Cyprus: Cyprus Double Taxation Treaty (DTT) with ANDORRA - Company formation In ANDORRA

The Principality of Andorra is a constitutional parliamentary democracy with a population of approximately 85,000. Two co-princes--the president of France and the Spanish bishop of La Seu d'Urgell--serve with joint authority as heads of state, and a delegate represents each in the country. In April 2009 the country held free and fair multiparty elections for the 28 seats in the General Council of the Valleys (the parliament), which selects the head of government.

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. Andorra lacked a currency of its own and used both the French franc and the Spanish peseta in banking transactions until 31 December 1999, when both currencies were replaced by the EU's single currency, the euro. Coins and notes of both the franc and the peseta remained legal tender in Andorra until 31 December 2002. Andorra negotiated to issue its own euro coins, beginning in 2014.

Andorra has traditionally had one of the world's lowest unemployment rates. In 2009 it stood at 2.9%.

Andorra has long benefited from its status as a tax haven, with revenues raised exclusively through import tariffs. However, during the European Sovereign-debt crisis of the 21st century, its tourist economy suffered a decline, partly caused by a drop in the prices of goods in Spain, which undercut Andorran duty-free shopping. This led to a growth in unemployment. On 1 January 2012, a business tax of 10% was introduced, followed by a sales tax of 2% a year later, which raised just over 14 million euros in its first quarter.

On 31 May 2013, it was announced that Andorra intended to legislate for the introduction of an income tax by the end of June, against a background of increasing dissatisfaction with the existence of tax havens among EU members. The announcement was made following a meeting in Paris between the Head of Government Antoni Marti and the French President and Prince of Andorra Francois Hollande. Hollande welcomed the move as part of a process of Andorra "bringing its taxation in line with international standards".

On 1 June 2018, Cyprus ratified the double tax treaty (the DTT) it had signed with Andorra on 18 May 2018. The DTT is the first ever double tax treaty between the Andorra and Cyprus and it is based on the the OECD Model Convention. Certain prescribed legal procedures and/or mechanisms in the two countries need to take place (i.e. both Cyprus and the Andorra need to exchange notifications that their formal ratification procedures have been completed), following which the DTT will enter into force with effect as from the 1st January 2019.

Highlights from key provisions of the DTT are summarised below:

1. No withholding taxes on Dividends, Interest, Royalties

The DTT provides for a 0% withholding tax (WHT) rate on dividends, interest and royalties.

2. Capital Gains

For capital gains, under the DTT, it is provided that gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50 % of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State, i.e. Cyprus retains the exclusive taxing rights on disposals of shares made by Cyprus tax residents, except where the shares derive more than 50% of their value, directly or indirectly, from immovable property situated in Andorra.

However, the exception shall not apply to gains derived from the alienation of shares of a company listed (disposal of shares that are listed) on a recognised stock exchange ( means of Andorra, Cyprus or European Union (EU)/European Economic Area (EEA) Member State) of one or both Contracting States or a European Union or European Economic Area Member State, where the alienator (the disposer) at all times during the 12-month period preceding such alienation held directly or indirectly not more than 25% of the capital of the company whose shares are alienated (of the disposed-of company).

3. Principal Purpose Test.

The DTT incorporates the OECD/G20 Base Erosion and Profit Shifting (BEPS) project Action 6 Principal Purpose Test, (PPT), which is about 'Preventing the Granting of Treaty Benefits in Inappropriate Circumstances'. This is a dual test (both subjective and objective) which comprises of the minimum standards and provides, in other words that, a DTT benefit shall not be granted if obtaining that benefit was one of the principal purposes of an arrangement or transaction. Therefore, in order to determine whether the benefit of the treaty should be granted in a specific case one should ask whether, having regard to all relevant facts and circumstances, obtaining the benefit of the DTT was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit? If this is the case, the treaty benefit will not be granted, unless – and this is the objective test – granting that benefit would be in accordance with the object and purpose of the relevant treaty provision(s). This provision operates as an anti-treaty shopping measure i.e. is designed to tackle "treaty shopping" (''Treaty shopping'' generally refers to a situation where a person, who is resident in one country (say the "home" country) and who earns income or capital gains from another country (say the "source" country), is able to benefit from a tax treaty between the source country and yet another country (say the "third" country) and further ensures that operations are supported by the appropriate substance and support a main commercial purpose. This situation often arises where a person is resident in the home country but the home country does not have a tax treaty with the source country.

FORMING A COMPANY IN ANDORRA

Incorporation

The incorporation/formation of an Andorran company by non-resident/s must first be approved by the Ministry of the Economy. Towards this effect, an application is made to the Ministry providing all relevant and necessary information e.g. purpose and figures. Since the relevant laws and regulations may change and/or be expanded from time to time it is advisable that it would be better to appoint a lawyer to draft the application letter in order not to risk getting a refusal. With regard to the acquisition of an existing company (already formed-off the shelf company) there would still need an application to be made to the Ministry for certain amendments in order to tailor the company for the exact purposes of the new owner (the acquirer of the off the shelf company).

Once approved by the Ministry, incorporation has to be confirmed/certified by a Public Notary. Following the notary's confirmation an official deed of Incorporation is issued with the name of all shareholders and their respective equity stake (number of shares and/or shareholding). In the same manner, any future transfer of shares due to sale or otherwise must be duly recorded and confirmed/certified by the Public Notary.

The lawyer will also arrange to draft the company constitutional documents.

Foreign shareholding

Foreigners may legally own 100% of a trading enterprise or a non-trading holding company in Andorra provided that, as a pre-condition, an application is made and an approval is granted by the Ministry of the Economy in the case of any non-resident shareholdings of 10% or more of the share capital of the company before the Public Notary can approve and issue the deed of incorporation. In situations where the foreigner has not been officially recognized resident of Andorra, it seems that permission for majority shareholdings may be very difficult to obtain.

Nominees

Nominee shareholders may be permitted, however, strict and thorough checks are made on the ultimate beneficial owners (UBOs) for Money Laundering purposes as per the relevant laws and regulations.

Bearer shares are not permitted under the Andorran Company Laws and regulations.

Types of Companies-Limited Liability Companies.

a. Societat Limitada (S.L.) which is considered the most common type of entity formed for small family business enterprises. This type of company can have a relatively limited number of shareholders and a minimum capital requirements of Euro 3.000:- (three thousand Euro).

b. Societat Anonima (S.A.) which is considered to be the required type of entity for situations where there exist a big number and different kinds of shareholders and has a minimum share capital of Euro 60.000:- (sixty thousand Euro).

Taxes and Trading.

In order to be allowed to work and trade in Andorra with a company that has been registered/formed, a relevant trading license must be obtain and a registration of the company with the IGI (similar to V.A.T.) and Corporation Tax. V.A.T is currently at 4.5% which is considered of the lowest in Europe and corporation tax on net profits is set at 10%.

It would be an omission not to mention that there is a further tax incentive in Andorra for tech companies in the software development, licensing and intellectual property fields to choose to locate and/or be formed in Andorra which provides for a grant of allowance and/or approval upon a specific application for enjoying a special 2% corporation tax rate.

Published by the Offshore Corporations Comparative and Tax Law Practice

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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