Substance in Andorra
With everybody talking about the substance requirements for international subsidiaries it becomes clear that the traditional world of low-cost offshore companies is coming to an end in the next years. Terms like aggressive corporate tax planning, harmful tax competition and the OECD’s concepts of base erosion and profit shifting, BEPS, have been receiving a lot of press coverage for some time now.
With the OECD countries, most of all EU, US and G-7 nations fighting tax fraud and the so called “treaty shopping” of multinational companies the substance requirements are becoming fundamental in your international tax planning.
Not only offshore companies set up for simple tax avoidance reasons but also genuine companies that are trading internationally and do not have the sufficient size and resources to maintain a large international subsidiary structure are challenged with the new substance regulations.
What exactly is “substance”?
While there are many technical definitions by various tax authorities around the world, in general, it is referring to any condition or factor that justifies the operation of a company in a low tax jurisdiction apart from pure tax optimization or avoidance motives. Further any resources allocated to the actual operation of this company are considered substance factors when it comes to determining if a company is properly operating in its country of residence.
Companies and individuals operating subsidiaries, holdings or related linked companies in low-tax jurisdictions should be ready to prove a sufficient level of substance.
- The company has a registered and physical office and no mailbox address
- Management is located and important board decisions are taken in the country
- Some countries require up to 50% of the board to be residing or at least hold all board meetings in the country
- Bookkeeping / accounts take place in the country
- Depending on the activity and volume there should be an adequate and qualified staff to perform activities
- Main active bank account is in the country
- Have company operating expenses in the country
- If an actively trading company then local registration of activity / license or memberships in chamber of commerce or others recommended
- Director on the ground speaks local language and is qualified to perform the activities
- Offices equipped for a proper operation
- Sufficient insurance coverage of the entity
- Clients and provider base variety especially for subsidiaries and related companies
- Different nationalities of clients or investments for holdings than the majority shareholder’s nationality
All of the above strongly vary case by case and are depending on each country and type of foreign subsidiary. Also there is plenty of room for interpretation. It basically comes down to who is interpreting and in which country.
Any company or individual planning to set up a subsidiary abroad in a low-tax jurisdiction such as Andorra should be prepared and seriously consider the above, especially when the transaction volume and size is considerable. But even smaller businesses expanding across borders must be aware of the topic of substance whenever it substantially alters their current activity and volume in their home country.
Why is Andorra the perfect location to meet substance requirements?
Substance means essentially having a structure on the ground, which of course creates cost for your company. Salaries and office leases are extremely competitive in Andorra if you compare to other low-tax jurisdictions like Switzerland, Malta, Ireland or Cyprus. In 2023, the minimum salary in Andorra is 1,286.13 EUR and office space can be rented as low as for 400 EUR per month to meet local substance requirements for the 2% special reduced corporate tax company models. If you need qualified staff consider that much of the population is trilingual and has university education from France and Spain.
Finally associated costs like accounting and auditing costs, electricity and annual maintenance fees for your Andorran company are very competitive and at the price level of Spain or below.
Substance is the future as the offshore business entity is slowly disappearing as such. Obviously substance comes at a price and it has to fit into your business model. Andorra may be the right choice if you compare with other jurisdictions. It is not only country with the lowest corporate tax in Europe, but also with the lowest structural costs in Western Europe.