international reporting of information in Andorra is regulated by the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. This convention aims to facilitate the exchange of tax information between the signatory jurisdictions. While this convention could be aligned with international standards, it would be recommended to consult the specific text of the convention for specific details on how the exchange of information is carried out.
Regarding tax consolidation, can you provide additional details on the circumstances under which it is allowed in Andorra?
Joan-Francesc: Tax integration in Andorra is allowed under certain circumstances. However, only Andorran companies can be part of a consolidated group. The specific details of the circumstances and eligibility criteria may be governed by Andorran tax legislation, and it would be advisable to consult these provisions for accurate information.
Read our article on tax integration
Could you give a concrete example of how anti-hybrid rules work in Andorra?
Joan-Francesc: Anti-hybrid rules are designed to prevent situations where an entity can take advantage of differences between the tax systems of different jurisdictions. In the absence of specific information on anti-hybrid rules in Andorra, an example could include provisions to avoid financial instruments or structures that could be used to generate tax deductions in one jurisdiction without including those amounts in the taxable income of another jurisdiction.
With regard to indirect taxes, are there specific thresholds or exemptions for value added tax (VAT) or other indirect taxes?
Joan-Francesc: The specific details of thresholds or exemptions for VAT or other indirect taxes in Andorra may be governed by tax legislation. It would be recommended to consult these provisions for specific information on the applicable thresholds or exemptions.
Finally, can you clarify whether the exit tax in the event of a change of residence is based on the current market value or on the tax value of the assets?
Joan-Francesc: The exit tax in case of change of residence in Andorra is based on the fair market value of the company’s assets and the tax value of these assets. This could involve valuing assets at their current market value at the time of the change of residence. The precise details of the valuation method may be governed by tax legislation and may require a professional valuation.
Summary on taxation and corporate income tax in Andorra
Concluding this exclusive interview on taxation in Andorra with Joan-Francesc Montané Debias, it is clear that this small country of 468 square kilometres offers a unique and attractive tax environment for companies. The clarity of the single tax system, the competitiveness of tax rates, the favourable special regimes and the commitment to international standards make it an attractive choice for entrepreneurs and investors.
Joan-Francesc highlighted the flexibility of the system, allowing companies to take advantage of substantial tax exemptions and benefits, especially in the area of intellectual property. In addition, Andorra’s ongoing efforts to harmonize its practices with international protocols, such as double taxation treaties, strengthen its reputation as a safe and responsible tax destination.
The optimistic outlook for the future, with potential legislative reforms focused on foreign investment and technology, suggests that Andorra remains attentive to global developments while preserving its unique tax appeal.
We warmly thank Joan-Francesc for sharing her in-depth expertise and insightful advice, providing a clear and comprehensive view of the tax landscape in Andorra. This interview is a valuable resource for those considering venturing into the business world in this small but dynamic principality.