Taxes

Taxes in Andorra: All you need to know about taxes

These are the taxes you have to pay if you’re a natural or legal person in Andorra, rates, examples and more.

In this article we provide you with relevant information about taxes in Andorra. This country is known as a country with various tax benefits for natural and legal persons. To keep you up to date with information on the Andorran tax system, we’ve compiled data and examples of the respective tax rates for individuals, companies and the tax benefits offered by this system.

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Taxes for individuals or natural persons in Andorra

In Andorra, individuals are subject to a simplified tax system and tax rates are quite competitive compared to other European countries. Below are the taxes payable by individuals in Andorra, both direct and indirect.

Personal Income Tax (IRPF)

Personal income tax, known as IRPF, is levied on Andorran residents who earn income in Andorra or abroad. The tax rate is considerably low compared to other European nations, with a progressive structure that aims to keep the tax burden to a minimum.

First €24,000 ($25,005.47): Tax exempt.
Between €24 001 ($25,006.51) and €40 000 ($41,675.78): 5 %.
More than €40 000 ($41,675.78): 10 %.

For example, if a person resident in Andorra earns an annual income of €50,000 ($52,094.73), the first €24,000 ($25,005.47) are exempt. On the next €16,000 ($16,670.31) pay 5 %, which is €800 ($833.52). For the remaining €10 000 ($10,418.95), the rate is 10 %, which adds up to an additional €1,000 ($1,041.89). €1,800 ($1,875.41) in personal income tax, which represents a significantly lower tax burden than in other countries.

General Indirect Tax (IGI) for individuals in Andorra

The General Indirect Tax (IGI) is the Andorran equivalent of VAT in other countries. This tax is levied on the sale of goods and services within Andorra, and the general rate is 4.5%. However, reduced rates are available for certain specific products and services:

1 % for essential products such as basic foodstuffs.
2,5 % for cultural and educational services.
0 % for certain medical and financial services.

For example, when buying a consumer good in Andorra valued at €1,000 ($1,041.89), the buyer will pay an additional €45 ($46.89) in IGI, resulting in a final price of €1,045 ($1,088.78). This rate is considerably lower than VAT in neighbouring countries such as Spain or France, where the tax can exceed 20 %.

Property tax in Andorra

Although Andorra doesn’t levy a recurrent real estate tax as in other countries, there are certain taxes related to the acquisition and transfer of real estate. These taxes are applied when buying or selling a property in Andorra and vary depending on the municipality where the property is located.

Real estate transfer tax: Between 1.5% and 2.5% of the value of the property.
Municipal capital profits tax: Varies according to the municipality, generally between 0.5% and 1%.

For example, if a person acquires a property valued at €200,000 ($208,378.92) in Andorra, he or she could pay between €3,000 ($3,125.68) and €5,000 ($5,209.47) in transfer taxes, plus a small additional percentage for the municipal capital gains tax.

Inheritance and gift tax in Andorra

One of the most attractive aspects of the Andorran tax system is that there’s no inheritance tax or tax on direct gifts between family members. This means that, in the case of an inheritance or a gift between close relatives, the beneficiaries won’t have to pay tax on the assets received. However, in situations of inheritance or gifts between unrelated persons, certain fees may apply, although they’re generally low compared to other countries.

Social security contributions in Andorra

In Andorra, people working and residing in the country must contribute to the social security system, which finances services such as health and pensions. Contributions are divided between the employee and the employer, with a total of around 20% of the salary:

Employer: Approximately 15.5% of the employee’s salary.
Employee: About 5.5% of his salary.

For example, if a resident in Andorra receives a monthly salary of €2,000 ($2,083.79), his employer will contribute €310 ($322.99) and the employee €110 ($114.61) towards social security, which covers both his access to health services and his future pension contribution.

There are several taxes for individuals in Andorra @unsplash

Stamp duty (administrative taxes) in Andorra

Stamp duty or administrative tax is a minor tax levied on certain administrative procedures and services, such as the issuance of official documents or registration in the commercial register. Fees vary according to the type of document or procedure, but are generally quite low and do not represent a significant burden.

Advantages of the Andorran tax system for natural persons

The Andorran tax system is designed to maintain a low tax burden on its residents. In addition to low tax rates, there are specific benefits that make Andorra an attractive destination for residence:

Exemption on the first €24,000 ($25,005.47) of income from personal income tax, allowing many people to pay little or no income tax.
No wealth tax, unlike other European countries that tax the assets of their residents.
No inheritance tax or direct gifts between family members, which is beneficial for those who wish to plan their inheritance without tax worries.

Taxes for legal persons or companies in Andorra

Andorra has positioned itself as an attractive country for companies and entrepreneurs thanks to its competitive and simple tax system. Legal entities or companies in Andorra are subject to certain taxes, albeit at reduced rates compared to many European countries. Here we’ll review the main taxes that companies must pay in Andorra and the tax benefits that make this country an interesting option for businesses and start-ups.

Corporate taxation in Andorra

Corporate income tax is the main tax payable by companies in Andorra on their profits. This tax is much lower than in other countries in the region, which attracts both local companies and international investors.

General rate: 10 % of the company’s net profits.
Reduced rate: 2 % for companies that qualify as “holding companies,” a type of legal structure used to manage investments in other companies. This reduced rate is designed to attract investment companies and asset managers, providing an incentive to invest in Andorra.

For example, if a company generates €100,000 ($104,189.46) of net profit, it will pay €10,000 ($10,418.95) in corporate tax at the general rate of 10 %. In the case of a holding company that meets the specific requirements, the amount of tax would be reduced to only €2,000 ($2,083.79). This advantage makes Andorra an attractive tax destination for wealth management and investment companies.

General Indirect Tax (IGI) for companies in Andorra

The General Indirect Tax (IGI) in Andorra is the equivalent of VAT in other countries. This tax is levied on the sale of goods and services within Andorran territory. The overall IGI rate is one of the lowest in Europe, which benefits both local businesses and consumers.

General rate: 4.5 %.
Reduced rate: Varies according to the type of good or service, with a rate of 1% for essential products and 2.5% for certain cultural and educational services.
Exemption: Some financial and medical services are exempt from IGI.

For businesses, the IGI is a tool that allows them to maintain competitive prices, especially in comparison with businesses in neighbouring countries where VAT can exceed 20 %. For example, if a company sells a product worth€1,000 ($1,041.89), it’ll apply a IGI of €45 ($46.89), resulting in a total price of €1,045 ($1,088.78), a considerably low tax burden compared to other EU countries.

Taxation of economic activities in Andorra

The tax on economic activities is a tax that companies must pay annually for doing business in Andorra. This tax is mainly applied depending on the activity and location of the company, varying in each municipality. Although the rates are quite low, it’s important to bear in mind this annual obligation.

Fees: Fees can vary from a few hundred to thousands of euros per year, depending on factors such as the size of the company, the number of employees and the type of activity it carries out.
Example: A small trading company in the centre of Andorra la Vella could pay approximately €500 ($520.95) per year in this tax, while a larger company could be charged more.

This tax allows municipalities to raise funds for the maintenance and development of local infrastructure, which is important for Andorra’s economic growth.

Property taxes in Andorra

Companies owning real estate in Andorra are subject to taxes related to the purchase, sale and transfer of real estate. Although Andorra doesn’t have a recurrent real estate wealth tax, there are certain taxes at the time of acquisition and transfer of property.

Real estate transfer tax: Varies between 1.5% and 2.5% of the value of the property, depending on the location.
Municipal capital gains tax: Generally between 0.5% and 1%, also depending on the municipality where the property is located.

For example, if a company acquires a property valued at €500,000 ($520,947.29) in Escaldes-Engordany, it could pay between €7,500 ($7,814.21) and €12,500 ($13,023.68) in transfer taxes, plus a small additional fee for the municipal capital gains tax.

The Andorran tax system offers various tax benefits @unsplash

Social security contributions in Andorra

Companies in Andorra are obliged to contribute to the social security system on behalf of their employees. These contributions help finance health services and pensions for the country’s residents.

Employer contribution rate: Approximately 15.5% of the employee’s salary.
Employee contribution rate: Around 5.5% of salary, which is deducted directly from gross salary.

For example, if a company pays an employee a monthly salary of €2,000 ($2,083.79), the total contribution of the company will be €310 ($322.99), while the employee will contribute €110 ($114.61). These contributions ensure that both employees and employers have access to the benefits of the Andorran social security system.

Tax benefits in Andorra

In addition to its low tax burden, Andorra offers several tax incentives to attract companies and investors. These benefits are designed to encourage economic development, employment generation and technology.

Incentives for technology and innovation companies in Andorra

Andorra has implemented specific tax incentives for companies in sectors such as technology, innovation and software development. These sectors can benefit from corporate tax reductions and facilities for the import of technological equipment free of customs duties. Andorra also has a policy of supporting entrepreneurship in technology, which facilitates the creation of start-ups and attracts talent in the sector.

Advantages for holding companies in Andorra

Holding companies in Andorra, created to manage investments in other companies, can benefit from a reduced corporate tax rate of 2%, which is significantly lower than in other European countries. This incentive is aimed at attracting private equity and investment companies seeking to optimise their tax operations.

Tax exemption on dividends in Andorra

For investment companies and individuals holding shares in Andorran companies, one of the most attractive tax benefits is the tax exemption on dividends received. This implies that dividends distributed by an Andorran company to its shareholders are not subject to taxation in Andorra, which is a considerable advantage for investors.

Facilities for obtaining tax residence in Andorra

Andorra also offers tax residency facilities to foreign individuals who invest in the country or establish their business there. Tax residency in Andorra allows entrepreneurs to benefit from a low tax burden and a secure and stable environment, ideal for people looking for an alternative residence in Europe.

Reductions in transfer tax for new companies in Andorra

To encourage the creation of new businesses, Andorra offers reductions in real estate transfer tax for those setting up offices or buying property for commercial activities. This benefit is designed to support new businesses and facilitate their installation in the country.

Frequently Asked Questions about taxes in Andorra

What is the corporate tax rate in Andorra for companies?

The corporate tax rate in Andorra is 10% on the company’s net profits, which makes it significantly lower than in other European countries. Holding companies can also benefit from a reduced rate of 2%, provided they meet certain specific requirements.

What is the General Indirect Tax (IGI) and at what rate does it apply?

The General Indirect Tax (IGI) in Andorra is similar to VAT in other countries and is levied on the sale of goods and services. The overall IGI rate is 4.5%, one of the lowest in Europe. There are also reduced rates, such as 1% for essential goods and 2.5% for cultural and educational services, while some medical and financial services are exempted.

Are there tax benefits for foreign companies in Andorra?

Yes, Andorra offers tax benefits to companies in the technology, innovation and software development sectors. These incentives include corporate tax reductions, facilities for the import of technology equipment and support for start-ups, all of which boost the growth of these sectors in the country.

Can foreigners obtain tax residency in Andorra?

Yes, Andorra allows foreign persons investing in the country or establishing a business there to obtain tax residency. This allows residents to benefit from Andorra’s low tax burden. Tax residency requires spending at least 183 days a year in the country and meeting other requirements.

Do Andorran companies have to pay social security contributions?

Yes, companies in Andorra must contribute to the social security system on behalf of their employees. The contribution rate is approximately 15.5% for the employer and 5.5% for the employee, which ensures access to health and pension benefits.

Are dividends taxed in Andorra?

No, Andorra doesn’t tax dividends distributed to shareholders of Andorran companies. This is a significant tax advantage for investors, as it allows dividends to be received without being subject to an additional tax burden.

Is it compulsory for companies to file annual tax returns in Andorra?

Yes, all companies in Andorra must file annual tax returns, even if they’re exempt from some taxes or have had reduced income. This declaration is necessary to maintain the company’s tax status and to comply with local regulations. Companies often engage accounting advice to ensure that their obligations are met correctly and within the time frame set by the tax authorities.