Andorra is one of many locations around the globe considered a tax haven because of its relatively lenient tax laws. However, as of 2015, pressure from the European Union has prompted the Andorran government to increase taxation, making it less of a haven than it was a decade ago.
What Is a Tax Haven?
A tax haven is a locale, or a country, state or territory, that is popular among wealthy individuals and businesses because its tax laws allow them to legally reduce their tax liabilities. Typically, this is done by allocating assets to offshore bank accounts or shell companies, or by taking up residency to benefit from lower tax rates.
No Offshore Incorporation
Unlike most other tax havens, Andorra does not provide for the easy creation of offshore companies, so it is better suited to wealthy individuals in need of offshore banking services than to businesses looking to squirrel away assets in Andorran-based subsidiaries. To own more than 10% of an Andorra-based company, nonresidents must request approval from the Ministry of Economy, which can prove difficult. It is possible for a foreigner to form a company after attaining residency, but the company's net profits are subject to the 10% corporate tax applicable to resident businesses.
Andorran Tax Laws
Historically, Andorra has had no income, capital gains, sales, gift or inheritance tax, and gaining residency was relatively simple. The Andorran government implemented a 4.5% value-added tax (VAT) and a set of relatively stringent residency requirements, primarily based on an investment of no less than 400,000 euros. A capital gains tax will be introduced in 2016 that taxes profits from the sale of Andorran property at a maximum rate of 15% depending on how long the property has been held. Most other investment income remains tax-free.
In addition, a new income tax rate is set to take effect in 2016. The tax is still extremely low by U.S. standards, topping out at 10% for those who earn more than 40,000 euros per year, and it only applies to income for which tax has not been paid elsewhere, preventing any double taxation.