Economic Substance and Tax Transparency: How to Establish a Company in Andorra

Andorra has emerged as a compelling destination for foreign investors due to its competitive tax regime and economic stability. However, establishing a company in Andorra requires meticulous planning to ensure economically justified structures that align with international tax transparency standards.

In recent years, Andorra has strengthened its cooperation with the European Union, the OECD, and other international organizations, adopting measures to prevent tax evasion. This article examines how compliance with these international regulations and the implementation of economic substance are critical for Andorran companies to be recognized as legitimate, providing investors with a solid foundation to optimize their projects in Andorra.

Concept of Economic Substance

In Andorra, the establishment of a company must be supported by a genuine economic rationale and legitimate business purposes. Otherwise, the company risks being classified as a shell company by foreign authorities, which could lead to legal and tax risks, such as the denial of tax benefits or penalties.

Economic substance is a key requirement for a company in Andorra to be recognized as legitimate. This includes, for example:

• Physical Office: Maintaining an operational office in Andorra.
• Local Employees: Hiring staff who reside in the country.
• Effective Management: Making strategic decisions from Andorra.

The concept of economic substance is not unique to Andorra’s system, it is part of a growing international trend driven by organizations like the OECD and the European Union, aimed at combating aggressive tax planning and the artificial shifting of profits between countries. Thus, substance requirements apply not only to structures created for purely tax-driven purposes but also to companies operating internationally.

Demonstrating that the company’s core activities and effective management are conducted in Andorra is essential not only to comply with local regulations but also to meet international standards. This enables access to the tax benefits Andorra offers while avoiding scrutiny over tax residency from foreign tax authorities.

Register of Beneficial Owners in Andorra

When establishing a company in Andorra, all legal entities are required to identify their beneficial owners (that is the individuals who control or hold a significant stake in the entity) and maintain this information accurately and up to date. This information must be recorded in the Register of Companies (Registre de Societats). While this register is not public, the information can be accessed by competent authorities, such as the UIFAND (Andorra’s Financial Intelligence Unit). Proper registration of beneficial owners is a key requirement for tax compliance and regulatory adherence.

Transparency and Automatic Exchange of Tax Information: The Common Reporting Standard (CRS)

Andorra participates in the automatic exchange of tax information through the OECD’s Common Reporting Standard (CRS). This system aims to combat tax evasion by facilitating the automatic and reciprocal exchange of information between countries. Companies must provide details about their financial accounts (such as balances, income, and assets) to the financial institutions where they operate, which then report this information to the relevant tax authorities. This information may be automatically shared with other countries that are signatories to the CRS.

Currently, Andorra exchanges data with a wide network of jurisdictions, including:

• The 27 EU Member States and Gibraltar
• Liechtenstein, Monaco, San Marino, and Switzerland
• Other jurisdictions such as Argentina, Australia, Norway, Iceland, South Korea, and the United Arab Emirates.

For more details on how this system operates, you can consult our comprehensive article on the automatic exchange of tax information.

Establishing a company in Andorra goes beyond leveraging a favorable tax environment: it involves building a robust business structure grounded in genuine economic substance and full compliance with international transparency standards. Engaging specialized legal support from the outset is essential to ensure the project’s viability and sustainability.

At Carlota Pastora Business Law Firm, we provide comprehensive and rigorous guidance, supporting you at every stage, from company formation to compliance with regulatory obligations. Our commitment is to help you develop a secure, efficient, and fully compliant structure under the current legal framework.