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An Andorran company management executive may opt to receive a mix of salary and dividends. Paying the lowest personal income tax from both is the most tax efficient effective strategy. Typically, the most effective is receiving a salary up to 40.000 EUR then receiving the rest in dividends.

Substance requirements demand that there are paid employees. The company’s revenue and corporate tax base are affected by outgoing salary payments as these are considered company expenditures. If management receive a salary, then it is a deductible company expense.

On the personal income side of taxation up to €24,000 EUR received is tax exempt. 5% personal income tax is paid on the part between € 24,000 and € 40,000. 10% is paid from the marginal increase past €40,000 EUR.

Shareholders receive dividends when the company is making profits and decides to distribute them. Dividends that are, in general, tax exempt from personal income tax in Andorra but note that corporate tax from company profits is charged at 10%. The company settles the 10% corporate tax on profits before it then decides to distribute the remaining profits after tax as dividends to its shareholders.

As explained dividend payments are tax exempted from;

a. personal income tax if distributed to a tax resident shareholder in Andorra

b. withholding tax if distributed to a non-resident shareholder tax resident elsewhere

The ideal situation simplifies how to receive the most income as a company executive.

Appreciate that real-life cases demand case-by-case tax consulting. Andorra’s company and personal tax laws are complicated. We recommend individuals wishing to optimize their income to consider financial consultancy.

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During the months that the income tax declaration lasts, the tax and accounting consultancies in Andorra are focused on preparing the necessary documents so that taxpayers can comply with this tax obligation. If you would like more information on who must make the declaration, what withholdings and deductions are like or general information on the income tax return, you can find it on our page Personal income tax declaration in Andorra.

If you would like more information about the services that Abast Global – ANDORRE INVEST offers in tax and accounting matters, just fill in our contact form and one of our advisors will get back to you as soon as possible.

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Since October 2020, Andorra has been an official member of the IMF. The member countries are organized in groups with mutual interests. Andorra applied to join the group led by Belgium and the Netherlands, due to the financial similarities they share. In November 2020, Eric Jover, Minister of Finance of the Principality of Andorra, met with his Dutch counterpart, Wopke Hoekstra. The reason was to advance in the negotiations of the agreement to avoid double taxation between both countries.

Since 2011 the agreement for the exchange of tax information between Andorra and the Netherlands is active. However, the signing of the double taxation agreement between Andorra and the Netherlands would improve the collaboration between both countries by creating a positive commercial and legal framework.

We will report soon on the progress of this negotiation.

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IMF Managing Director Kristalina Georgieva reported that she is pleased to welcome Andorra as a new member and that the organization will work closely with the Andorran government to achieve its growth objectives, in cooperation with other partners in the international community.

Interesting fact: only 4 member countries of the UN are not members of the IMF: Cuba, Liechtenstein, Monaco and North Korea.

Andorra becomes the 190th member country of the International Monetary Fund

Although Andorra has had relations with the International Monetary Fund (IMF) for years, with this incorporation, Eric Jover ensures that Andorra will improve its reputation and international approval. It also affirms that Andorra will “have access to more and better technical assistance and training in financial matters, and opens the door to having a financial safety net in case of need”.

The IMF executive consists of 24 directors. These represent the constituencies and member countries. Andorra enters the group formed by Belgium and the Netherlands. The Finance Minister explained that he chose this group due to the financial similarities they have with the other countries that make up it. Andorra, being a full member, participated on Friday in its first vote for the election of the new executive director of its group, Paul Hilbers.

In a nutshell, the entry of Andorra to the IMF has a positive impact on the reputation and prestige of the country, improving its rating worldwide. The country will be able to receive an annual review or “health check” of its economy by the IMF; it will be able to access training and technical assistance in addition to possible loans in case of emergency.

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The Andorran executive has informed last Wednesday at a press conference, through his head of government Xavier Espot that the interprofessional minimum wage will increase by 3.5% as of January 1, 2021. This means that € 1121.47 will be paid per month / € 6.47 per hour.

Espot has also indicated that this increase is part of measures to progressively equate the minimum wage to the real cost of living and respect the recommendation of the Council of Europe so that the minimum wage reaches at least 60% of the average wage.

Reviewing the increase in the minimum wage in 2020, which was 3.2%, placing it at 50.5% of the minimum wage, with the increase for 2021 it will be 52.5% of the average wage. In this way, little by little, the recommendations of the Council of Europe will be fulfilled. This increase will represent between 3% and 4% above the CPI forecast at the end of 2020, so Espot pointed out that it is “an important and remarkable effort in a context in which many entrepreneurs are experiencing difficulties”.

The rise in the interprofessional minimum wage is in line with what is included in the draft Law on urgent measures related to the leases of urban properties and improvement of purchasing power, which will also increase the CASS pensions below the minimum wage and solidarity pensions by a 3.5%. In addition, the Law indicates that housing rental contracts will be extended and will prohibit increases in rents above the CPI. This Law will be approved soon in parliament where the Government has sufficient support.

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Andorra continues to work on foreign policy issues with new tax conventions to avoid double taxation. Andorran foreign affairs minister Maria Ubach has reported that the next agreements to be signed will be with the Netherlands, Belgium and Hungary. Currently the Principality of Andorra has signed agreements to avoid double taxation with the following countries: France, Spain, Portugal, Luxembourg, Liechtenstein, Malta, United Arab Emirates and Cyprus.

Negotiations are well advanced and the agreements would have already been signed if COVID-19 had not appeared, although this year they should conclude, the Minister reported on September 10 when she presented Andorra’s annual report on foreign action for 2019.

The signing of these new agreements was to be expected soon since exchanges with Belgium and the Netherlands began almost 3 years ago and with Hungary the last contact was in February of this year. These new agreements will open an important commercial exchange between Andorra and these countries, promoting the transit of goods and services.

On the other hand, the minister reported that the agreement with Germany is costing more since they consider that the economic activity between both countries does not justify said agreement, although the minister insists that an agreement with Germany would be positive for Andorran foreign policy. She also indicated that soon, possibly in January 2021, negotiations with Italy could begin and that she sees it feasible to start talks with Austria.

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The inequality in the way the COVID19 has affected the global business and working community is visible among the workforce of much of Southern Europe and worldwide. The drop in jobs related to tourism, hospitality, and B2C services is contrasting with the rise of independent consultants that work as freelance in the IT sector or are related to the digital economy in general. With the growth that we are experiencing in e-commerce and IT-related services, it becomes clear which sectors are benefiting from the current tendencies. Andorra is positioning itself with this trend as a potential base and place of residency for a skilled, independent, and flexible workforce.

Working from home is becoming increasingly the norm for many professionals in those sectors. They are flexible and can be digital nomads when it comes to choosing their home base.

Anyway, coming back to the topic, life quality and taxation are important factors that influence higher relocations to Andorra. Besides this, the health system, general safety, and crime, as well as quality of life-related factors, are to be considered for a potential residency. Tax residency in Andorra has gained in popularity during those months of lock-down and ongoing pandemic. Our research and internal data show that the demand to establish a residency in Andorra has risen mostly among IT consultants and technicians. Home office has come to stay at least partially. Even digital nomads find themselves limited given travel restrictions and the issue of national health systems in certain countries such as in Asia and the Caribbean.

Andorra offers one of the best health systems in the world. The cost of social security and health care coverage is very competitive as well as living expenses for housing, food and utilities. In a worst-case-scenario of an ongoing pandemic over months or a year Andorra can be a safe-haven for those that may provide their services over distance working from home or with limited travel.

Through an official income tax of 10% with an effective tax rate well below that on salary / earnings Andorra offers multiple advantages for those that become tax resident. Corporate tax at 10% and tax-exempted dividends as well as the absence of wealth tax make Andorra more than attractive for medium and high earning individuals.

We do not dare to predict the outcome of the pandemic but it is clear that for years to come companies will reduce travel budgets, home office or working over distance will remain in place at least partially and the tax burden among OECD countries will be on the rise. Andorra is not immune to the drop in its tourism sector and will also be pressured to reduce its fiscal deficit. However it is well aware that its tax regime is one of the main attractions for foreign investment which it will rely on even more in a post-COVID situation.

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Since the approval of Law 10/2012 on Foreign Investment in 2012, which allows 100% of the capital of an Andorran company to come from abroad, foreign investments have continued to grow. The purpose of this law is to promote economic openness for both the new and traditional sectors of the country.

It should be noted that Andorra, in its effort to adapt to European regulations, is very strict regarding the origin of foreign capital. For this reason, Andorra dismisses foreign investments:

• of resident, domiciled or national natural persons, or legal entities from some of the countries that do not cooperate with the International Financial Action Group (FATF), the entity in charge of developing and promoting policies to combat money laundering and terrorist financing.
• of individuals or legal entities that obtain an unfavorable report related to the prevention of money laundering and terrorist financing.
• that interfere or harm the exercise of public power, sovereignty and security of the country, public and economic order, the environment, public health or the general interest.

Since 2017, an upward trend has been observed, however, the increase in investment volume of 82% in 2019 compared to the previous year is impressive. It should be noted that 94% of the applications received have been approved and 77% of the companies have formalized the investment. It is a capital of around 790 million euros. The investment made in 2019 is 10 times that registered in 2013.

Truth be told, the capital investment was the one that attracted the most capital to the country, followed by the provision of services and real estate development and construction. Most of the investments that have been formalized in Andorra come from neighboring countries: Spain with 45.5% and France with 25.2%.

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