- Tax in Andorra
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Located in the immensity of the Pyrenees, Andorra has been crowned as one of the favorite destinations for entrepreneurs and investors at the international level. Not only is it a country with a high quality of life, but it also has the freest tax measures. However, there is one concept that is very important for entrepreneurs looking to establish themselves in Andorra: economic substance.
Economic substance refers to the need for an entity’s business, financial, and operating activities to coincide with where revenues and costs are recorded for tax purposes.
This means that if a company benefits from a favorable tax regime in a given country, it is expected also to have a “substantial” commercial presence and activity.
Therefore, economic substance involves having employees, housing assets, and making business decisions within the same tax territory.
To make sure that a company has economic substance, you need to pay attention to the following components:
Real activity: The company has to develop tangible business operations from the country where it is registered for tax purposes. It can produce goods, provide services, or any other legitimate activity.
In addition to these essential factors, to ensure that a company has economic substance, consideration should be given to contracts and agreements (negotiated, signed, and executed in the jurisdiction), local records (such as accounting), and regular audits to ensure compliance with local regulations.
After all, the economic substance does not have to be reviewed only once but must be updated frequently as companies grow and international regulations change.
Economic substance in companies brings some essential benefits:
On the other hand, not presenting economic substance in the country where the company is registered for tax purposes carries risks. Moreover, it is pursued by the OECD (Organization for Economic Cooperation and Development) and the EU. Below, we present them to you:
Andorra is a country in constant evolution. It has carried out several reforms and new regulations to follow international guidelines and regulations in tax matters.
This reflects that Andorra is a country with transparency and international tax cooperation. Here are some of the most important changes and regulations:
In conclusion, economic substance is an essential concept in modern international taxation. Companies must ensure their presence and operations in the country where they carry out their tax effects to avoid legal problems and serious reputational penalties.