Andorra vs Spain: A Comparison of Tax Systems

1. Personal Income Tax (IRPF)

Andorra
One of the major selling points of Andorra is its very attractive personal income tax system. The country employs a progressive income tax with a maximum rate of just 10%. However, the first €24,000 of income is taxed at 0%, meaning that only higher earners pay any tax at all. Here’s a breakdown of how Andorra’s personal income tax works:

• €0 – €24,000: 0%
• €24,001 – €40,000: 5%
• €40,001 and above: 10%

This relatively low tax rate is one of the key reasons why many high-net-worth individuals, business owners, and retirees are drawn to Andorra. The country also offers tax exemptions for certain types of income, such as capital gains from the sale of shares and real estate, making it a favorable environment for investment.

Spain
In comparison, Spain has a more complex tax structure with higher personal income tax rates. Spain’s tax system is also progressive, but the rates can be much higher, especially in regions like Catalonia or Madrid, where regional taxes add to the national income tax rates. The national tax rate starts at 19% and can go up to 47% in some autonomous communities for income over €300,000. Here’s how Spain’s personal income tax brackets break down:

• €0 – €12,450: 19%
• €12,451 – €20,200: 24%
• €20,201 – €35,200: 30%
• €35,201 – €60,000: 37%
• €60,001 and above: 47%

Additionally, Spain taxes savings income (interest, dividends, capital gains) at rates ranging from 19% to 23% depending on the amount, and wealth tax applies to those with assets over a certain threshold (e.g., €700,000 in most regions). As a result, Spain has one of the highest tax burdens in Europe, particularly for higher-income individuals.

2. Corporate Tax

Andorra
Andorra’s corporate tax rate is among the lowest in Europe, making it an attractive destination for businesses. The standard corporate tax rate in Andorra is just 10%, with even lower rates available for certain types of activities or special regimes. For example, companies engaged in research and development, international trade, or financial services may benefit from tax exemptions or reduced rates.

Spain
In contrast, Spain’s corporate tax rate is significantly higher. The standard corporate tax rate in Spain is 25%, but there are various deductions and incentives available, especially for newly established businesses or startups. Spain also offers favorable tax treatment for small and medium-sized enterprises (SMEs) with lower tax rates on profits below €300,000. However, Spain’s corporate tax rates are still much higher than those of Andorra, which could be a major factor for businesses looking to optimize their tax burden.

3. Value Added Tax (VAT)

Andorra
Andorra has a low VAT rate compared to Spain and many other European countries. The standard VAT rate in Andorra is just 4.5%, with some goods and services being exempt or taxed at lower rates. This low VAT rate is one of the attractions for consumers and businesses in Andorra, particularly for those who frequently purchase goods or services.

Spain
Spain’s VAT, known locally as IVA (Impuesto sobre el Valor Añadido), is much higher than Andorra’s. The standard VAT rate in Spain is 21%, which is one of the higher VAT rates in the European Union. Spain also has reduced VAT rates of 10% for certain goods and services, such as food and transport, and 4% for essential items like books and medicines. For businesses that deal with VATable goods and services, this higher rate can significantly affect operational costs.

4. Capital Gains and Other Taxes

Andorra
Andorra does not impose capital gains tax on the sale of most assets, including stocks, bonds, and real estate. This is a huge advantage for investors looking to buy and sell assets without being taxed on their profits. The wealth tax is also absent in Andorra, meaning residents don’t have to pay tax on their global wealth. Additionally, inheritance taxes are extremely low, and donations to family members are not taxed.

Spain
Spain, on the other hand, imposes capital gains tax on the sale of assets such as real estate, stocks, and investments. The rates for capital gains in Spain range from 19% to 23%, depending on the amount of profit made. Spain also has a wealth tax, which can apply to individuals with assets above €700,000 (the threshold varies by region). Inheritance tax is another concern in Spain, with rates that vary based on the value of the estate and the relationship between the deceased and the heirs.

5. Social Security and Other Contributions

Andorra
Andorra has a highly attractive social security system, with low contribution rates. Employees contribute about 6.5% of their income to the social security system, while employers pay a similar amount. The country’s social security system provides benefits like healthcare, pensions, and disability support, but the low contribution rates make Andorra an appealing destination for entrepreneurs and employees alike.

Spain
In Spain, the social security contributions are considerably higher. Employees contribute around 6.35% to social security, while employers pay around 29.9% on top of the employee’s salary. These contributions cover a wide range of benefits, including healthcare, pensions, unemployment, and disability support. For businesses, these higher social security costs can add a significant burden, especially for small and medium-sized enterprises.

Conclusion: Which is Better for You?

Whether Andorra or Spain is a better choice for you depends largely on your personal or business situation.

• Andorra is an attractive option for individuals and businesses seeking to reduce their overall tax burden, particularly those with higher incomes or substantial assets. With its low personal and corporate tax rates, absence of capital gains tax, and favorable conditions for wealth preservation, Andorra is ideal for high-net-worth individuals, entrepreneurs, and investors looking to optimize their tax strategy.
• Spain, on the other hand, may be more appealing for those who are looking for a larger economy with more job opportunities, a well-developed infrastructure, and access to the European Union market. While Spain has a higher tax burden, it offers a range of social services and benefits, particularly for residents who are interested in social security coverage and public healthcare.

Ultimately, the choice between Andorra and Spain will depend on factors like your income level, business activities, residency status, and personal preferences regarding social services and lifestyle. For those primarily concerned with tax efficiency, Andorra is clearly the more favorable option.

Other tax systems comparisons

• Taxes in Andorra vs. the UK
• Taxes in Andorra vs. France
• Taxes in Andorra vs. Russia