Andorra is attempting to raise its profile on the international stage by drawing attention to its increasing transparency and attractively low taxes. Stefanie Linhardt reports.

Andorra cycling

Andorra, one of the world’s oldest countries, has been geographically isolated for centuries. But with globalisation changing the international status quo, Andorra is continually working on its relationship with the outside world, as 2016’s signing of the Automatic Exchange of Information (AEOI) agreement on tax matters with the EU showed.

With its current borders, Andorra dates back to the 13th century, following treaties signed between the Bishop of Urgell in Spain and the French Count of Foix, who were quarrelling over possession of the territory. Through these treaties, the country’s unique political system was created: a co-principality, with the bishop and the count as the joint heads of state. This peculiarity still exists today, although the count’s rights have over time been handed down to the French king and subsequently the French president.

But having led a largely insular life based on agriculture and livestock for centuries, Andorra took a step towards the outside world in the 1990s, with its customs union agreement with the European Economic Community – the forerunner to the EU – and through the adoption of a written constitution, which institutionalised today’s parliamentary co-principality and introduced the division of powers between the general council (legislature), the government (executive) and the judiciary overseen by the country's High Council of Justice. The passing of the constitution allowed Andorra to join the UN in 1993.

But what is Andorra’s position in the international system today?

Growing into Europe

Over the past 30 years, Andorra and the EU have found common ground through co-operation agreements and, crucially, the 2011 monetary agreement, which made the euro the official currency in the country. Since 2014, Andorra has minted euro coins without being a member of the eurozone or the EU. This came as a result of the 2011 agreement, which brought with it requirements for Andorra’s banks to adopt all EU banking regulations. This was followed by agreements on ending banking secrecy and implementing standards on transparency with the Organisation for Economic Co-operation and Development (OECD) and the EU, culminating in 2016’s AEOI agreement.

“While additional regulations have been difficult for us as a sector, they make Andorran banks more mature and give us the opportunity to compete with banks all over the world,” says Xavier Cornella, managing director at Credit Andorra, the country’s largest bank by assets. 

Andorra’s move to transparency started in 2009, a year of drastic change for the country. Then relying solely on indirect taxes, without taxation on items such as income and corporate business, Andorra faced international headwinds. The OECD included Andorra on the list of “non-co-operating countries” following the institution’s first reports on tax havens in 2000. When no action from Andorra followed, the country’s then co-head of state, French president Nicolas Sarkozy, threatened in 2009 to resign as co-prince of Andorra if the country did not introduce a complete tax system to avoid being a tax haven.

“Since Mr Sarkozy’s warning in 2009, Andorra started its big path to modernisation with a complete tax reform, tax agreements with third countries, double taxation agreements and the [passing of its] foreign investments law,” says Víctor Pou, a professor of economics at the IESE Business School at the University of Navarra in northern Spain.

Andorra has now signed 24 bilateral tax information exchange agreements (TIEAs), created a new fiscal framework with direct – if very competitive – tax rates, and has signed double taxation agreements and 2016’s AEOI agreement.

The European Commission “approves this modernisation process”, according to Mr Pou, who has written several books about Andorra’s economy and its relationship with the EU. He adds that because of the country’s modernisation efforts, the EU is now looking favourably on Andorra.

“Andorra is currently negotiating an association agreement with the EU,” he says. “If this agreement takes place, it will be a very stable and long-lasting one.”

Andorra stats

In or out?

But the UK’s vote to leave the EU could upset Andorra’s plans, some fear, as more resources and efforts are shifted towards negotiations with the UK rather than Andorra. Others are keen to see what agreements the UK will manage to reach with the EU to gauge what compromises might be achievable for Andorra.

For most Andorrans it is clear: full membership of the EU is not desirable, because an influx of Europeans moving freely into a country of fewer than 80,000 inhabitants and limited space could cause difficulties.

Nevertheless, Mr Pou suggests a deal with the EU could provide Andorra with access to the European domestic and labour markets, help diversify the country’s economy, bring additional stability and legal certainty and stimulate the internationalisation of Andorra’s companies, the latter being one of the country’s toughest tasks.

“One of the biggest challenges for Andorran businesses is making themselves international,” says Xavier Altimir, president of Andorra’s business confederation, Confederació Empresarial Andorrana (CEA). “For many years we have been inward-looking as we have been a very competitive tourist destination. We are at the point where if you want to grow your company you have to invest abroad, which will most likely mean to find partners from abroad.”

Toward internationalisation

Since 2012, internationalisation in Andorra has been much easier thanks to the foreign investment law. Where previously foreign businesspeople were allowed to own a maximum of 49% of the capital in an Andorra-registered company, the updated legislation allows for full ownership.

Passing that law was seen as a significant step towards the country ending protectionism and embracing more freedoms, but has yet to pay off in the form of foreign investment.

“About 90% of foreign-owned businesses that have come to Andorra since the enactment of the foreign investment law are from Spain or France,” says Marc Pantebre, the president of Andorra’s Chamber of Commerce. “This is mainly a question of culture and knowledge of Andorra. It is an important challenge for the government to communicate abroad what Andorra is and what it can offer.”

Douglas Pate, president of the international committee at CEA, works on the committee to establish a brand for Andorra. He points out that an understanding of the international community’s necessities is especially important for Andorra’s internationalisation.

“The consciousness of a need to be able to speak English is not yet accepted by the majority of mid-level business owners,” he says, highlighting the country’s previously inward-looking nature.

Andorra’s national language is Catalan, but most of the population also speak Spanish and French, in part thanks to the school system and the fact that most foreigners working and living in Andorra are from the neighbouring countries.

Tax systems

One thing that attracts business owners and people of working age to Andorra is its competitive tax system. Mr Sarkozy’s 2009 admonishment and the consequent tax reform led to the introduction of direct taxes across corporate and personal income – something that would have seemed impossible only a few years prior, according to Mr Pou – which paved the way for international transparency and co-operation.

Starting in 2011, for the first time in its history Andorra introduced income taxes of 10% (general rate), and a corporation tax and tax on the income of non-residents also of 10% each. These rates compare favourably with Andorra's neighbours (see comparison table).

Andorra taxes capital gains at between 0% and 15%. It has no stamp or capital duty, nor inheritance tax, luring corporations and businesspeople to the country.

“Our indirect tax system was returning enough revenue to the government to cover the public finances, which is why today’s direct tax system is based on lower taxes than in some other countries,” says Credit Andorra’s Mr Cornella. “We needed to introduce direct taxes to bring our fiscal system in line with international standards and therefore be able to sign agreements with other countries.”

The tax model has recently also attracted sports personalities, especially professional cyclists, something Mr Pate was involved with.

“Professional cyclists compete around the world. They maybe earn a maximum of about €4m a year. They are under incredible stress during the big tournaments, so when they have time to recover from the Tour de France or La Vuelta, they have to be able to relax thoroughly,” says Mr Pate, who is also the ambassador for sports in Andorra. “When the cyclists recover they need to breathe clean air and need to be able to just enjoy the nature. They can do that here.”

International road cyclists such as Ireland’s Dan Martin and Colombia’s Esteban Chaves have made the move to Andorra, allowing them to benefit from the nature – with its mountains and lowest point of 840 metres above sea level, Andorra also is a prime destination for altitude training – as well as from the low taxes.

“We are receiving more and more sportsmen and sportswomen in the country who move here under the immigration permit of only residing here for 90 days a year because their career is outside the country,” says Mr Pantebre. “In a few years this could evolve into a new way of development for the country.”

An end to the haven

While the new tax framework has faced some resistance in the country, it has allowed Andorra to sign double taxation agreements with eight countries, taking important steps towards removing the country’s status of a ‘tax haven’.

The OECD, which classified Andorra as a tax haven in 2000, removed the country from its ‘non-co-operative’ list in 2009. In December 2015, Andorra signed the Multilateral Competent Authority Agreement with the OECD, also called the Automatic Exchange of Information Agreement, which will introduce the automatic exchange of information in tax matters on a reciprocal basis from September 2018.

This, as well as February 2016’s AEOI agreement with the EU, which sees Andorra collect all tax information from 2017 and exchange it annually with all 28 EU member states from 2018, are contributing to Andorra’s further internationalisation and transparency.

“We are living in important times for our country,” says Mr Pantebre. “We have seen the opening of our economy, we are out of recession, we are trying to find new activities to boost our economy and we are becoming more transparent internationally. All this makes Andorra more sellable abroad.”

These factors, as well as plans to establish a brand for Andorra to create a definition of the country and make it more known internationally, make the country’s future exciting. But will it be bright?

“If things go as expected and Andorra and the EU reach an association agreement, Andorra can become a small but modern and strategically positioned player,” says Mr Pou. “It could be a small Luxembourg or Singapore with a high income per capita and a good quality of life.”

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