Taxation in Andorra and comparison with other european countries
The Principality of Andorra has been making a significant effort of integration and homogenization during the last decade in order to be in line with the evolution of international regulations and requirements.
In this respect, the implementation of a tax system had become necessary to stop being considered as a tax haven by the OECD, and, with the economic liberalization initiated in 2012, to attract significant foreign investment taking into account Andorra’s competitiveness.
Moreover, the transparency and collaboration of Andorra with the international bodies is more and more developed, manifesting itself for instance by the signing of multilateral agreement for automatic exchange of tax information as well as the signature of various Conventions to avoid international double taxation (currently in force with 7 countries).
The different taxes have allowed Andorra to currently offer a fiscal attractiveness that, along with other virtues of the country (security, geographical location, among others), have boosted foreign investment in many economic sectors.
More specifically, direct taxation (both at the level of individuals and legal entities), currently provides for various exemptions and deductions that translate into a lower effective rate than the nominal rates themselves, which are already quite low. Also, unlike the other countries, it should be noted that Andorra has no taxes on successions and donations and no Tax on Wealth.
With regard to indirect taxation, the applicable general rate is not taken into account for setting the price of a product or service, as its rate is so low that its impact is almost neutral.
In this sense, for purely illustrative purposes, here below is a comparative table of taxation in some European countries:
|IS (CORPORATE TAX)||10%||25%||15% - 28%||17% - 21%||12% - 25%||12,50%||21,75% - 41,50%||12,50%||12,50%||35%|
|SPECIAL PATENT BOX TAX REGIME||2%||10%||10%||10,50%||10%||6,25%||5,20%||2,50%||-||1,75%|
|HOLDING (DIVIDENDS AND CAPITAL GAINS)||EXEMPT||EXEMPT||5% / 12%||EXEMPT||0,00%||EXEMPT||EXEMPT||EXEMPT||EXEMPT||EXEMPT|
|IRPF (INCOME TAX) : MIN – MAX RATE||10%||21% - 48%||11% - 45%||14,50% - 48%||24,30% - 40,15%||20%||8% - 42%||20% - 35%||1% - 8%||15% - 35%|
|IRPF: MINUMUM EXEMPT||24.000€||-||9.064€||-||-||-||11.266€||19.500€||15.000 CHF||9.100€|
|IGI / VAT||4,50%||21%||20%||23%||7,70%||23%||17%||19%||7,70%||18%|
As illustrated by the grid above, the comparison takes into account the taxation of our neighboring countries such as Spain, France and Portugal. In these countries, it is indisputable that they bear a much higher tax burden than the Andorran system, in all of the different taxes.
Andorra is also very attractive for tax purposes compared to other European countries with a lower tax burden such as Luxembourg, Cyprus and Malta.
With respect to Andorran IS (corporate tax), it is one of the lowest in Europe, thus generating a fiscal attraction towards the country. In fact, both French, Spanish and Portuguese legislation provide for a higher minimum tax rate (15%, 25%, 17% respectively) than the single and maximum Andorran tax rate. Spanish legislation has a special regime for “start-ups” which provides for a tax of 15% for the first two years of activity, but it is still a higher rate than the Andorran IS. Although the laws of the countries neighboring Andorra have more developed regulations and provide for a broader base of taxation given the characteristics of their economies, the effective rate that the taxpayer ends up paying is superior to what the latter would pay in Andorra.
Regarding the countries with a territorial dimension that is closer to Andorra, all of them also have a higher tax rate than Andorra (although some also have some tax deductions), the fact that Andorra provides for an exemption on dividends and reductions for new investments and an average increase in staff of Andorran companies allow Andorra to continue to enjoy its fiscal competitiveness.
On the other hand, Andorran income tax (IRPF) has a simple configuration in relation to the complexity of the same tax figure in other countries, as it’s nominal and unique rate is 10%, although many residents are exempt to pay such tax due to the multiple exemptions available.
Thus, due to the collection purpose of the three neighboring States around Andorran (Spain, France and Portugal), the nominal and effective tax rates are much higher than in Andorra. Although the tax system is much more complex and includes deductions and tax-exemptions, the tax burden ultimately imposed on taxpayers in these countries is much higher. The creation of this tax figure (IRPF) in the Principality of Andorra, applicable since 2015, stems from the intention to homologate its tax system with other European countries and not, at least in the short term, to represent a predominant source of income for the state.
With regard to the smaller countries, we observe that both Switzerland, Ireland, Cyprus and Malta have a lower rate than the Andorran maximum rate. On the other hand, in the case of Luxembourg, although the lower section of the tax rate is 8%, for practical purposes as of 16,881 euros of income obtained the rate becomes higher than 10% with a multiplicity of sections of progressive taxes up to a maximum of 42%, a much higher rate than the Andorran rate which is a flat rate.
Consequently, the undoubted competitiveness of the Andorran tax system has been demonstrated. This favorable environment has made it possible to create the right climate for attracting foreign investment and to consolidate investor confidence, which has resulted in higher growth and investment rates year after year.