Tax System in Andorra

Tax System in Andorra

Andorra is a gorgeous principality in the Pyrenees mountain range, well known for its favorable taxation policies. The micronation didn’t have income taxes until the EU pressured it to implement basic income tax in 2015 with a maximum rate of 10%.

There are many advantages to becoming a tax resident, which is why you’ll see a steady increase in the expat community residing here.

In this guide, we’ll explore how Andorra’s taxation system works and learn more about the different kinds of taxes.

Andorran Taxes in a Nutshell

Even though Andorra is no longer recognised as a tax haven, its taxation policies are still among the most favorable you’ll find anywhere in Europe. The rules differ slightly for active and passive residents.

Passive residents can be exempt from the personal income tax (IRPF, with a maximum 10%) if they reside here for less than 183 days per year. They are also not required to make any passive declarations or declare their movements.

In practical terms, the 90-day requirement for passive residency and the 183-day requirement for active residency is a grey area.

Many of our clients voluntarily report themselves as fiscal residents and declare the tax with the authorities. Due to exemptions, their tax return can be zero. It’s possible to be a fiscal resident in the principality by residing for less than 183 days a year. This way your income is not subject to taxation.

The time spent here is not monitored and you don’t have to be physically present in the country for more than 183 days if you wish to declare taxes in Andorra and only pay a fixed rate of 10% for all income above €40,000/year.

Types of Taxes Levied in Andorra

The Andorran tax structure is designed with the intention of boosting economic activity, welcoming foreign investment, providing a solid base for expats, and creating a favourable environment for entrepreneurs. Here’s what the rates look like:

  • Maximum 10% income tax (0% for passive foreign residents).
  • Corporate tax rate of 10% (0-2% on foreign-sourced income).
  • Lowest VAT In Europe at 4.5% (many items tax-free).
  • Low property taxes (€100/year for a large house).
  • Tax-free dividends (on all Andorran CIF funds for retirees).
  • Non-taxable interest (on bank savings to €3,000 per year).

IRPF

The IRPF, or Impost Sobre la Renda de les Persones Físiques, is a personal income tax that was introduced in 2015 after pressure from the French and Spanish governments — Andorra didn’t have an income tax prior to 2015.

Income tax varies based on the marital status of the tax resident. The government provides relief for couples with children and mortgages.

Value-Added Tax

VAT (Value-Added Tax) is the lowest in Europe. The most popular shopping items such as alcohol, cigarettes, and perfumes are duty-free and millions of shoppers from nearby countries shop in the country for cheaper prices.

Consumer goods are 20-40% cheaper than in France. The general VAT for other purchases is capped at 4.5% except for banking fees. Similar to other European countries, the VAT is determined by the product being purchased:

  • 0% VAT on items such as cigarettes, alcohol, and perfumes. VAT exemptions also apply for medical services, housing rentals, and gold.
  • 1% VAT for books, magazines, water, and meat products.
  • 2.5% VAT for transport tickets, library membership, museum tickets, access to historical places, theatre tickets, art sales, theatre tickets, and similar.
  • 9.5% VAT for banking and financial services.

For comparison, VAT is 20% in France, 20% in the UK, 21% in Spain, and 23% in Ireland. As a resident here, you will enjoy some of the cheapest consumer goods in Western Europe due to low VAT.

Corporate Tax

The principality has the lowest corporate taxes in Western Europe, with many tax exemptions. For comparison, Ireland, the biggest corporate tax haven in Europe has a tax rate of 12.5%. Here, the corporate tax is only 10%.

You don’t have to physically reside in the country to incorporate for tax purposes. It is possible to incorporate in Andorra for as little as €3,000 (not including agency fees).

The Andorran government gives tax advantages for the first 3 years:

  • 50% reduction in the first year. This means the effective tax rate is only 5% for the first 12 months. If the company produces an income of €1,000,000, the corporate tax rate will only be €50,000.

Residents also have corporate tax exemptions in the first 3 years of operation. All new entrepreneurs and businesses who incorporate for the first time can enjoy the following privileges:

  • 5% tax rate for income between €0-50,000 in the first 3 years.

We offer a company formation service and we can help you set up your corporation, including handling all paperwork in Catalan.

Real Estate Tax

Property tax is symbolic and tends to cost €100/year for a large 150m2+ home. On average, you’ll be paying €0.75 per square meter in property taxes a year. The tax is determined based on the parish of residence.

The property tax only applies to property owners between the ages of 18 and 65. Property owners over the age of 65 do not have to pay property tax. There are transfer taxes for sold properties between 1.5-2.5% that are paid by the seller.

Note: Each parish imposes annual taxes for infrastructure maintenance that can amount to between €500 and €1,000 per year. This is the only real tax burden on property owners in the principality.

Tax on Rental Income

Rental income in Andorra is taxed depending on the property owner’s resident status. Local residents enjoy lower taxes on rental income while foreign residents still get relatively low taxes.

If you rent out a property on a long-term basis or a short-term rental such as Airbnb, you will pay between 0.4-4% as a local resident. As a foreign investor deriving income in the principality, the tax rate is fixed at 7.5% of the gross rental income.

Capitals Gains Tax (For Sales)

Capital gains taxes are paid by property owners who sell their Andorran property for a profit, however this rate changes depending on length of ownership.

The rate is the highest, at 15%, if the property is sold within 12 months of ownership. This decreases to 13% in the second year, 10% in the third year, and 1% each year thereafter. The capital gains tax is 0% if you’ve held the property for more than 12 years.

Capital gains taxes do not apply if the property was used as the main residence and the property owner purchases another property with the funds obtained from the sale within 6 months.

Vehicle Tax

Andorra makes it easy to import a car from the European Union and abroad. The import tax rate is only 4.5% (VAT) on the market value of the car. If a car is worth €10,000, the import tax will only be €450. The registration cost for a car is €200 as a one-time fee.

The license plate cost is €60 and is issued by the Automobile Club of Andorra. Vehicle registration is only possible for residents who possess a residencia (residence permit) in the principality and can provide proof of address.

The following vehicle importation rules apply:

  • The vehicle has to be Class 5 or above energy-efficient, according to the EU emission standards.
  • Older vehicles such as high-value classic cars can be imported and are exempt from the class-5 rating requirement.
  • Important for UK residents: Vehicles with a right steering wheel are not permitted.
  • Automotive insurance is mandatory for all vehicle registrations in the principality.
  • Cars manufactured outside the European Union will be subject to a 10% income tax.

Dividends Tax

Dividends tax in Andorra only applies to foreign dividends. If the dividends are derived from Andorran entities and companies such as Andorran CIFs, they are subject to 0% personal income tax. This means that retirees who invested their money in Andorran CIFs can enjoy tax-free income for the rest of their lives.

If the dividends are derived from companies that are not resident in Andorra, they may be subject to the personal income tax at a maximum tax rate of 10%. However, these dividends can also be exempted under the double taxation rule. If the dividends have been taxed at 10% or more in it’s country of domicile, they are not likely to attract tax in Andorra.

A Fair System

So there you have it. While Andorra is no longer a country with zero tax, it’s what many would consider incredibly fair.

Similar to the tax benefits of Singapore and similar “offshore” countries like Hong Kong and the UAE, there are many opportunities to lower the amount you pay to the government each year, while staying completely compliant. That’s thanks to Andorra being compliant with OECD and other organisations.

Want to move to Andorra and become a tax resident? We can fast-track you to residency and advise you on tax-residency in the Principality of Andorra.

Main Benefits of the Tax System in Andorra

  • Andorra has historically been known for its low tax policies.
  • While it is not technically a tax-free country, the few rates that do apply are some of the lowest in Europe.
  • There is a tiered system for the newly introduced personal income tax.
  • The VAT system was introduced in 2013 and replaced the old Sales Tax regime.
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