While not without its grey areas, Andorra’s tax system is on the whole relatively straightforward.
Something that, in my opinion, makes living in Andorra even more appealing. I like simplicity and clarity, especially when it comes to financial topics.
Of course, tax is rarely a simple topic, but I’ll do my best to offer a high level synopsis of Andorra’s tax system. Bearing in mind that I’m not a professional, this is purely based on my own experience as a long-term resident of the principality.
Personal Income Tax (IRPF)
The IRPF is the main income tax in Andorra and the one you’ll need to concern yourself with if you are a tax resident. Tax is calculated at a general rate of up to 10% of your income, broken down as follows:
- Up to €24,000 per year: 0%
- €24,001-€40,000 per year: 5%
- €40,001+ per year: 10%
For married couples it’s calculated slightly differently. Earnings up to €40,000 per year are taxed at 0%, while anything above that is taxed at 10%.
Tax is paid on all forms of income—salary, dividends, interest. It’s all the same. In addition to local income, Andorra also taxes residents on earnings from outside of the principality as well.
For example, if your employer is based in London, you’ll pay tax on the salary you receive from them. Bank interest from a different country and dividends from investments held abroad are also taxable under Andorran law.
This said, if you have already paid taxed on these amounts abroad, it’s likely that you won’t have to pay tax on it again in Andorra.
Until a few years ago, income that came about from other economic activities as well as that earned by entrepreneurs was levied by the IAE (Taxes on Profits from Economic Activities). Those earnings are now integrated within the IRPF.
Non-Resident Income Tax (IRNR)
Non-residents (people who spend less than 183 days a year in Andorra), pay IRNR. This is calculated at a rate of 10% on monies earned within Andorra’s borders.
This tax is focused mainly on workers who reside outside of Andorra but travel into the country for work or business purposes.
This could be as simple as a consultant offering services to Andorran companies, someone paid to speak at a conference within the country, or a building company that contributes goods and services to a building project within the country.
In general, this tax is withheld from payments made by Andorran companies before the income is paid out.
Corporate Tax (IS)
Corporate tax (IS) is levied at a maximum rate of 10%, although it can be reduced in certain instances.
Businesses with profits of less than €100,000 during the first three years pay only 5% on the first €50,000 profit earned—making the deal even sweeter for those considering a move to Andorra.
Since 2015, Andorra has entered into double taxation agreements with several countries including France, Malta, Portugal and Spain. These agreements play an important role in attracting foreign investors to the country.
By preventing the same income from being taxed twice in different countries, the country remains competitive from a global perspective.
Capital Gains Tax
Until recently, capital gains tax in Andorra amounted to exactly nothing. While that’s since changed, it is still well below that of many of its European counterparts.
The amount isn’t set in stone, either. Investors can effectively reduce the capital gains tax owed from 15% (the upper end of the bracket) to zero by holding onto property and shares for longer and opting for minority shareholder status.
CGT on Shares
If your stake in a business or entity is 25% or less you are exempt from paying any capital gains tax when it comes time to transfer or sell equity.
This is advantageous for investors that buy and sell listed stocks, taking profit via capital gains.
Owning a percentage of an Andorran company for longer than 10 years will also exempt you from capital gains tax.
CGT on Property
A similar scenario applies to property. In an attempt to reduce the practice of flipping, Andorra has sliding scale in place for capital gains on real estate.
Selling a property in the first year of ownership will incur a rather hefty 15% capital gains tax. This drops in the second year to 13% and 10% in the third. From there it decreases by 1% each year until no longer being a consideration after 13 years of ownership.
If the property you are selling is your residence in Andorra, then purchase another property within six months, capital gains tax is not payable.
Value Added Tax (IGI)
You will also need to pay value-added tax (VAT) on goods and services. In Andorra, this tax is called ‘IGI‘, and replaces general sales tax on goods.
Unlike much of the Americas, IGI is included in advertised prices, so there are no last minute surprises when making a purchase.
Andorra boasts the lowest VAT in Europe, with a general rate of 4.5%. There is some nuance however. The following goods and services are taxed as follows:, broken down as follows:
- Banking and financial services: 9.5%
- Transportation, artistic and cultural services: 2.5%
- Food, drink (non-alcoholic), livestock, agricultural goods and most printed media: 1%
- Most healthcare, medicine, education, stamps and precious metals: 0%
Local Taxes Levied by Parishes
Additionally, individuals and corporations may be subject to communal taxes or fees levied by the town or parish in which they are based. These include:
- ‘Foc i lloc‘ payable by resident individuals between the ages of 18 and 65
- Tax on real estate transfers
- Annual property tax
- Tax on rental income
- Tax on construction
Lastly, there is the filing or location tax of commercial, business and professional activities, which varies according to where the company is registered and the nature of the activity.
It’s worth noting that the communes are autonomous, which means taxes and fees vary within the country.
Property Acquisition Tax
When you purchase property in Andorra you need to pay acquisition tax. This tax is split into two parts:
- Property transfer tax: 1% of the sale price goes to the Andorran government.
- This is Impost de Transmissions Patrimonials or ‘ITP’
- Fixed tax: 3% of the selling price goes to commune
In terms of exemptions, you don’t pay tax on inheritance, wealth, gifts or donations made between residents in Andorra. Income on investments and savings is tax-exempt under €3,000 (above that you pay 10%).
Money from scholarships, public grants and literary, artistic or scientific prizes is also tax-exempt.
Details about exempt income are outlined in Law 5/2014.
Is Andorra a Tax Haven?
No, Andorra is not a tax haven. The country has clear systems in place to ensure it is both compliant and transparent with regards to tax and is not on any blacklists.
However, in a colloquial sense, many people still refer to the country that way. If you consider Andorra to be a tax haven, then countries like Singapore are as well.
The lower tax rates, coupled with the potential to reduce them even further, make Andorra an extremely tax-friendly home base. It’s no surprise that many entrepreneurs consider it the best place to live.
Summing Up Andorra’s Tax System
The still relatively unknown principality has some distinct advantages when it comes to tax. If nothing else, it’s extremely easy to estimate what you will owe the taxman in Andorra.
While you are expected to pay tax on a number of things, such as income, capital gains, consumption and so on, in a lot of cases it’s possible to reduce taxes owed.
That being said, it’s up to you to make sure your tax affairs are in order. Andorra might be fair in the amount of tax it levies but, like most other countries, reporting and filing is still your responsibility.
Leave a comment if you have questions or anything to share based on your own experiences.