The Principality of Andorra as a privileged player in the new paradigm of human capital mobility
Cases & Lacambra, Barcelona
Cases & Lacambra, Andorra
A radical change in human capital mobility trends
Achieving the correct work-life balance for employees became a concern for large companies in the last decade, and new work schedule arrangements emerged, such as flexible working hours, condensed working hours and remote work.
The overnight switch to remote work during the Covid-19 pandemic fuelled the change in this direction. According to a McKinsey Global Institute study, the potential for remote work is highly concentrated among highly skilled, highly educated workers in a handful of industries, occupations and geographies, and concentrated primarily in the computer-based office work arena. Now, even if some companies – led by the giants of the financial services and technology industries – are calling their employees back to the office, remote working is here to stay.
This new paradigm has resulted in a rise in the population of digital nomads, defined as people who choose to embrace a location-independent, technology-enabled lifestyle that allows them to travel and work remotely, anywhere in the world.
Competition between states to attract highly skilled individuals
This increase in human capital mobility has led to stronger competition between states to attract highly skilled individuals. However, this is not a new phenomenon: over the last few decades, countries have sought to reconcile the need to increase their tax attractiveness with the need to avoid eroding their domestic tax base by implementing specific schemes that attract high-income taxpayers, reducing their effective taxation. Some estimates show that, only in the European Union, more than 200,000 taxpayers could be currently benefiting from these regimes, with an estimated loss of revenue of €4.5bn per year.
The Organisation for Economic Co-operation and Development (OECD) has also warned that residency/citizenship by investment (RBI/CBI) schemes could be potentially misused to hide offshore assets by escaping reporting under the OECD/Group of Twenty (G20) Common Reporting Standard (CRS). In particular, identity cards and other documentation obtained through these schemes could potentially be used to misrepresent an individual's jurisdiction of tax residence, and used to endanger the proper operation of CRS due diligence procedures. The OECD has analysed over 100 RBI/CBI schemes and identified 21 regimes that potentially pose a high risk to the integrity of the CRS.
European institutions have already taken action against investor citizenship and residence schemes in the EU (golden visa programmes), and warned that these immigration regimes usually include privileged tax regimes that result in tax competition (race to the bottom) between Member States and an uneven playing field in the market for investors.
In this regard, the European Commission has proposed to broaden the scope of the work of the Code of Conduct for business taxation, which aims at ensuring coordinated action at European level to tackle harmful tax competition (limited to business taxation under the current mandate), to include other types of harmful tax practices, including those targeted at individuals.
Thus, RBI/CBI schemes and privileged tax regimes for transferred employees, pensioners or, directly, high-net worth individuals have come under the spotlight, and it is likely that targeted actions to counter them will come in the next few years.
Andorra as a pole of attraction for highly skilled workers
The Principality of Andorra, a European microstate situated in the eastern Pyrenees, bordered by France to the north and Spain to the south, is a unique environment for highly skilled workers without the sword of Damocles implicit in privileged visa or tax regimes. Thus, living in Andorra offers an impressive high-mountain landscape, public security, a first-rate healthcare system, three free educational systems in three languages (Catalan, Spanish and French), high-speed internet, and good connections to Spain and France, including Andorra-Seu d'Urgell Airport, with two flights per week to Madrid.
Andorra is working hard to digitalise its economy, and the recently launched Digital Transformation Programme seeks to modernise government services, upscale current businesses on the digital economy, conform to EU regulations, and attract new investment through upgraded digital infrastructure and services. This commitment eases the attraction of digital, highly skilled workers.
Andorra also offers an internationally homologated and competitive tax system.
Andorran legislation requires foreign individuals to obtain an immigration permit to legally reside in Andorra. The most common immigration authorisations are the residence and work permit for the self-employed (commonly called 'active residence') and non-lucrative residence permit ('passive residence'). Whereas the former requires the incorporation of a company, holding a director position and an effective stay of more than 183 days, the latter can be obtained by investing more than €400,000 in certain assets and an effective stay of at least 90 days, among other requirements. Passive residence does not allow an individual, in principle, to carry out any economic activity in Andorra other than managing one's own wealth.
The draft law on the digital economy, currently under parliamentary discussion, creates two new immigration permits: the digital nomad visa, addressed to technological profiles or individuals who want to establish themselves in the country; and the entrepreneur visa. The government stated that the digital nomad visa will focus on people with projects with a high component of digital value that reverts to the country.
Since 2009, Andorra has undertaken comprehensive reform of its tax system, which was historically based on indirect taxation, and introduced new direct and indirect taxes. Nowadays, the Andorran tax system is comparable with those of the EU and OECD countries, while bearing moderate taxation. The Principality of Andorra has signed double taxation agreements with France, Spain, Luxembourg, Liechtenstein, Portugal, the United Arab Emirates, Malta, Cyprus, San Marino and Hungary. These agreements facilitate, in particular, inbound investment.
Andorran personal income tax, which is applicable to highly skilled workers transferring their residence to the country, is levied on the worldwide income obtained by them during a calendar year, and divides income into five groups: employment income, business income, income from capital gains and losses, and passive income.
Capital gains resulting from the transfer of units of collective investment undertakings and shares of Andorran or non-Andorran companies are exempt in some circumstances. Dividends obtained from an Andorran entity are exempt from taxation, whereas dividends received from non-resident entities are subject to tax.
The tax liability is assessed by applying a ten per cent tax rate to the net income. There is an exempt threshold of €24,000 (and €3,000 for savings income) and reduction of 50 per cent of the tax rate on income ranging from €24,000 to €40,000. The Andorran personal income tax law also regulates a deduction to avoid international double taxation (tax credit relief). The corporate income tax rate is also ten per cent.
Some unresolved questions involving digital nomads
The new increased human capital mobility raises some questions regarding the existence of a permanent establishment for the employer in other countries, withholding taxes in the source state and social security in the destination country.
The first question to address is whether an employee remotely working in another country may create a permanent establishment for his/her company in that country. Andorran tax authorities have not issued any guidance in this regard, but the considerations made by the OECD in its document 'OECD Secretariat analysis of tax treaties and the impact of the Covid-19 crisis' of 3 April 2020 (updated on 21 January 2021) shed some light.
The OECD considers that the 'fixed place of business' provided for in Article 5 of the Model Convention requires a 'certain degree of permanency and be at the disposal of an enterprise'. In addition, the report says that the carrying on of intermittent business activities at the home of an employee does not make that home a place at the disposal of the enterprise. A home office may be a permanent establishment for an enterprise if it is used on a continuous basis for carrying on the business of that enterprise and the enterprise generally has required the individual to use that location to carry on the enterprise's business.
In light of the above, working remotely during the pandemic did not pose a sufficient degree of permanency so as to consider the existence of a permanent establishment. Is there any change if the employee continues to work remotely after the cessation of the public health measures imposed or recommended by governments? The answer depends on many factors. Thus, the home office could be deemed to be at the disposal of the enterprise, and therefore be a permanent establishment, if such a company requires the employee to use that location or reimburses some related expenses, among other indicia. The OECD also addressed the question of the dependent agent.
Withholding taxes and social security contributions
A foreign company with an employee located in Andorra may have doubts regarding the Andorran personal income tax withholding for such an employee. Article 50(3) of Law 5/2014 of 24 April on the Personal Income Tax Law (the 'PIT Law') sets out that 'non-resident natural and legal persons operating within the Principality of Andorra with or without a permanent establishment will be subject to withholding obligations when satisfying labour income subject to this tax'. Then, the obligation to withhold taxes relies on the fact that the foreign entity operates in Andorra (with or without permanent establishment), which in turn would reasonably require the obtention of Andorran-sourced income. Thus, the mere existence of an employee working remotely from Andorra would not entail the obligation to withhold. Otherwise, the company should register before the Andorran tax authorities, obtain a tax identification number and submit the relevant tax forms.
The transfer of a worker to Andorra also poses concerns in the field of social security. As in neighbouring countries, the employer should register within the Andorran social security authorities (Caixa Andorrana de Seguretat Social or CASS) and pay social security contributions on behalf of the employee (15.5 per cent of the total salary). As this step has proven to be difficult in practice (in cases of voluntary transfer, it is likely that the employer will not be eager to bear an additional compliance cost), the employer and employee could assess alternatives, such as the employee becoming freelance, when possible. This individual should register as self-employed before CASS and pay social security contributions, which range from €118.71 to €652.92, depending on the net income obtained or annual turnover.
The change in human capital mobility in the last two years, fuelled by the Covid-19 pandemic, has no precedent in history, and remote work in some sectors, especially those related to the digital economy, has become the 'new normal'. Tax systems have traditionally focused on labour income, assuming that this capital could not move, and now states are struggling to deal with this new reality. In this scenario, some countries have started a competition (a race to the bottom, in some cases) to attract these individuals, that is, digital nomads, either through residence/citizenship via investment visas or through privileged tax regimes that usually set flat tax rates and do not tax foreign income.
These schemes, though, are under the spotlight of international bodies such as the OECD and EU, and countermeasures could come in the short- or medium-term. As an example, the European Commission has proposed to broaden the scope of the work of the Code of Conduct for business taxation to also include harmful tax practices targeted at individuals, which would imply the creation of new black or grey lists.
In this context, the Principality of Andorra offers a tax regime that is not likely to be challenged (because it is not a privileged regime but the same for all residents, taxing worldwide income at a ten per cent rate) and a unique environment for this type of professional (nature, legal certainty, security, high-speed internet, outstanding education and healthcare systems, and good connections with France and Spain).
 Susan Lund, Anu Madgavkar, James Manyika, Sven Smit, Kweilin Ellingrud, Mary Meaney and Olivia Robinson, 'The Future of Work after COVID-19' (McKinsey Global Institute, 2021) 37 www.mckinsey.com/featured-insights/future-of-work/the-future-of-work-after-covid-19 accessed 3 May 2022.
 Eloi Flamant, Sarah Godar and Gaspard Richard, 'New Forms of Tax Competition in the European Union: an Empirical Investigation' (EUTAX Observatory, 2021) 18 www.taxobservatory.eu/wp-content/uploads/2021/11/EU-Tax-Observatory-Report-3-Tax-Competition-November-2021-2.pdf accessed 3 May 2022. This document is not an official EU document.
 OECD, Residence/Citizenship by investment schemes www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/residence-citizenship-by-investment accessed 3 May 2022.
 European Commission, 'Investor citizenship schemes: European Commission opens infringements against Cyprus and Malta for "selling" EU citizenship', 20 October 2020 https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1925 accessed 3 May 2022.
 European Parliament, 'Avenues for EU action on citizenship and residence by investment schemes – European added value assessment' (European Parliamentary Research Service, 2021) 37 www.europarl.europa.eu/RegData/etudes/STUD/2021/694217/EPRS_STU(2021)694217_EN.pdf accessed 3 May 2022. Also, the Council of Europe underlines in its Resolution 2355 (2020) on Investment Migration that 'Member States should not attract investment migration by offering an undue tax shelter for assets and revenue generated abroad' https://pace.coe.int/en/files/28900/html accessed 3 May 2022.
 European Commission, Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Investor Citizenship and Residence Schemes in the European Union - Document COM(2019) 12 final (European Commission, 2019) 18 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52019DC0012&from=EN accessed 3 May 2022.
 See www.oecd.org/coronavirus/policy-responses/oecd-secretariat-analysis-of-tax-treaties-and-the-impact-of-the-covid-19-crisis-947dcb01 accessed 3 May 2022.