Dateline: Belgrade, Serbia
There’s a lot of good to be said about the small European Principality of Andorra. In fact, I’ve had a lot of good things to say about the country myself in the past. Back in 2013, I named it one of the five most livable countries with no income tax. This was, of course, before the EU pressured Andorra into implementing a minimal income tax of its own. However, the 10% income tax they did apply was so low that Andorra made it onto this year’s list for the best low-tax countries in Europe.
If low tax policies weren’t enough, Andorra also has some of the most attractive residency programs around. In fact, I’ve ranked it among the top five investor programs better than the US EB-5 visa. Nestled in the mountains between France and Spain, Andorra is a rare jewel among tax havens for folks looking for a second residency in a developed country.
While its isolated nature means it’s not readily accessible, the two-hour drive from the Barcelona or Toulouse airports is worth the stunning mountain scenery you will find in Andorra. Quaint towns are surrounded by the towering Pyrenees making Andorra the perfect location for hiking, mountain biking, fishing, horseback riding, and other outdoor activities. In the winter, the exceptional ski resorts of Grandvalira and Vallnord offer up roughly 185 miles worth of slopes and thermal hot springs are available year-round. To top it all off, Andorra is within close proximity to the beaches of the Mediterranean via France and Spain.
It is no surprise then that Andorra is a popular tourist destination in Europe.
But Andorra isn’t just for tourists.
For those who live there, Andorra offers excellent public health and school systems, almost non-existent crime rates, high-speed fiber-optic coverage throughout the country, and a relatively low cost of living in combination with one of Europe’s highest per capita incomes. The quality of life is so high, in fact, that Andorra’s population of approximately 80,000 residents has the second-longest life expectancy in the world, second only to Japan.
If the recreational activities and quality of life available in Andorra aren’t enough to convince you to stay the entire year, becoming a resident of the country will also grant you numerous travel benefits. For one, despite its seclusion, Andorra is just a few hours from most European cities, whether by ground or by air. Second, the Andorran resident card permits instant visa-free access to Spain, Portugal, France, and Monaco. And third, a quick twenty-minute visit to the Spanish consulate will produce a multiple entry Schengen visa for any Andorran resident.
Even if you do leave, you are sure to come back, whether it’s for the eclectic combination of Spanish, French, Portuguese, Catalan, and Andorran cultures and languages, the great food and folkloric traditions, or simply for the fantastic European shopping at prices as much as 15-30% lower than almost anywhere else in Europe.
Taxes in Andorra
Andorra seems to be doing things right. They’ve been following their own path for centuries and it has resulted in a legacy of neutrality and stability. Formed in 1278, Andorra is one of the oldest countries in the world, but the country’s tax policies are far from outdated. Since 1993, Andorra has made significant efforts to modernize its political system and, with it, create a favorable environment for investment and business. Andorra is wide open to foreign capital and ownership and has pulled out all the stops to create a favorable tax environment.
Income Tax
On January 1, 2015, Andorra introduced a new personal income tax regime. Under this regime, those whose personal income is below €24,000 are still tax-exempt. Those who earn between €24,001 and €40,000 are taxed at a rate of 5%, and anyone whose personal income exceeds €40,000 is taxed at a very reasonable rate of 10%. Interest on bank savings and earnings is also taxed as personal income, but the first €3,000 in earned interest is exempt.
Corporate Tax
Corporate tax rates for those who choose to incorporate their business in Andorra range from zero to a maximum of 10%. Holding companies incorporated in Andorra that have interests in foreign companies will not be taxed, even if the dividends are paid directly to the Andorran holding company.
If you set up an international trading company that actively buys and sells goods abroad, or if you run a special financial management company from Andorra, you can qualify for a tax rate of 2%. This rate even applies to products merchandized from Andorra, as long as they are not exported or imported within the country’s borders. The only other stipulations you must meet to qualify for the lower tax rate are to hire at least one part-time employee and to have an office space of at least 20 square meters in the country.
All other companies incorporated in Andorra that participate in standard business activity, provide services, or operate locally will be subject to the 10% tax rate. This type of business also requires that you obtain active residence in Andorra, which comes with more requirements in comparison with the other residency options. For example, you will be required to pay social security contributions and will need to spend much more than 90 days a year in the country.
Value Added Tax
Andorra has Europe’s lowest VAT of just 4.5%. This rate is reduced to a nominal 1% for goods and services such as education, food, culture, and health.
Real Estate Tax
If you sell a property in Andorra for a profit, you will be subject to a capital gains tax on your real estate. However, the system is set up to reward long-term ownership and individuals selling their main residence.
For example, while the initial tax rate is 15%, if you sell the property in the second year of ownership, the rate goes down to 13%. This rate continues to go down over time; if sold in the third year it is reduced to 10% and then it decreases 1% annually every year after that (9% in year four, 8% in year five, etc.) until it reaches 0% after twelve years. In other words, if you own your home for more than twelve years, you will not be taxed on the profit from selling your home.
If you sell your main residence, you can also avoid the capital gains tax if you buy another property within six months of the sale.
Regardless of when you buy or sell your home, you will need to pay a property ownership tax of €100 per property each year. In addition, when you buy or sell a property, the new owner must pay a property acquisition tax of between 1.5% and 2.5% of the purchasing cost of the home.
Other Taxes
Besides real estate, there are no capital gains taxes in Andorra. There is also no wealth tax, inheritance tax, or gift tax. For those who choose to run a business in Andorra, social insurance contributions for old age are 8.5% of gross earnings and 6% for disability, survivors, sickness, maternity and work injury. These rates are some of the lowest in Europe.
Residency Programs in Andorra
As mentioned, Andorra has some of the most attractive residency programs, especially in the European region. Each year, Andorra admits a group of roughly 500 new residents to its small population and, if you’re looking to invest or incorporate your business in Andorra, you have a good chance of becoming one of these select few.
The programs are based on your active or passive residence in the country. Active residents need a work permit as they will be working in the country, while passive residents do not. Among the passive residency programs, there are varying requirements based on whether you will invest, set up an international business, or if you are an internationally recognized person.
Category A: Passive Residence – Investment
This residence is available to those who only wish to live in Andorra without working or incorporating a business in the country. Residents must spend at least 90 days a year in Andorra to maintain their residency. They also benefit from fewer regulations in comparison to other programs. Category A residents are also exempt from paying any personal income tax. To qualify as a Category A resident, you must satisfy the following requirements:
1. Be 18 years or older;
2. Present a police certificate showing a clean criminal record;
3. Sign a document promising to reside in the Principality of Andorra for a minimum of 90 days a year;
4. Provide proof of private medical insurance covering Andorra;
5. Demonstrate that you either rent or own a residential property in Andorra (or will own a property within six months of your application date);
6. Prove self-sufficiency by means of a bank certificate confirming a minimum balance of 300% of the Andorran minimum salary (€35,692.92 for 2017), plus an additional €11,897.64 per dependent (or 100% of the current Andorran minimum salary). These funds can then be used for the bond deposit required in step seven.
7. Deposit €50,000 for the applicant and €10,000 per dependent at the Andorran National Institute of Finance (INAF) as a no-interest yielding bond designed to pay any debts incurred by the applicant throughout your residency. The government bond is refundable if you choose to give up your residency.
8. Submit documentary proof of a minimum investment of €400,000* in Andorra within seven months of your application date. If you have not already made the investment at the time you apply, you must sign a document stating your intent to do so. Permitted investments include property (which can fulfill step five), shares or funds issued by Andorran financial institutions, public bonds issued by the government of Andorra, additional no-interest yielding government bonds (from step seven), or a combination of any or all of the options.
*The value of the initial deposit from step seven is included in the total €400,000 investment.
Category B: Passive Residence – International Business
The Category B visa is designed for international businessmen who can form and run an Andorran business that operates largely outside of Andorra. In order to qualify, 85% to 100% of the business must be conducted outside of Andorra. This residency combines perfectly with the 2% corporate tax rate applied to international trading businesses that do not buy or sell goods within Andorra.
This residency also requires a minimum stay of 90 days a year and includes many of the same conditions as a Category A residence, including the personal income tax exemption. There are, however, several important differences. The biggest difference is that the Category B residence does not require a €400,000 investment and, instead, requires that you submit a business plan and confirm the creation of your business in Andorra before a set deadline.
1. Be 18 years or older;
2. Present a police certificate showing a clean criminal record;
3. Sign a document promising to reside in the Principality of Andorra for a minimum of 90 days a year;
4. Provide proof of private medical insurance covering Andorra;
5. Demonstrate that you either rent or own a residential property in Andorra (or will own a property within six months of your application date);
6. Prove self-sufficiency by means of a bank certificate confirming a minimum balance of 300% of the Andorran minimum salary (€35,692.92 for 2017), plus an additional €11,897.64 per dependent (or 100% of the current Andorran minimum salary). These funds can then be used for the bond deposit required in step seven.
7. Deposit €50,000 for the applicant and €10,000 per dependent at the Andorran National Institute of Finance (INAF) as a no-interest yielding bond designed to pay any debts incurred by the applicant throughout their residency. The government bond is refundable if you choose to give up your residency.
8. Submit evidence that you either rent or own a residential property in Andorra that is at least 20 square meters, satisfying the minimum office space requirement.
9. Create a business plan for the next three years, accompanied by your CV and all other supporting documents. The business must target people or organizations located outside of Andorra and any income derived from Andorra cannot exceed 15%.
10. Confirm that the company formation is completed within seven months of your application date.
Category C: Passive Residence – International Recognition
This residence applies to a very select few. If you are known globally for your scientific, cultural, athletic, or artistic ability, you may be able to snatch a Category C residency in Andorra. But don’t get your hopes up. The distribution of this honorary residence is at the sole discretion of the Andorran government.
If you do qualify, you will still need to meet many of the same requirements that come with the other residencies. In fact, you must provide the documents listed in steps 1-7 for the Category A and B residencies, including the government bond deposit of at least €50,000. You do not, however, need to invest €400,000 or produce a business plan. Instead, you must submit your impressive Curriculum Vitae and any other documents necessary to prove your international renown, achievements, and abilities.
And, as with the Category B residency, at least 85% of your professional activity must take place outside of Andorra since you will also be considered a passive resident and qualify for the personal income tax exemption.
Category D: Active Residence – Local Business
We have already discussed most of the requirements for active residents, including the greater degree of permanency in Andorra and the obligation to contribute to social security. This residence program is available to those who form a local company in Andorra and who plan to live and work there on a permanent basis.
There are no specific guidelines about what passes as ‘greater permanency’ or as a ‘local company,’ but the longer you stay the better, and the more legitimate and ‘local’ your business activity is, the more likely it will be that you will pass the regular inspections from the Andorran police. They will be checking that you are, indeed, living and working in the country.
You will not have to present a business plan, but you will have to set up your business in Andorra before you apply for residency. Setting up a company in Andorra can take up to ten weeks, but once the business is incorporated, the immigration procedure will be completed in a matter of days. You do not have to deposit €50,000 for government bonds as with the other residency programs, but you will need to prove that all licensing procedures and company formation is completed within three months of the approval of your residence.
If you have a spouse or any dependents, they must wait a period of twelve months before being admitted as non-working dependents. Or, you can include your spouse as a shareholder in your business (at a minimum of 11%) and they can skip the waiting period. However, since the spouse will be considered to be working under this arrangement, you will have to make extra contributions to Andorra’s social security system.
The Category D residency is the only program in Andorra that requires you to make payments to social security or pay income tax in the country. However, since you will be living there the majority of the year, this will likely be your only tax residence. And, given the low tax rates in Andorra, that’s not such a bad deal.
Cost of Living – Andorran Real Estate
If you are considering one of the residency programs in Andorra, you should also consider the cost of living there, including real estate prices. If you are looking at the Category A investment residence, once you pay the government bond deposit you will have approximately €350,000 that you could potentially invest in local real estate.
For that price, you can find a modern two bedroom two bathroom 55 square meter apartment in the center of Andorra la Vella (Andorra’s capital). Within that price range, you will find various house sizes and levels of luxury depending on your tastes and where you choose to live.
The only downside to investing in Andorran real estate is that, due to the country’s general isolation, the market is fairly illiquid. It can take years to sell a large real estate investment, but that could all change as the country attracts more deep-pocketed investors and businessmen.
Despite being a low-tax haven in the heart of Western Europe, the cost of living in Andorra is surprisingly reasonable. If you choose to lease instead of buy, one-bedroom apartments in the city center can rent for roughly €600 a month, and three-bedroom apartments outside of the city center are available for about the same price.
Andorra is a duty-free jurisdiction so costs are low on everything from retail and cosmetics to bars and restaurants. You can even ski at the world-class ski resorts for decent prices. Services and labor are also low, making life in this secluded European resort country a great value proposition.
Banks
Andorra’s banks are ranked among the world’s top twenty banks in terms of private investment allocation. Banking privacy is guaranteed in the Andorran constitution and safety deposit boxes and private numbered accounts are still the norm among these locally owned and highly liquid banks. In fact, one bank I spoke to there has a liquidity ratio of 30%.
Privacy, liquidity, and stability do come at a price, though; while most Andorran banks do not require a minimum, they will charge significant annual fees. Nonetheless, this fee will give you access to highly secure banks, bankers who specialize in wealth management, and an e-banking interface that allows you to access and manage your account from anywhere in the world.
Andorra is the perfect example of a country that stills offer privacy while remaining firmly compliant with international anti-money-laundering standards. Andorra is now one of the strictest banking jurisdictions in terms of compliance, but you should be reporting your offshore bank accounts anyway, so I see the privacy and compliance combination working in Andorra’s favor.
Is Andorra Right For You?
Like I said in the beginning, there is a lot of good to be said about Andorra. The beautiful scenery, the diverse outdoor activities, the duty-free living, the low taxes, the cost of living, and the world-class banks all add up to make for a very attractive offer. If you don’t mind the two-hour drive to get to the nearest airports, then Andorra might be a good option for a base residence.
If you run a business that operates outside of Andorra, this could be the perfect setup. Or, if you are willing to invest a little, Andorra is one of the most attractive residency programs in Europe. It won’t give you automatic access to the Schengen area, but Andorra is already in the process of becoming a full Schengen member. So, even with everything already going in its favor, Andorra could become an even more attractive offer.
The only question that remains is whether or not it’s the right place for you.
