Introduction
Andorra, officially the Principality of Andorra, also called the Principality of the Valleys of Andorra, is a small landlocked country in western Europe, nestled in the eastern Pyrenees mountains and bordered by Spain and France. Once isolated, it is currently a prosperous country mainly because of tourism and its status as a tax haven. The people of Andorra are currently listed as having the highest human life expectancy in the world, at an average of 83 years at birth (2008 est.). Andorra is the sixth smallest nation in Europe. Its name is thought to be derived from that of an ancient Basque tribe, the Andosinos, that is believed to have inhabited that region of the Pyrenees thousands of years ago.
Andorrans live in seven valleys that form Andorra’s political districts. Andorrans are a minority in their own country; they make up only approximately 36% of the population or about 28,000 native Andorrans. Spanish, French, and Portuguese residents make up the other 64% of the population.
The national language is Catalan, a romance language related to the Provençal groups. French and Spanish are also spoken.
Business Environment
The business environment in Andorra is quite liberal. There are no corporate income taxes, but there are moderate annual fees and charges. Regulation is light. Since there is no currency, there are no exchange or capital controls. Telecommunications are good, and Internet hosting is available.
Although there is some industrial and commercial activity, particularly around the tourist trade, the best-developed sector is banking, especially private banking, taking advantage of Andorra’s strict banking secrecy rules. Other financial services are not particularly sophisticated, although the Government has encouraged the insurance sector.
In June, 2004, however, Andorra was obliged to accept the EU’s Savings Tax Directive, and from July, 2005, imposed a withholding tax of 15% on returns on savings paid to citizens of Member States of the EU, of which 75% is remitted onwards to the States concerned.
Economic Environment
Tourism, the mainstay of Andorra’s tiny, well-to-do economy, accounts for roughly 80% of GDP. An estimated 9 million tourist’s visit annually, attracted by Andorra’s duty-free status and by its summer and winter resorts. Andorra’s comparative advantage has recently eroded as the economies of adjoining France and Spain have been opened up, providing broader availability of goods and lower tariffs.
The banking sector, with its tax haven status, also contributes substantially to the economy. Agricultural production is limited—only 2% of the land is arable—and most food has to be imported. Some tobacco is grown locally. The principal livestock activity is domestic sheep raising. Manufacturing output consists mainly of cigarettes, cigars, and furniture. Andorra’s natural resources include hydroelectric power, mineral water, timber, iron ore, and lead.
Andorra is not a member of the European Union, but enjoys a special relationship with it, such as being treated as an EU member for trade in manufactured goods (no tariffs) and as a non-EU member for agricultural products
A hydroelectric plant at Les Escaldes, with a capacity of 26.5 megawatts, provides 40% of Andorra’s electricity; Spain provides the rest.
Taxation
There is no income tax on the individual or corporate level. Employees pay social security taxes at rates of 5-9%; employers pay 13%. As of October 1991, a value-added tax had been enacted and was expected to impose charges of 1-7% on the production and import of goods. Also scheduled for implementation under the 1992 budget law were a registration tax on certain activities, to provide 8.6% of government revenues, and a tax on electricity consumption and telephone services to contribute 1.6% of state revenues.
Banking
Andorra lacks a currency of its own and uses that of its two surrounding nations. Prior to 2002 these were the French franc and the Spanish peseta, which have since been both replaced by the EU’s single currency, the euro. Andorra is negotiating to issue its own euro coins.
Banks and other financial institutions in Andorra are regulated by the Andorran National Financial Institute (INAF) under the Law Regulating the Financial System of 1993. Andorran banks are all members of the Agrupacio de Bancs Andorrans, which operated a system of self-regulation until the regulatory law was passed in 1993. The banks have very conservative policies, and high solvency ratios: depositors’ funds are guaranteed under a 1997 law, but no Andorran bank has ever defaulted on its depositors.
There are currently only 7 banks in Andorra. Foreign banks are prohibited from opening branches and this is unlikely to change. Banking in Andorra is very efficient and Andorran banks have ties to Swiss banks. The banking entities established in the Principality basically offer traditional universal banking services.
Offshore
It is misleading to describe Andorra as ‘offshore’, not because it is landlocked, which it is, but because it does not particularly set out to offer such classical ‘offshore’ products as trusts, international business companies or specialized tax regimes for insurance, banking or investment funds. It doesn’t need to, because there isn’t any income tax anyway, for individuals or companies, indeed hardly any taxes at all except for customs duties, local property taxes, and corporate registration fees.
Since there is no offshore sector as such in Andorra, and all trading or business activity has to be carried on by entities which are majority-owned by Andorran nationals or long-stay residents. Other than the rules concerning ownership, there is very little legislation to restrain business activity, which takes place in a liberal environment. However, the Penal Code and the Law of Protection of Banking Secrecy and of Prevention of Laundering of Money and Assets Deriving from Crime 1995 contain severe penalties for criminal activity; and the Government is very watchful in this respect.
