Andorra is a well known European tax haven, and residents benefit from a zero rated income tax and inheritance tax.

The reason for the introduction of the capital gains tax according to the Andorra authorities is to try to slow down the high property inflation seen in the principality in recent years.

Property prices have risen an average of ten per cent over the last decade, but this has been increasing recently with a 19 per cent rise recorded in 2005, and 16 per cent in 2006, leading to worries that locals might be priced out of the market.

As well as the local market, Andorra property sells to second home buyers and international buyers wanting residency. With property prices a quarter of rival tax haven Monaco, demand has increased from international buyers.

But any hope of the new capital gains tax dampening property prices is unlikely to work, according to Andorra property companies.

'While there is a large disparity between Europe's top two tax havens - Monaco and Andorra - in property prices, the advantages of buying a property in Andorra, gaining residency and having no income tax far outweighs any capital gains taxes', they say, pointing out that Andorra prices are a quarter of those of Monaco's.

Long Term Benefit

'Besides the increase in property prices that offset any Capital Gains Tax', they continue, 'It's on a sliding scale, with one per cent reduced for each year of residency. So for example if someone maintains residency for ten years, the capital gains tax will be five per cent of the property price increase. If someone stays a resident for fifteen years there will be no capital gains tax at all to pay on the increase of their property value.'

Buying a property in Andorra is often seen as a route to residency, which entitles people to live in Andorra and benefit from her tax haven status.

To obtain residency in Andorra, applications need to be submitted in Catalan. A notarised copy of the applicants passport, birth certificate and a certificate of good conduct from the home country are submitted at the same time. According to a local travel guide residency normally takes between three and six months to be approved.

Once residency is granted, residents are supposed to spend six months a year in Andorra, but this isn't policed.

One of the drawbacks for those looking to become a resident in a tax haven when considering Andorra has been that the country has no airport of its own, and is unlikely to have ine future given that it is located in the Pyrenees. The nearest airports are Barcelona and Toulouse.

Recent improvements in the road from Barcelona to Andorra though have cut the travelling time by some thirty minutes to two hours fifteen minutes.

'Given the tax advantages Andorra has', note the travel guide, 'A two and a quarter hour trip to the nearest international airport could be viewed as a small price to pay for those who will be saving substantial amounts of money in tax. Especially when you consider that their properties could be rising in value quite significantly in the years to come, and for those who like skiing it's a holiday and tax paradise in one!'