In Andorra it is not compulsory to conduct a business by means of a legal entity, but it is normally more efficient to do so, in terms of the deductions applicable to legal entities over individuals, who have more limitations for deductions or exemptions.

Andorra only regulates two kinds of companies: limited liability companies (Societat de Responsabilitat Limitada – SL) and joint-stock companies (Societat Anònima – SA). The main difference between the two corporate forms is that the SL requires a minimum share capital of EUR3,000, whilst the SA requires at least EUR60,000 equity to initiate its commercial operations. Additionally, the SA is intended to be more accessible to foreign investors, whereas the SL is aimed to be restrictive towards the entrance of new shareholders.

The main entity used for investments is regulated by the Andorran Financial Authority (Autoritat Financera Andorrana – AFA) under the form of a SICAV (Collective Investment Vehicle). There are different classes of SICAV in relation to the investment policy but, from a corporate point of view, all of them are incorporated as SAs. The key advantage of these entities is the tax treatment: although they are subject to Corporate Income Tax (CIT), the tax rate is equal to 0%.

The residence of companies is determined according to three different criteria:

• if the company has been incorporated according to Andorran laws;
• if the company has its registered office located in Andorra; and
• if the company is effectively managed from Andorra (ie, the effective management headquarters are located in Andorra).

The general tax rate for CIT is 10%, although taxpayers benefit from a reduction of 50% of the taxable base in the first financial year. However, SICAVs are subject to a 0% rate. If individuals receive proceeds because of an agreement to distribute dividends, they would be also fully exempt, according to law.

Accounting profit is very close to tax profit, since the Andorran system does not regulate many adjustments to the accounting result, with the following exceptions:

• permanent adjustments – exemptions, fines, gifts, donations and unjustified expenses, double tax reliefs, etc; and
• temporary adjustments – amortisation and depreciation, provisions, etc.

There is a specific regime for investments in intangible assets, provided that the following requirements are fulfilled:

• the company must apply those intangible assets to its business activities;
• the intangible assets can only be used by or destined for the business;
• the company trying to apply the regime must have all the records and books duly deposited; and
• the intangible asset must be developed in Andorra.

The application of this regime must be requested from the government, which shall authorise it expressly.

A special treatment is applied to new investments carried out after the CIT entered into force. The treatment is more than a deduction or relief, and applies different criteria for the amortisation of those assets.

Previous tax losses that arose when the CIT was in force can be offset against the profits arising during a maximum term of ten years.

Andorra does not impose any limits on the deduction of interest.

Consolidated tax grouping is an option: a group can be taxed globally if all the companies, directly or indirectly, have at least 75% in other companies of the group.

Capital gains are taxed at 10%. There is a full relief applicable to gains arising from the sale of shares of subsidiaries if, at the time of the sale, the parent company held at least 5% of the shares during the previous 12 months, and the subsidiary is subject to CIT of at least 4% (40% of the general corporate tax rate in Andorra).

VAT is applicable, at a rate of 4.5%. Real estate transfer tax is applicable, at a rate of 1%. Other activities (such as gambling, insurance or the commercialisation of special products) may be subject to special taxes.

Incorporated businesses must consider the fees of the notary and a flat stamp duty tax payable to the government. Companies must also pay a registration and maintenance fee to the Andorran Companies Registry (Registre de Societats) and apply for a commercial licence for the development of an economic activity, which also triggers annual maintenance expenses.

Normally, all businesses and entrepreneurs carry out business using a corporate form (either SL or SA). Alternatively, entrepreneurs can develop an economic activity as self-employment.

The corporate tax rate is 10%, with taxpayers benefiting from a reduction of 50% of the taxable base in the first financial year.

Non-corporate businesses shall be taxed by means of Personal Income Tax, at the following rates:

• 0% up to EUR4,000;
• 5% from EUR24,000 up to EUR40,000; and
• 10% from EUR40,000 upwards.

There are no tax incentives for accumulating earnings for investment purposes. However, investments in fixed assets in Andorra generate a tax incentive of 5% of the total invested amount, provided that certain conditions are met.

Dividends are fully exempt if they have been distributed by Andorran companies to individuals who are residents in Andorra. Capital gains are exempt if, before the sale, the seller held up to 25%, or had maintained the shares for more than ten years. Otherwise, the capital gain should be subject to tax at a rate of 10%.

If investments in listed companies do not represent a participation quota higher than 25% of the share capital of the company, the capital gain is exempt. Otherwise, capital gains would be subject to a flat tax rate of 10%.

Only royalties are subject to withholding tax, at a rate of 5%.

The primary tax treaty countries used by foreign investors to make investments in local corporate stock or debt are Spain, Portugal, France and Luxembourg.

To date, local tax authorities have never challenged the use of treaty country entities by non-treaty country entities. However, the Andorran tax authorities could well challenge such cases, since Andorra is a BEPS jurisdiction and is complying with all the duties arising from BEPS. In this case, the authorities are obliged to check that a transaction is carried out in a normal way, avoiding artificial structures with the aim of avoiding or minimising the tax payable (treaty shopping).

Linked transactions must be carried out at a fair market value. Taxpayers are obliged to request a valuation report from an independent expert, evidencing that the transaction has respected the standards of the market. There are no specific obligations to document the transfer pricing transaction, but this would be necessary in the case of a tax audit.

To date, the tax authorities have not challenged the use of related-party limited risk distribution arrangements for the sale of goods or the provision of services locally, but there is a risk they could, because the law is clear in this regard.

Andorra’s policy towards local transfer pricing rules is the same as that established by the OECD, and those parameters have been incorporated into the law.

The tax authorities have confirmed that there have been no international transfer pricing disputes in Andorra resolved through double tax treaties and mutual agreement procedures.

The tax authorities have not been very active in challenging transfer pricing matters, so it is hard to know how they would act in such scenarios.

The tax base for local branches of non-local corporations and local subsidiaries of foreign corporations is calculated through the same system, with the common flat tax rate being 10%. However, the local branches have certain limitations on deducting expenses related to the parent company.

Capital gains arising from the sale of stocks in local corporations by non-residents are taxed at a rate of 10%, although the capital gains will be exempt if the seller has held less than 25% of the company during the last 12 months. However, if more than 50% of the company’s assets are made up of real estate assets located in Andorra, a special tax for capital gains arising from the stock transactions applies, which is regressive from 15% in the first year down to 0% if the sale is more than ten years after the acquisition.

Andorran regulations do not provide for change of control provisions.

Any formulas used to determine the income of foreign-owned local affiliates selling goods or providing services are normally determined by an independent expert, who drafts the master file determining the market price of the transaction.

Transfer pricing rules apply to transactions related to management and administration expenses.

Related-party borrowing by foreign-owned local affiliates to non-local affiliates is subject to the same rules as apply to other linked transactions.

The foreign income of local corporations is not exempt from corporate tax per se, but the withholding at the source, if that is the case, is deductible up to a certain limit (effective taxation in Andorra on this income).

Andorran regulations do not provide for non-deductible local expenses.

Dividends from foreign subsidiaries of local corporations are exempted from tax by applying the participation exemption principle, under certain conditions (ie, minimum participation, length of participation, and effective taxation or the existence of a double tax treaty).

Intangibles developed by local corporations can be used by non-local subsidiaries in their business without incurring local corporate tax, provided that the foreign company pays the linked company a fair market price. The profit for the transferor is taxed at a rate of 5% if the transfer is considered a royalty, or at 10% in all other cases, except for other dispositions under double tax treaties.

Andorra has not yet incorporated any CFC rules into its tax system.

Andorra has not yet incorporated any rules related to the substance of non-local affiliates into its tax system.

Capital gains are taxed at 10%. There is a full relief applicable to gains arising from the sale of shares of non-local subsidiaries if, at the time of the sale, the parent company held at least 5% of the shares during the previous 12 months, and the subsidiary is subject to CIT of at least 4% (40% of the general corporate tax rate in Andorra).

Andorra has a set of anti-avoidance provisions in the General Tax Act, with the most important provisions being as follows:

• transactions must be carried out for valid economic reasons and not just for tax reasons;
• simulated transactions with the sole purpose of avoiding the tax applicable to the real business are prohibited; and
• presumptions or valuations are fixed by law.

Audits are carried out without any prior notice, and there is no regular cycle for non-regulated SLs or SAs. However, financial entities shall be audited. An auditing company can be appointed for a maximum period of four years, which may be renewed without exceeding an overall total of eight consecutive years.

All the BEPS recommendations have been implemented, although the incorporation of CFC rules into the Andorran tax system is still pending, and some other pending items will be implemented very soon. 

Andorra is fully compliant with BEPS, and the government agrees 100% on the spirit of BEPS in order to avoid fraud or artificial transactions with the sole aim of reducing or eliminating taxation in the most expensive jurisdiction.

International tax has a high profile in Andorra. Andorra did not have any experience in tax matters before 2011, and consequently needs the guidance of the OECD and countries with many years of experience.

It is likely that the tax pressure would be increased with the adoption of a competitive tax policy, but this decision will be implemented very slowly to avoid internal conflicts.

It could be suggested that the 0% taxation of SICAVs makes no sense, and the CFC rules must be implemented as soon as possible.

Andorra is following the timeframe agreed with the OECD to implement BEPS, and is fulfilling the changes at the due time. To date, Andorra has not implemented the item related to hybrid instruments, but the government has a timeframe within which to approve the relevant laws.

Andorra does not have a territorial tax regime. Income is taxed following the principle of worldwide income for residents, and, in certain cases, non-residents are subject to real taxes when making transactions with real estate properties.

As Andorra does not have a territorial regime, the CFC proposals are not relevant here. The next tax reform will target potential evasion by Andorran residents (individuals or corporations) through companies located in countries where passive entities owned by non-residents are not subject to tax.        

All the double tax conventions are the same in terms of following the OECD model and, in some cases, the UN model.

The transfer pricing rules are very clear in the law, and no relevant changes in this regard are expected.

The proposals for transparency and country-by-country reporting are essential for tax justice and a more efficient distribution of tax resources among countries.

Andorra has not implemented any criteria in this matter, but it will follow the relevant recommendations of the OECD. To date, a draft bill on digital economy, entrepreneurship and innovation has been submitted to the General Council (the Andorran legislative body), providing for a more beneficial taxation of personal and non-resident income for shareholders of companies that are deemed to be start-ups.

Andorra fully supports the proposals made by the OECD.

All the provisions regarding the taxation of offshore IP that were originally included in the law have been abolished because of the amendments introduced to the law following the BEPS recommendations.