Living in Andorra

If you want to hide from the taxman, there aren’t many options within Europe. One of the options is the not readily accessible but very discreet Principality of Andorra. This self-willed nation is hidden high up in the Pyrenees mountains. Andorra has been doing its own thing for centuries without paying too much attention to other countries.

Historical background

Andorra is the last independent survivor of the ‘Marca Hispanica’, buffer states founded by Charles the Great (Charlemagne) to prevent an invasion of Christian France by the Islamic Moors. In 1933, France occupied Andorra because of social unrest before the elections. Between 1936 and 1940, France stationed a detachment of troops in Andorra in order to keep out influences of the Spanish Civil War and Franco’s Spain. Only in 1958, Andorra officially declared peace with Germany: during World War I, Andorra was fighting on the side of the ‘Triple Entente’ (France, Britain and Russia), but because it was omitted from the Treaty of Versailles, it remained in a state of war with Germany until 1958. Due to the relative isolation of the country, Andorra’s existence took place outside the mainstream of European history, with few ties with other countries. This differs greatly from Spain and France. Nowadays, however, the country is becoming less isolated with a thriving tourism industry in conjunction with improvements in transport and communications, and its political system was thoroughly modernised in 1993.

Political system

The Constitution, adopted in 1993, established Andorra as a sovereign parliamentary democracy with two co-princes as the joint and indivisible heads of the State. The two co-princes exercise their functions with equal but limited powers and they don’t have the right to exercise their veto against legislation passed by the General Council. Each prince is represented by a personal representative in Andorra. The way in which the two princes are chosen makes Andorra one of the most politically different countries in the world. One of the co-princes is the president of France, now François Hollande (historically any French head of state has served as co-prince, whether it was a king, emperor or president). The other co-prince is the Catholic bishop of the Spanish town La Seu d’Urgell. Because neither of the co-princes lives in Andorra, their role is almost completely symbolic.

Cultural background and leisure activities

Andorra is the perfect place for trekking and hiking in the mountains, trout fishing, horseback riding, mountain biking, bird watching, etc. During wintertime, you can ski in the ski areas of Grandvalira and Vallnord with nearly 300 kilometres (186 miles) of ski slopes available (with the benefit that the slopes are less crowded than in the big resorts of France, Switzerland and Austria). If you love a rich flora and fauna, then this is your place. Extensive woods, alpine meadows, beautiful flowers, mountain goats,… However, stay away if you’re a fashionable jetsetter because you’ll end up in a psychiatric hospital within a year. The Principality isn’t readily accessible because you can count on a 3-hour car drive from Barcelona. But this can be an advantage too.

Andorra has a population of approximately 80,000 people of which 35% are locals. Each year a small group of approximately 500 newcomers is admitted. The sole official language for administrative purposes is Catalan but French and Spanish are also commonly spoken. The only banks are local banks, but this can have its advantages as well. The cost of living is acceptable and you can rent or buy something for a reasonable amount of money. You could say that living in Andorra is relatively inexpensive and crime is an unknown concept in Andorra.

Taxes

Direct taxes

As a resident of Andorra, you’re subject to little direct taxes: There’s no wealth tax, no gift tax, no inheritance tax and no capital gains tax (unless the capital gain was realised by buying and selling Andorran property).

Andorra will introduce a new personal income tax regime on the first of January 2015. The following personal income tax rates will apply:

– Personal income between EUR 0 and EUR 24,000: 0% (first EUR 24,000 is tax-exempt);

– Personal income between EUR 24,001 and EUR 40,000: 5%;

– Personal income exceeding EUR 40,000: 10%.

Interest on bank savings and earnings will also be taxed under the personal income tax regime (but the first EUR 3,000 of interest earned is tax-exempt). Additionally, some real estate taxes apply and a Value Added Tax rate of 4.5% applies to most goods and services.

Real estate taxes

A capital gains tax is to be paid by individuals who sell Andorran property with a profit. The nominal rate is 15% but diminishes to 0% over a period of 12 years. More specifically, the capital gains tax rate is 15% when you sell the property within a year, 13% if you sell the property in the second year of ownership, 10% if you sell the property in the third year of ownership, and this rate decreases by 1% annually after the third year (so 9% for the fourth year of ownership, etc.). This means the seller isn’t subject to any capital gains tax if he/she sells the property after owning the property for more than 12 years. Alternatively, sellers also don’t pay capital gains tax if the property they’re selling is their main residence and if they buy another property within six months of the sale. Property ownership tax is levied on each property owned, at an average of EUR 100 per property yearly. When real estate is transferred, a property acquisition tax is payable by the new owner and the amount payable is generally calculated as a percentage (between 1.5% and 2.5%) of the acquisition cost.

Value Added Tax

On the first of January 2013, the Principality of Andorra introduced a Value Added Tax system. It replaces the old Sales Tax regime, it’s imposed on most sales of goods and provisions of services and it implies a standard rate of (only) 4.5%. As a consequence, international luxury brands and electronic products are considerably cheaper in Andorra than in the surrounding countries (because the VAT rates in France and Spain are considerably higher).

Becoming resident of Andorra

Becoming a resident of Andorra is relatively easy. Four categories of residence exist: active residence, category A (the former passive residency), category B (an international business permit), and category C (a cultural permit).

Active Residence

This type of residence is available to individuals who form an Andorran company and who intend to live and work on a permanent basis in Andorra. This type of residence requires a degree of permanency (being present in Andorra for only 90 days is insufficient, for example) and as an active resident, one is required to pay social security contributions. Additionally, active residents are subject to the new personal income tax regime to be introduced in 2015.

Category A (former passive residence permit)

In order to become a resident of Andorra under Category A (the former passive residence permit), applicants must meet the following conditions:

– Over 18 years old;

– Provide the appropriate legalised police certificates (which prove a clean criminal record);

– Sign a document that they will reside for a minimum of 90 days per year in Andorra;

– Prove that they have a private medical insurance valid for Andorra;

– Prove that they either rent or own a residential property in the Principality of Andorra (or prove that they’ve signed a contract to buy a property within six months from the date of application);

– Prove that they dispose of sufficient means to support themselves and their dependents. One needs a bank certificate which confirms a balance of minimum 300% of the minimum Andorran annual salary for the main applicant and 100% for each additional dependent. Therefore, one has to open a bank account with a local Andorran bank and deposit the required funds (EUR 34,634.43 for the main applicant and EUR 11,544.81 for each dependent) into that bank account. These funds aren’t lost because after the bank issues the bank certificate, these funds can be used to fulfil the government bond requirement (explained in the next bullet point);

– Deposit a EUR 50,000 bond plus EUR 10,000 for each dependent at the Andorran National Institute of Finance (INAF). The bond doesn’t yield interest and is designed to cover any debts that the applicant may incur with any administration or state-owned utility company. This government bond is entirely refundable when giving up the residence permit, so this money isn’t lost (it only doesn’t yield interest);

– The applicant (head of the household) needs to sign a document which states that he/she will submit documentary proof within seven months from the date of application that he/she has invested a minimum total amount of EUR 400,000 in Andorra. Permitted investments are the following: property in Andorra, shares of or funds issued by Andorran financial institutions, public bonds issued by the Andorran government, a straight increase of the non-interest bearing government bond or a combination of all of them. It’s important to realise that the bond deposited at the INAF (EUR 50,000 for the main applicant and EUR 10,000 for each dependent) is included in this EUR 400,000 investment requirement. This means that the actual amount that needs to be invested is the balance which is computed by deducting the total amount deposited at the INAF from the minimum requirement of EUR 400,000.

This category offers great advantages: less conformity to local regulations and no personal income taxes payable! Perfect for people who run businesses outside Andorra for example and who don’t need a work permit in Andorra. Passive residents need to spend at least 90 days per year in Andorra.

Category B (International Business Category)

This is a residence permit designed to attract international businessmen who wish to form an Andorran company but only want to spend a minimum of 90 days (more is allowed) in Andorra. 85% to 100% of the business must be conducted outside Andorra. In order to obtain this permit, applicants must meet the following conditions:

– Over 18 years old;

– Provide the appropriate legalised police certificates (which prove a clean criminal record);

– Sign a document that they will reside for a minimum of 90 days per year in Andorra;

– Prove that they have a private medical insurance valid for Andorra;

– Prove that they either rent or own a residential property in the Principality of Andorra which satisfies the minimum requirement of an office space (minimum 20 square meters);

– Prove that they dispose of sufficient means to support themselves and their dependents. One needs a bank certificate which confirms a balance of minimum 300% of the minimum Andorran annual salary for the main applicant and 100% for each additional dependent. Therefore, one has to open a bank account with a local Andorran bank and deposit the required funds (EUR 34,634.43 for the main applicant and EUR 11,544.81 for each dependent) into that bank account. These funds aren’t lost because after the bank issues the bank certificate, these funds can be used to fulfil the government bond requirement (explained in the next bullet point);

– Deposit a EUR 50,000 bond plus EUR 10,000 for each dependent at the Andorran National Institute of Finance (INAF). The bond doesn’t yield interest and is designed to cover any debts that the applicant may incur with any administration or state-owned utility company. This government bond is entirely refundable when giving up the residence permit, so this money isn’t lost (it only doesn’t yield interest);

– Produce a business plan with a projection of the next 3 years, a detailed Curriculum Vitae and all supporting documents;

– Prove, within 7 months after the application, that the company formation has been completed.

As mentioned before, this residence permit is designed to attract international businesspeople who wish to establish an Andorran company but only want to spend a minimum of 90 days (more is allowed) in Andorra. The businessperson’s primary base of operations must be established in Andorra. The services offered by the professional must be aimed primarily at persons or entities not resident in Andorra: the professional may offer his services within the Principality but the income derived from within Andorra may not exceed 15% of the total earnings from the business activities and the professional isn’t allowed to aim for full-time employment in Andorra.

In contrast with the active residence scheme, category B residents have to pay a government bond. The good news is that they only have to spend 90 days in Andorra (versus active residence which requires a certain degree of permanence). In contrast with category A, category B residents aren’t required to invest a minimum amount of EUR 400,000 in Andorra. It’s expected that category B residents will be classed as passive residents, meaning they won’t be subject to personal income tax in Andorra just like category A residents. The decision will be made in the near future.

Category C

Certain individuals can apply for a residence permit for scientific, cultural or sportive reasons. Category C can be considered as the VIP category and the Andorran government decides in its absolute discretion whether an individual qualifies for this category or not. Applicants for category C residence must meet the same conditions as applicants for Category B residence (including the government bond). In contrast with category A and in line with category B, this category isn’t required to invest a minimum amount of EUR 400,000 in Andorra.

In order to qualify for category C, an individual must be internationally recognised in his/her particular field and he/she should submit a detailed Curriculum Vitae and all supporting documents which prove his/her international standing, achievements and fame. Additionally, 85% of the professional activities must be carried on outside Andorra. It’s expected that category C residents will be classed as passive residents, meaning they won’t be subject to personal income tax in Andorra. This decision will be made in the near future.

About the requirement that one needs to be present in Andorra for at least 90 days per year (category A, B and C). Nobody’s going to lose any sleep over it. There are solutions for this.

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