Once known for its tax haven status, the Principality of Andorra boasts significantly low tax rates in comparison with most European countries. The country draws thousands of people each year owing to its favourable tax structure and evolved political system.
Andorrans enjoy a low VAT, 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
Until 1st 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 Even though its previously long-standing reputation as a tax haven is no longer valid (legally at least), the tax rates here are still significantly favourable when compared to most other European countries.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.
Income tax in Andorra is locally known as Impost sobre la renda de les persones físiques, or IRPF. It is calculated on a one-year basis, namely 1st Jan to 31st Dec.
Rates vary based on whether you are a resident or a non-resident; specifications for both scenarios are explained below.
Resident Income Tax Rates
The basic Income tax rate for residents in Andorra is 10% — this 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, for residents (only), is exempt. If you, as a resident, make money through investments, the first €3000 is exempt.
For individual residents, the tax rate brackets are as follows:
- €0 to €24,000: 0%
- €24,001-€40,000: 5%
- €40,000 or higher: 10%
For couples who are married, the brackets differ, but only slightly:
- €0 to €40,000: 0%
- €40,000 or higher: 10%
Unlike most countries, the income tax rate here is applicable to all salaries, pension income, and foreign investment. This means that if you’re 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’ll be charged an income tax of 10% 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 above. Though this 10% is still a very low rate for income tax, it’s important to note that Andorra does not have taxation treaties with a wide range of countries yet, so you may be taxed twice.
This type of tax is most commonly applied to French and Spanish cross-border workers. It also applies to contractors, artists, freelancers, and other service providers. If your income structure is fee-based, 5% of your invoice will be taxed, and an additional 1.5% for reinsurance. If (one of) your income sources consist of real estate rentals, a 20% reduction is applied to the amount received. Basically, all lucrative activity within the country’s borders is taxed.
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.
Unlike sales tax, VAT or value-added tax 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’d be happy to know that’s not the case. Andorra actually boasts some of the lowest VAT rates in Europe, at 4.5%.
There are a few exceptions worth noting:
- 1% on certain media,
- 1% on all food and drink except alcohol,
- 2.5% on people transport and art,
- 9.5% on banking and financial services.
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 meager 10%. Holding companies that operate solely for investment purposes can pay 0% if they comply with some requirements. Intellectual or industrial registered and licensed property management companies are only tasked with paying a paltry 2% tax rate on all profits.
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 compared to France and Spain at 33.33% and 25% respectively. 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 held liable for withholding tax from dividends, nor are they responsible for income paid to non-residents.
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 a majority of stocks without having to pay tax on the profits. This is a lucrative proposition for day traders.
In addition, the tax rate is also 0% on capital gains from selling off an asset that has been owned for over 10 years.
Real Estate Tax
In many countries, the sale of real estate can incur 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,
- 13% if you sell it in less than 2 years,
- 10% if sold in less than 3 years, and
- From there on, it decreases by 1% 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 their homes. The government’s main focus is to attract people who want to be contributors to the economy so that the place can thrive with activity.
Understanding Andorran Tax Rates
As you can see from this brief guide, Andorran tax rates aren’t that complicated. While there are some small details and stipulations, you’ll find that the system is fair and straightforward.
Essentially, it boils down to a maximum rate of 10% on income for residents and companies, no sales tax, and a 4.5% value-added tax. There are no inheritance, estate, or transfer taxes.
Have more questions about how this might affect your plans of relocation to Andorra? Reach out and give us a call! We’re here to help.