As we already commented in our article on taxes in Andorra and in the open a company in the country, one of the most recent tributes is the one that it taxes the profits of companies, because until 2011 there was no (was approved on December 29, 2010, Law 95/2010) and until 2012 it did not enter into force.
While corporate tax shouldn't even exist absurd (because if you only tax the part of the dividends exempting reinvestment tax, etc., it is like an income tax on economic activities, and if you tax all the profit of a company you are paralyzing the activity of the business by taxing reinvestments, acquisitions , etc.) in Andorra this tax is very light and responds to the homologation process that the country took to be able open internationally and adapt to new times.
So today we are going to explain what is this tax and how is it usually applied, the origin and its operation for the specific case of the Principality of Andorra. A country that although it is no longer a tax haven it does offer some more than clear tax advantages compared to the countries around it, also in corporation tax and is a powerful alternative for those entrepreneurs, be they entrepreneurs or private investors, who are fed up with the inefficiency of the current states and whose businesses do not depend on the physical location or the territory.
What is corporation tax or IS?
Corporation tax is a direct tax imposed by a jurisdiction on the income or capital of corporations or similar legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at the state or local level. This tax is also often called capital tax. Associations are generally not subject to these types of tribes. The corporation tax of a country can be applied to:
- Companies incorporated in the country
- Corporations that do business in the country with income from that country
- Foreign companies that have a permanent establishment in the country
- Corporations considered residents for tax purposes in the country
Taxable business income is often determined in a way very similar to taxable income for individual taxpayers or natural persons. Although there are many ways to apply the levy, countries generally do so by taxing corporations on their net earnings or by taxing shareholders when the corporation pays a dividend. The tax rate varies by jurisdiction and is usually single and fixed.
Net earnings are generally the net profit of the financial statement with modifications and it can be defined in great detail within the tax system of each country. When dividends are taxed, a corporation may be required to withhold taxes before the dividend is distributed. In addition, most systems provide specific rules for the taxation of the entity and / or its members upon the termination or dissolution of the entity.
History and structure of corporation tax
The following definitions form the structure of this tax:
- Passive subject: they constitute the taxable person typical of the tax capital companies, which are entities with their own legal personality and limited liability of the partners. Although most entities lacking legal personality are excluded from the tax, there are usually exceptions such as investment funds and pension plans, although with the application it is normally a special type of tax.
- Taxable base: In calculating net income deductible expenses are subtracted from gross income, taking into account the compensation of losses as well as the valuation of inventories, amortizations or deductions for depreciation of the asset and changes in equity.
- Tax rate: As we have previously said the rate applicable in corporation taxes is generally fixed and does not depend on the tax base level, therefore constituting a proportional tax. However, the existence of special types of taxes for companies engaged in non-profit activities is common. There are also differentiated tax rates for distributed and undistributed benefits in certain countries.
As for the story, it is more or less similar to that related to Individual Income Tax (Personal Income Tax). In the United States, up to the Sixteenth Amendment various income and corporate taxes were enacted, but they were short-lived because they were considered unconstitutional. This Amendment of 1909 and ratified in 1913 forever imposed corporation tax such as corporate provisions within federal income tax.
The Corporation Tax in Andorra
In Andorra the Corporation Tax is the one that taxes the income of the Andorran legal persons regardless of the place where it was produced and whatever the taxpayer's tax residence (as long as the legal person or company resides fiscally in Andorra), and applies to the entire territory of the Principality.
So that, they are taxed of the tax the so-called "companies" or "entities" when they have their residence in Andorran territory:
- Legal entities
- Collective investment institutions included in the scope of Law 10/2008, of June 12, regulating collective investment organizations under Andorran law
- Public and parapublic entities and of public law
On the other hand, they are considered tax residents in Andorran territory the entities that fulfill one of the following:
- That they have been constituted in accordance with the laws of the Principality of Andorra.
- Have your registered office in the Principality of Andorra.
- Have your effective management seat in the territory of the Principality of Andorra. For this purpose, it is understood that an entity has its effective management headquarters in the Principality's territory when the general management and control of the production of all its activities or businesses are established or exercised.
- They have transferred their residence in Andorra and from the moment the transfer of your domicile in Andorra has been perfected, in accordance with the provisions of commercial law.
The tax base is generally calculated by the direct determination method, that is, correcting the accounting result obtained based on the legislation, and the General Accounting Plan of Andorra. For this, amortizations, losses due to deterioration of the value of the assets and certain provisions of liabilities are taken into account, valuing the assets according to the acquisition price or the cost of production and their "normal market value". . It should be noted that negative tax bases can offset positive tax bases of the tax periods ending in the following ten years.
Tax rate of tax
The general type of tax for Andorra's corporate taxpayers is 10 percent. However, the tax rate applicable to collective investment institutions regulated by Law 10/2008, excluding management companies, is 0 percent.
Despite the above, there are special regimes that apply to a series of entities that meet a series of conditions and requirements. These special regimes act in determining the tax base, modifying it.
For example, there is a special regime for «companies that carry out international exploitation of intangibles or intervene in international trade»And another for«intragroup financial investment and management companies«, Which fulfilling certain requirements can benefit from a reduction of 80 percent of the tax base (equivalent to a effective rate of 2% on the general basis).
They also have a special regime cooperative societies, the tax consolidations (holdings) and companies whose activity is holding and maintaining holdings in foreign companies (that is why it is so advantageous to be a broker or trader in Andorra). In addition, there is another special amortization regime for new investments. We therefore recommend dealing with these issues with good professionals for optimal tax planning with strict compliance with all laws, such as associates of Andorra Insiders.
Exemptions to avoid double imposition
In order to alleviate the double taxation of the same income, exemptions on profit shares of other internal and international entities. For example, if the entity receives dividends or profit shares from both tax resident and non-resident entities in Andorra, these benefits are exempt if (although they also have extra limitations):
- The tax non-resident entity is subject, without the possibility of exemption, to an income tax with characteristics similar to the corporation tax of the Principality of Andorra as established by law. These exemptions are valid throughout the chain of investees.
- The tax resident entity in Andorra, is subject and not exempt from corporation tax.
- The percentage of participation, directly or indirectly, in the capital, equity, equity or voting rights of the resident or non-resident tax entity is equal to or greater than 5 percent.
Deductions are also given for job creation and for investments in Andorran assets. Finally it should be noted that dividends obtained as individuals from Andorran entities are exempt from personal income tax. They can get more information on personal income tax here.
Tax period and accrual
The tax period coincides with the financial year of the entity, although it cannot exceed twelve months and in the event that the fiscal year is higher, the period ends at the end of the twelve months. The year also ends when the company is extinguished (registration cancellation) and when the entity's legal form is changed so that it affects this tax.
Regarding the accrual of the tax, the last day of the tax period.
Payments on account
In September taxpayers must make a payment on account of the settlement corresponding to the tax period in progress on September 1, calculated as the percentage of the 50 percent on the settlement fee of the immediately previous year. Payment on account is considered a tax debt.
This payment on account is deducted from the settlement fee to pay after the tax period ends. When, as a result of the payment on account, the differential fee is negative, the ministry in charge of finances will return the excess.
Interesting additional reductions
In addition to those discussed above, there are two reductions for new business worthy of comment. The first is that the first year tax application taxpayers enjoy a 50% reduction in settlement fee, with which the effective rate would be 5% with respect to the tax base (benefits).
The second, on the other hand, benefits SMEs and micro-enterprises. And it is that for the taxpayers of this tax that are constituted as new entrepreneurs of a new business or professional activity and obtain some profits less than 100,000 euros, the tax rate applicable during the First 3 years of activity it is:
- 5% for the part of the tax base between 0 and 50,000 euros.
- The 10% for the remaining tax base.
Conclusion and summary
Although the morale to tax the income of legal entities is quite doubtful because they are managed by individuals already taxed (or that will be taxed in the future), andorran corporation tax is very attractive, light and interesting. Although the general rate is 10%, it contains a huge variety of details that make it even more tempting and place the maximum rate of total direct taxes for individuals at 10% of the income obtained.
However, these details should meet a series of conditions and requirements established by law, both the Principality's own and the international one, which must be strictly adhered to. That is why we always recommend discussing the subject with professionals in the sector and that they provide good legal, tax and accounting services, to ensure optimum tax planning within that strict margin of legislation.