Changes to the special 2% tax regimes in Andorra

Changes to the special 2% tax regimes in Andorra

The parliament of Andorra has recently approved the legal amendment to the corporate tax law that previously permitted a special tax regime for various activities resulting in a 80% reduction on the taxable base. The special regimes also known as the 2% special taxation regimes have been altered or eliminated to some extent.
After adopting to the BEPS framework new protocols have been implemented following the harmonization of the Andorra taxation system with international standards suggested by the OECD and European Union.

Previously there was a series of special regimes applicable for a reduced taxation such as:

International trading of goods
International exploitation of intellectual property also known as patent box
– International cash-pooling
– International holding structure and participation

All of those were taxed at 2% corporate tax or exempted from taxation in case of the international holding structure under certain requirements.
However, the guidelines of BEPS (base erosion profit shifting) of the OECD and the Code of Conduct on taxation of EU companies have shown that the Andorran special tax regimes made allowed possible unfair tax competition which may lead to the artificial shift or delocalization of profits by offering an effective taxation significantly lower than the one generally applicable in other mostly European jurisdictions.
This has resulted in changes and elimination of some the special regimes.

Changes to the International exploitation of intellectual property

The reduction from 10% to 2% will only apply if the Andorran company that is exploiting the intellectual property is also developing the technology / knowhow involved through using sufficient resources and substance in Andorra. The essential meaning of this is not clearly confirmed, but we may assume that substantial HR and local resources have to be present in Andorra to actively work on, create and develop the intellectual property concerned.

This would go beyond the requirements of having a 20 sqm office with a part-time employee. We may assume that for example a software license or right may require a programmer to be working and developing the software from Andorra.

The benefits must come through royalties or license fees rather than from the simple sale of goods or services. So clearly there is a legal patent and license agreement to be registered and granted through a contract to the licensee.

Elimination of the special regime for trading companies / triangular invoicing

This special regime has simply been eliminated and the 10% standard tax rate is applicable. There is a transition period for companies that already are operating under this regime.

Elimination of the special regime for cashpooling companies

This special regime has simply been eliminated and the 10% standard tax rate is applicable. There is a transition period for companies that already are operating under this regime.

Changes to the special regime for international holding companies

The special holding regime allows to benefit from a tax exemption on dividends perceived by an Andorra holding company participating in foreign companies.

With the new changes the exemption is only applicable if the corporate tax rate of those companies that are participated in exceed 40% of the nominal tax rate in Andorra. In other words you can only be exempted if the company in the country of origin has paid a minimum of 4% in corporate tax on those profits. This would basically result in a taxation for holding companies in Andorra whenever there is participations in tax-haven based companies (with essentially 0% corporate tax in origin).

Summarizing the changes the standard tax rate of 10% is consolidated and special exceptions are eliminated except for companies that bring added-value in terms of knowhow and technological development to the country. The 2% regime for patent box / intellectual property exploiting companies in Andorra remains very attractive however it remains to be seen if logistics and local talent can be found and maintained to meet the substance requirements.

The Andorran special holding regime remains very attractive and essentially just sorts out aggressive optimization through participations in tax-haven based companies where no corporate tax at all is paid.

For more information especially on requirements to meet for the special regime for intellectual property / patent box in Andorra please contact us.