Andorrans enjoy a low VAT rate, close to zero capital gains taxes and very low personal income taxes. The situation here is especially favourable for businesses too, thanks to a rather generous corporate tax rate.
At face value, the tax system in Andorra might come across as complex. In reality though, it’s pretty straightforward and easy to understand. Below, we’ll summarise the tax environment in Andorra and throw light on some important facts and figures that you must know before making the move.
Income Tax Rates in Andorra
Up until January 2014, Andorra didn’t tax individual income. Even though its previously long-standing reputation as a tax haven is no longer valid (legally at least), the tax rates here are still significantly more favourable when compared to most other European countries.
Despite the quick modernisation of Andorra’s political system and its progressive fiscal policies, the country has managed to retain a shockingly low income tax rate—one that never exceeds 10%—making it one of the lowest in Europe.
Known locally as Impost sobre la renda de les persones físiques, or IRPF, income tax in Andorra is calculated on an annual basis: from 1 January to 31 December.
Rates vary based on whether you are a resident or a non-resident and specifications for both scenarios are explained below.
Resident Income Tax Rates
The basic income tax rate for residents in Andorra is 10% and is, of course, subject to credits and deductions. Salaries below €24,000 are not charged any income tax whatsoever. From there on, the tax gradually increases and is capped at 10%.
Dividends issued by Andorran companies are tax-exempt for residents. If you, as a resident, make money through investments, you pay zero tax on the first €3,000.
Capital gains on stockmarket investments are tax free.
For individual residents, the tax rate brackets are as follows:
€0 to €24,000: 0%
€40,000 or higher: 10%
For couples who are married, the brackets differ, but only slightly:
€0 to €40,000: 0%
€40,001 or higher: 10%
Unlike most countries, the income tax rate here is applicable to all salaries, pension income and foreign investments. This means that if you are a resident in Andorra making over €24,000, no matter the source of your income, you will be charged a nominal tax.
Income tax here also covers a few key deductions and provisions for your dependents and mortgage payments; each of these will affect your overall personal tax rate.
Non-Resident Income Tax
If you are not a tax resident (i.e. if you do not stay in Andorra), but your income is generated in the principality, you will have to pay IRNR. Levied at a rate of 10%, IRNR is payable on all economic activity that occurs within the country’s jurisdiction.
Once you formally become a resident, you will be eligible for the tiered tax brackets and income adjusted rates mentioned further up. Although the 10% rate is still a very low rate for income tax, it’s important to note that Andorra currently has taxation treaties with only 24 countries. Depending on where you live, you may be taxed twice.
Until a few years ago, this was a real concern for French and Spanish cross-border workers. However, Andorra now has tax agreements in place with both countries.
Technically, Andorra does not charge sales tax. This is the reason why many people from both Spain and France happily hop the border to indulge in tax-free shopping.
The most notable benefit of not having to pay any sales tax is that you’ll always know how much you’re paying when you buy products—the price tag will include taxes.
Value-Added Tax (VAT)
Unlike sales tax, VAT is applicable for all goods and especially services. Here in Andorra, it is locally known as Impost General Indirecte or IGI for short.
This might raise the question of whether or not VAT rates are inflated to compensate for the absence of sales tax—you’ll be happy to know that’s not the case. At an average rate of 4.5%, Andorra actually boasts some of the lowest VAT rates in Europe.
There are a few exceptions that are worth noting. VAT is levied differently on the following goods and services:
1% on certain media
1% on all food and drink (except alcohol)
2.5% on tourism operators and art
9.5% on banking and financial services charges
Healthcare, medicine and education are all exempt from value-added taxes.
Corporate Tax Rates
Corporate tax in Andorra is primarily levied on the profits obtained by companies or other legal entities operating within the borders of the principality. As of today, the Andorran corporate tax rate is a reasonable and meagre 10%.
Intellectual and industrial property companies can benefit of a reduction of the tax to 2% on their profits, although this may change in the future.
Despite the recent changes to Andorra’s tax system, the corporate tax rates are still regarded as some of the most competitive in the world—much lower when compared to France (25%) and Spain (25%). Companies in France making under €38,000 can pay as little as 15%, which is still a lot more than what you’d end up paying in Andorra.
It is also worth noting that companies based in Andorra are not responsible for withholding tax from dividends, nor are they responsible for income paid to non-residents. With benefits like these, it’s little wonder more and more people are looking to establish to establish a company in Andorra.
Capital Gains Tax
While on the subject of corporate tax rates, let’s discuss capital gains taxes. In Andorra, the capital gains of both individuals and companies are treated like any other form of income. Because of this, the nominal capital gains tax rate is the same as the corporate tax rate, which is 10%.
Bear in mind, you will not pay tax on gains from selling shares if your ownership of the said company comprises less than 25% of the total shares.
What does this mean for buying and selling stocks? Well, the system works in your favour. You can buy and sell stocks without having to pay tax on the profits (provided you keep them within the 25% margin mentioned above). This is a lucrative proposition for day traders.
In addition, shares that have been held for more than 10 years incur no capital gains tax whatsoever.
Real Estate Tax
In many countries, the sale of real estate can be subject to heavy taxation. That’s not the case in Andorra. Apart from the 4% property transfer tax, profits earned from the sale of real estate are taxed on a very fair sliding scale.
The real estate tax is subject to change based on the duration of property ownership. To summarise:
15% if your property is sold in less than 1 year of ownership
14% if you sell it in less than 2 years
13% if you sell it in less than 3 years
12% if sold in less than 4 years
From there on, it decreases by 2% every year until it reaches 0%.
The system is designed to discourage individuals from buying and selling a property without any intention of actually living in it. The government’s main focus is to attract people who want to actively contribute to the economy, so that the place can thrive.