Banks and other financial institutions in Andorra are regulated by the Andorran National Financial Institute (INAF) under the Law Regulating the Financial System 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.

The over-riding characteristic of Andorran banks that attracts foreign depositors and investors, apart from the absence of taxes, is secrecy. Numbered accounts, made available only to top-quality clients, are said to be known only to 'the customer, the banker and God'. General accounts, also secret under the law, are highly protected as well.

The Andorran Penal Code includes specific provisions against disclosure of details of a bank account to anyone, including the authorities. Only a court order (judge's warrant) can force disclosure.

In response to international concern over money-laundering, Andorra introduced the 'Law of Protection of Banking Secrecy and of Prevention of Laundering of Money or of Assets Deriving from Crime' in 1995.

This law requires financial institutions to report any suspicious money movements to the INAF; and the INAF is then entitled to pass on such information to foreign countries if an Andorran judge orders it. However, this will only be done if there is prima facie evidence of a crime (which in Andorra definitely does not include tax avoidance or evasion), and even then is only permitted to countries which have banking secrecy laws, thus excluding, for instance, the UK and the US. In most circumstances, the effect of the law is to strengthen secrecy, not weaken it.

The Law is quite explicit about wanting to balance the attack on money-laundering on the one hand against the need to preserve banking secrecy on the other. Article One reads: 'The present law has as its object the protection of banking secrecy and the prevention of the laundering of money or assets deriving from drug trafficking and other criminal activities'.

The Law defines money-laundering (and offences against banking secrecy) in terms of the existing Penal Code: this provision clearly excludes tax matters from the ambit of the Law.

The Law imposes 'know-your-customer' rules on financial institutions and intermediaries ('fiduciaries').

The Law permits disclosure only in the context of judicial proceedings and in response to an Order from a 'Batlle' (Andorran court).

The Law doesn't just impose a passive duty on financial institutions and intermediaries; there is a positive requirement to report what appear to be suspicious transactions (preferably in advance) to the duty Batlle. The Batlle then either takes appropriate action, or authorises the transaction; the financial authorities are kept informed in either case.

The Law specifically prohibits any person who is reporting a suspect transaction from giving any information about it to the subject of the suspicions, or to any third party.

Financial institutions or intermediaries which infringe the Law are subject to penalties depending on the severity of the infringement:

Minor infractions are punished with a fine between SPA 10,000 and 50,000;

Serious infractions receive up to six months' suspension and a fine between SPA 50,000 and 2m;

Very serious infractions receive suspension up to 3 years, or permanent suspension, and a fine between SPA 2m and 50m.

The Penal Code provides imprisonment up to 4 years for malicious infraction of the privacy law, and 7 years if done for gain.

Govern Corporations formed in Andorra through Act 1983.-

The term 'offshore' is not used in Andorran legislation or in describing company forms. Indeed there is no 'offshore' sector as such, since there is no significant direct taxation of Andorran entities in any event. 

There are three types of company:

Societat de Responsabilitat Limitada

Societat per Accions (both having shareholders with limited liability),

Societat Colectiva, whose partners have unlimited liability.

Companies with commercial or profit-seeking goals must be owned at least two-thirds by Andorran citizens; this means, people born in Andorra, or Privileged Residents - those with more than 20 years' residence. In practice, the Andorran majority owner of a business (called a 'titular' in Catalan) can be an Andorran individual or professional adviser who is willing to cede operational control of the business to the foreign 'owner', and sign a share transfer in blank, in return for a fee (called 'prestanom' in Catalan). In practical terms the titular is a nominee; but not in legal terms. 

Although this system is in everyday use in thousands of companies, and even though formal contracts are entered into between the parties, the inescapable legal fact remains that the titular can wield considerable power if he wants to. Presumably one is on fairly firm ground with a established, professional titular.

The Societat Limitadad (SL) is commonly used for local trading and requires a minimum paid up share capital of ESP1,000,000 (Spanish Pesetas), with a minimum of two shareholders. In order to set up an SL, the first step is to obtain approval of the proposed name (some generic words are banned). The name, once approved and registered, will have local protection.

The company's Memorandum and Articles ('estatuts' and 'rao social') are then presented to the Government ('Andorra Govern') in a petition ('suplica') for incorporation. This step is straightforward when a holding company is being created for local assets, but if local trading or complex external financial situations are involved, the Government may look closely, particularly if the foreign party (who is being given 'rights' by the titular) is a newcomer or non-resident.

Once the Government's approval is given, the capital can be deposited and a notary will formalise the incorporation, along with the 'nominee' paperwork.

If there is to be actual trading or other tangible activity in Andorra, the company will need to apply via a 'suplica' to the Commercial Register in the appropriate commune for a trading license, or 'Registre de Comerc' permission. Finally, the Commune has to approve the premises proposed to be used, which requires further paperwork . . .

Once everything is in place, the Government becomes involved once more (another suplica) to approve the formal opening of the business.

It can be imagined that this whole process will take some months even if everything goes smoothly; if not, it can take a year or more. However, for a straightforwad holding company, it may be only two or three months.

The Government's annual fee (tax) for the registration of an SL is ESP100,000, and if a Registre de Comerc is needed, a further ESP100,000 is due annually. It can be imagined that professional fees will add substantially to these costs due to the formality and complexity of the process.

The Societat Anonima (SA) is usually created for larger types of company, or those with many shareholders, and must have a minimum paid up share capital of ESP5,000,000.

The formation procedures for an SA are the same as for a Societat Limitada (see above) except that Governmental checks will be more stringent; and the annual fee (tax) for registration is ESP150,000.

There are no limited partnerships in Andorra. Civil companies can be created by two or more persons to incorporate a partnership with unlimited liability by private contract or deed. In order to trade, it will need a Registre de Comerc permission from its local commune, at a cost of SPA100,000 annually.

This is a form that can be used by a foreigner wanting to set up in business locally, say as a restaurant; the usual rules about 67% local ownership will apply, and the Andorran titular will need to sign contracts giving the foreigner day-to-day management rights, and control over finances. It suffers from the obvious difficulty that the unlimited liability of a partner under the law cannot be signed away so easily.

A citizen or an individual who has exceeded ten years residency is permitted to establish a business as a sole trader, however he will need a trading license from his local Registre de Comerc, at an annual fee of SPA100,000.

This form also could be the basis of a foreign/Andorran business relationship; the Andorran in this case owning 100% of the business, but signing away operating and cash-flow rights to the foreigner. The difficulties are obvious; the advantage is that the Government doesn't have to become involved.

Taxation of Foreign Employees of Offshore Operations

There are in fact no personal taxes as such in Andorra and there is no distinction between the employees of resident or non-resident operations, because all employers have to be Andorran and resident.

All foreigners wanting to work in Andorra need work permits. These are obtained by employers, whether Andorran individuals or companies, on behalf of employees. Self-employment is not allowed until after 10 years' residence.or trade in Andorra.

Annual quotas are established for new issues of renewable work permits. In 1998 the quota for EU and EFTA was for 900 semi-skilled workers and 150 highly-qualified workers. The quota for other nationals was 25.

There are separate types of non-renewable work permit for temporary and seasonal workers, to which the quotas don't apply. The holder of such a work permit must leave the country within one month of expiry of the permit.

Renewable work permits are issued first for 6 months, extensible for a further year; then a temporary residence card is issued valid for a renewable 2 years; then, a 5-year ordinary residence card is issued; and finally a 10-year privileged residence card is issued. Fees are modest, except that the employer must pay SPA25,000 when first applying for a permit.

Tourist visas are issued freely, but for longer-term stay it is necessary to have either a work permit (which will ensure issue of a residence permit) or a Passive Residence Permit (PRP). Permanent residence means a stay of more than 183 days in the year.

The Law on Passive Residence Permits 1996 allows 200 new residence permits per year. Passive residents do not work or carry out professional activity in the principality. 

New entrants must:

show minimum annual income of 4 m pesetas (24,000 euros) for the head of the family and 1 m pesetas for each dependent family member;

prove good conduct in their previous domicile;

produce health insurance and a pension plan;

own or rent a house or apartment in the principality;

pay a non-interest-bearing deposit of 4 m pesetas (plus 1 m for each dependant) to the Government, which is refundable on departure.