Andorra Corporate Tax
Corporate tax in Andorra is one of the most recent taxes levied on company profits, as it did not exist until 2011 (it was approved on December 29, 2010, Law 95/2010) and did not come into force until 2012. This is the main tax applied to companies with tax domiciled in Andorra. Corporate tax is calculated on the profits with a 10% flat rate.
For individuals with tax residency in Andorra, dividends and profits on shares are exempt from this tax. SICAVs and investment funds are also exempt. Corporate tax (Impost de Societats) in Andorra is very competitive compared to other European jurisdictions. Andorra corporate tax can be reduced even to 2% for special tax regimes such as patents/management of intellectual property originating in Andorra.
Although the company tax should not even exist for absurdity, in Andorra this tax is very low and responds to the process of tax harmonization that the country took to be able to open internationally and adapt to modern times.
What is a Corporate Income Tax?
Corporate income tax is a direct tax imposed by a jurisdiction on the income or capital of corporations or similar legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at the state or local level. This tax is also often referred to as a capital tax. Partnerships are generally not subject to this type of taxation. A corporate income tax may apply to:
- Companies incorporated in the country
- Entities doing business in Andorra with income from Andorra
- Foreign companies having a permanent establishment in the country
- Corporations considered a resident for tax purposes in Andorra
Corporate taxable income is often determined in the same way as taxable income for individual taxpayers. Although there are many ways to calculate tax, governments generally do so by taxing companies on their net profits or by taxing shareholders when the corporation pays a dividend. The tax rate varies by jurisdiction and is usually single and fixed.
Net profits are generally the net income of the financial statement with modifications and can be defined in great detail within each country’s tax system. When dividends are taxed, a corporation may be required to withhold taxes before the dividend is distributed. Also, most systems provide specific rules for the taxation of the entity and/or its members upon termination or dissolution of the entity.
Corporate Tax in Andorra
In Andorra, corporate income tax is levied on the income of Andorran legal entities regardless of the place where it was produced and the tax residence of the payer (as long as the legal entity or company is fiscally resident in Andorra) and is applied throughout the territory of the Principality.
Entities liable for the tax when they reside in Andorran territory:
- Legal entities
- Collective investment institutions included in the scope of application of Law 10/2008, of June 12, 2008
- Public and para-public and public law entities
On the other hand, entities are considered tax residents in Andorran territory if they comply with one of the following:
- Incorporated under the laws of the Principality of Andorra
- Office/coworking space registered in Andorra
- Effective place of management is placed in the territory of Andorra.
Taxable Income Base
The tax base is generally calculated by the direct method, i.e. by correcting the accounting result obtained based on the legislation and the Andorran General Accounting Plan. For this purpose, depreciation, impairment losses, and certain liability provisions are taken into account, valuing the assets according to the acquisition price or production cost and the normal market value of the assets. It should be noted that negative taxable income can be offset against positive taxable income for tax periods ending within the following ten years.
Corporate Tax Rate
The general corporate tax rate on profits in Andorra is 10%. However, the tax rate applicable to collective investment institutions regulated by Law 10/2008, excluding management companies, is 0 percent.
Special Tax Regimes
Notwithstanding the above, there are special regimes that apply to a series of entities that meet a series of conditions and requirements. These special regimes act in the determination of the tax base, modifying it.
For example, there is a special regime for companies that carry out international exploitation of intangibles or intervene in international trade and another for intra-group financial management and investment companies, which, by meeting certain requirements, can benefit from a reduction of 80% of the tax base (equivalent to an effective rate of 2% on the general base).
There is also a special regime for cooperative companies, tax consolidations (holding companies), and companies whose activity is the holding and maintenance of shares in foreign companies (that is why it is so advantageous to be a broker or trader in Andorra). Besides, there is another special amortization regime for new investments. We, therefore, recommend dealing with these issues with good professionals for optimal tax planning with strict compliance with all laws, such as the associates of Andorra Partner.
Exemptions to Avoid Double Taxation
To mitigate the double taxation of the same income, exemptions are made on the profit participation of other domestic and international entities. For example, if the entity receives dividends or profit participation from tax resident and non-resident entities in Andorra, these profits are exempt if (although they also have some extra limitations):
- The non-tax resident entity is subject, without the possibility of exemption, to an income tax with similar characteristics to the corporate tax of the Principality of Andorra as established with the law. These exemptions are valid throughout the chain of investees.
- The Andorran tax resident is subject to and not exempt from corporate income tax.
- The percentage of direct or indirect participation in the capital, equity, net worth, or voting rights of the tax resident or non-resident entity is equal to or greater than 5%.
Deductions are also given for job creation and investments in Andorran assets. Finally, it should be noted that dividends obtained from Andorran entities are always exempt from Income Tax.
Tax Period and Accrual
The tax period coincides with the fiscal year of the entity, although it cannot exceed twelve months and in case the fiscal year is longer, the period ends at the end of the twelve months. The fiscal year also ends when the company is extinguished (registration cancellation) and when the legal form of the entity is changed in such a way as to affect this tax.
As for the accrual of the tax, it takes place on the last day of the tax period.
Payments on Account
Taxpayers must make a payment on account of the settlement corresponding to the tax period in progress on September 1, calculated as a percentage of 50% of the settlement amount of the immediately preceding year. The payment on account is considered as a tax debt.
Payment on account is deducted from the assessment payable after the end of the tax period. When, as a result of the payment on account, the differential amount is negative, the Ministry of Finance will refund the excess.
Additional Interesting Tax Reductions
In addition to those mentioned above, there are two reductions for new businesses that are worth mentioning. The first is that during the first year of application of the tax, taxpayers enjoy a reduction of 50% of the liquidation quota, with which the effective rate would be 5% concerning the taxable base (profits).
The second, on the other hand, benefits SMEs and micro-enterprises. For the taxpayers of corporate tax who are constituted as new entrepreneurs of a new business or professional activity and who obtain profits of less than €100,000, the tax rate applicable during the first 3 years of activity is:
- 5% for the part of the tax base between €0 and €50,000.
- 10% for the remaining taxable income
Company Tax in Andorra: Optimization
Although the principle of taxing the income of legal entities is rather dubious, as they are managed by individuals who are already taxed (or will be taxed in the future), the Andorran corporate income tax is very attractive. The general rate is 10%, however contains a huge variety of details and exemptions that make it even more tempting and place the maximum total direct tax rate for individuals at 10% of the income obtained.
However, according to the Andorra tax system, you must comply with a series of conditions and requirements established by Andorra’s law. We recommend dealing with professionals in the sector who provide good legal, tax advice, and accounting services, to ensure optimal tax planning in this strict margin of the legislation.