The myth that is Andorra a tax haven still exists, but we tell you that today, after a long process that took several years, the Principality is no longer a tax haven. Why is Andorra not a tax haven? We tell you in the following article.

Is Andorra a tax haven nowadays?

Do you still see Andorra a tax haven? We have to tell you that this country has always been seen this way. However, the country followed a process of more than 10 years in which economic and legal openness at the international level took place; on the other hand, the Principality modernized and bet on attracting innovation and foreign capital. All these processes have resulted in a much more transparent country, far removed from those years when Andorra was a tax haven.

For example, today, thanks to immigration regulations, more and more people can settle in the Principality. For example, content creators such as YouTubers. The problem is that, because of its low taxation, Andorra is still considered a tax haven, although it is no longer one.

Until recently, Andorra was a feudal or quasi-feudal country. This means that very traditional laws governed it. However, towards the end of the 20th century, the country began to stand out despite its status. For example, while in the 1960s, the world was immersed in a military and atomic escalation due to the Cold War, the Principality was distinguished by its peace, neutrality, and demilitarization.

This is because Andorra spent only $4.90 a year on armaments, unlike all other countries. And, of course, the Principality was very safe. At the time, Andorra was considered a tax haven, at least its Spanish and French neighbors did. The country survived thanks to the financial services it provided as a refuge for foreign capital and the smuggling of untaxed products, especially tobacco.

During these same years, the quality of life in the country began to increase thanks to the trade favored by Andorra’s status as a tax haven. This resulted in the development of tourism and the creation of the first sports facilities for skiing. At this point, the Principality began to need labor, and there was a massive migration from Spain and Portugal, although the Spaniards became the majority.

The democratization of Andorra

We have already seen that the country had a feudal regime, and it was not until 1993 that it became a democratic regime, approving the first written constitution in the history of the Principality. This created a modern parliamentary governmental system, and in the same year, the country became a member of the United Nations.

But the country, despite its great progress, continued to be very discriminatory towards non-nationals with many restrictions. Was Andorra a tax haven in the 1990s? Despite its social, political, and economic growth, it continued with its paradise status due to smuggling, commercial traffic, and a flourishing economy. Even until the beginning of the 21st century, the Principality continued to be a haven for opaque and illicit capital, and smuggling of certain products, such as tobacco, continued to be practiced.

Andorra, a tax haven on the verge of extinction

The world economic crisis that had severe consequences for Spain also had repercussions for Andorra. The Principality began to take measures and signed the first tax information exchange agreement with Spain (2010). This document allowed Andorra to leave the list of tax havens with its Iberian neighbor. In addition, the taxes on income from economic activities (IAE), on the income of non-resident taxpayers (IRNR), and corporate income tax (IS) were approved.

On the other hand, in 2011, Andorra ceased to appear on the blacklist of tax havens prepared by the OECD, and since 2012, it has become part of the gray list. Also this year, the Monetary Agreement was signed with the European Union to make the euro its official currency.

Foreign Investment Law

One of the significant advances in Andorra’s move away from being a tax haven was the opening up of the economy. In 2012, the Principality enacted a new law on foreign investment to attract foreign capital and diversify the economy. This measure limited the historical discrimination to which non-nationals of the Principality had been subjected.

The legislative reform also ended the limitation to companies with more than 50% of foreign capital. This put an end to the figure of “prestanoms” or “prestanombres” (front men). It also liberalized the practice of professions for non-nationals, so Andorra began to receive many immigrants. What does this mean? Now, anyone can move to the Principality and incorporate a company.

In tax matters, it should be noted that the country approved, for the first time, the Andorran IGI or VAT in 2013. That same year, it agreed to establish tax measures equivalent to the EU’s. The following year, the Personal Income Tax was installed.

Andorra, an extinct tax haven with no banking secrecy

One of the significant milestones of the Principality was lifting banking secrecy. This occurred after a tough process involving the US authorities. Andorra signed an agreement with the EU for the automatic exchange of tax information, and in 2016, a non-double taxation agreement with Spain came into force. After the crisis occurred with the United States and the BPA case, Andorra eliminated banking secrecy in 2017.

Since then, Andorran banks have been obliged to collect all the tax information of their clients and share it with Spain and other States with which it has signed an agreement. Other measures adopted by the Principality were the accession to the IMF, the criminalization of tax offenses, the new law on money laundering and financing of terrorism, and the insurance law, among others.

In 2018, and after reforming the corporate income tax law, Andorra finally managed to leave, officially, the gray list of tax havens. Despite all the efforts, many people still see Andorra a tax haven, but nothing further from reality.