- Towards a new fiscal framework
- The new fiscal framework
- Agreements on avoidance of double taxation, DTA
The International pressure
The unfolding of the international economic and financial crisis and the G20 meeting held in London on the 2nd of April 2009, clearly stated the international community’s will to move forward towards the transparency of the financial activity.
The Declaration of the Principality of Andorra signed in Paris on the 10th of March 2009 by the Andorran Prime Minister, Albert Pintat, acknowledged a strong commitment to establish tax information exchange agreements upon request from the tax authorities, pursuant to the OECD tax information exchange models.
Exchange of tax information upon prior request.
As a result of the enactment of this new Law many different agreements have been signed. As of today more than 21 Tax Information Exchange agreements have been subscribed:
- France: signed on 22 September 2009 and published in the BOPA on June 9, 2010. Came into force on December 22, 2010.
- Spain: signed on January 14, 2010 and published in the BOPA on May 13, 2010. Came into force on February 10, 2011.
- Signed and in force: in addition to Spain and France, Portugal, San Marino, Monaco, Liechtenstein, Austria, Faeroe Islands, Norway, Denmark, Sweden, Finland, Netherlands, Germany, Poland, Iceland, Greenland. Australia and Argentina.
- Signed but not yet in force: Belgium , Switzerland , Czech Republic and Italy.
With these agreements Andorra is no longer considered a tax haven and out of the gray list of the OECD and the respective States.
These agreements affect the different countries that have subscribed them and consists of an administrative procedure between financial authorities and their delegates (tax offices). These agreements are applicable to tax matters that have arisen on or after the date of entry the agreements came into force.
Their application is not retroactive and affects the tax accounting periods applicable from the date of entry into force.
There are certain legal procedures of appeal for those who are required information or are investigated for tax matters.
These agreements will in due course be replaced by the Agreements on Avoidance of Double Taxation.
Tax information automatic exchange.
Andorra is aware of the international trend towards transparency, and its response to it has been to move in the same direction, understanding the fact that the automatic exchange is an unavoidable future for all jurisdictions.
Currently, a total of 51 countries have signed the multilateral agreement on the automatic exchange of tax information in relation to certain financial accounts held in Andorran banks by individuals and legal entities which are non-tax residents in Andorra.
Most of the adhering countries will start applying this agreement in 2017, Andorra will do so in 2018. At the start of 2015, only four countries have not expressed their commitment to adhere to this agreement nonetheless, everything indicates that the international pressure will be a decisive factor in this respect.
It is important to state that even though the tax information automatic exchange in Andorra won’t come into force till 2018, the agreement foresees a one year retroactive effect.
What is unknown as of today are the financial accounts that will be reported and the general application of this automatic exchange.
THE NEW FISCAL FRAME
- Objective: To facilitate political and economic relations between Andorra and its neighbouring countries through the standardisation of the taxation framework.
- Need: Approval is necessary to reach agreements to avoid double taxation.
- New: Income taxation of business and professional origin: resident individuals,nonresidents and legal entities.
- Simplification and unification of the indirect taxation: Impost General Indirecte, IGI.
- Concision and creation of 4 new types of taxes:On the one hand, 3 laws have been approved to regulate the direct taxation, adopted on 29 December 2010 and came into force on January 27, 2011.
1.- Tax on Income of Nonresident. Effective from April 1, 2011. General rate of 10%.
2.- Corporate income tax. Effective from January 1, 2012. General rate of 10%.
3.- Personal Income Tax (IRPF): the fiscal framework has been complemented with a tax treatment for individuals under a very competitive tax rate and which under no circumstances surpasses a 10%. Law 5/2014, of 24th of April, in force from the 1st of January 2015.
On the other hand, the law that regulates the indirect taxation:
4.- The General Indirect Tax similar to Value Added Tax (IGI). The general rate is 4,5% as the Law 11/2012 indicates, approved on 21 June 2012, came into force on 1 January 2013.
The taxpayers under this type of tax are all those companies operating in Andorra and people having their residency or registered office in the Principality of Andorra be it by having been incorporated in Andorra or as a result of a change of the jurisdiction.This new tax leads to a highly attractive tax model, which has created a treatment that combines the best virtues of jurisdictions like the Netherlands, Luxembourg, Switzerland,Ireland and Cyprus. Depending upon the nature of the company there are:
- Traditional Andorran companies
The tax rate is 10% on the income obtained by the company for a tax accounting year with important reductions making the tax amounts to be paid lower.
- International operating companies of intangible assets
The result is an ideal international position improving the traditional model of the Netherlands. The taxpayers can benefit from an 80% reduction in the following cases:
1. Authorization for the use, sale or license of patent rights, industrial forms and designs, trademarks, domain names and other distinctive signs of enterprise and the industrial property rights.
2. License for use of drafts, formulas or procedures, industrial, commercial or scientific rights as well as the use of industrial, commercial or scientific equipment.
3. Assignment of copyrights, artistic and scientific rights as well as audiovisual productions computer programs and systems.
- Companies that take part in international commerce
Taxpayers can benefit from an 80% reduction on the taxation base if the trading of goods is made at an international level or when a realtor or an intermediary executes the sale and purchase of properties abroad, also if the activity of a commission agent is done from Andorra, and if the commercialised product does not enter nor leave Andorra.
Business premise or offices of a minimum of 20m2 and at least one part-time employee are requirements needed for the exemption to operate.
- Management and Investment Companies
Taxpayers benefit from an 80% reduction on the tax base. These types of entities are those tax residents in Andorra whose business consists of receiving loans from related companies or third parties, which added to its own share capital are used for entering into loans with related entities not possessing tax residents’ status. In order to carry out this business, a company must have a minimum share capital of 250,000 €, should also have its own staff in the Principality of Andorra, at least one employee, even as a part-time worker and an office space specifically dedicated to carry out this type of activity.
- Holding Companies
Holding companies are companies with shares in other companies located in foreign countries. These companies are tax-exempt on received dividends and capital gains in the following cases:
1. A non-resident company whose shareholder is an Andorran company should be subject to paying taxes in its own country, i.e. paying taxes similar to the Andorran income tax.
2. The percentage of participation, be it direct or indirect, in the share capital, equity and assets of the enterprise, the patrimony or voting rights should be at least 5%; this participation must be held without interruption for at least one year preceding the day on which the profit is to be distributed, or if the profit is not distributed, the participation must be maintained for the necessary time to complete this period.
INCOME TAX FOR NON-RESIDENTS
Non-resident individuals and legal entities in the Principality of Andorra that obtain incomes in Andorra are obliged to pay this tax. The standard rate is 10% with some exceptions.
This tax is not applied to dividends from non-real estate assets earned by non-residents in Andorra (there is a tax cost for citizens of the European Union).This is an important issue for assessing incomes from bank accounts.
Income obtained in the Andorran territory is considered to be the income from activities within this territory, from property in Andorra or exercisable rights arising or usable in the Principality.
Taxpayers of this tax shall follow the following taxation rules:
1. When income is obtained through a permanent establishment in Andorra, it is taxed on all attributable income to the permanent establishment, irrespective of where it was obtained.
2. When income is obtained with no permanent establishment in Andorra, the declaration on different types of income is required and they are taxed individually and separately for every income received.
THE NEW LAW OF GENERAL INDIRECT TAX IGI
The tax called IGI (similar in nature to the European VAT) combines and encompasses most of the indirect taxation types of tax. The law was adopted on the 18th of July 2012 and came into force on 1 January, 2013. With the entry of the IGI, indirect taxation is comprised of the following:
1. The IGI that taxes the transfer of new real estate and the rendering of services.
2. Property Transfer Tax (ITP) which taxes the second and subsequent transfers of real estate.
Nonetheless, in first transfers of real estate and those transfers managed by authorized real estate agents, the IGI tax rate of 4,5% will be applied. In all other real estate operations a 4% ITP tax is applied.
It is important to underline that the IGI tax rates under both the general and the reduced rates, are at levels below those neighbouring countries and adapt to the needs of the
Andorran economy. According to the new law, all operations are subject to a general tax rate of 4.5% except for those products and services considered of first necessity to which a reduced tax rate of 1% applies, or even a super reduced tax rate of 0%. An increased rate of 9.5% will be applied to banking and financial services.
PERSONAL INCOME TAX
The personal income tax is the figure that as of 1 January 2015 completes the new fiscal framework of the Principality of Andorra. Its structure is identical to that one of Spain and other neighbouring countries, but with the peculiarity of a 10% fixed rate. It includes important exemptions such as those applicable to employment income up to € 24,000 and movable assets up to € 3,000 or a total exemption on dividends from Andorran companies.
Exemptions and deductions that substantially reduce the effective tax rate along with the absence of tax on net wealth or property, inheritance and gifts, have made Andorra become one of the most competitive and lax jurisdictions on individuals’ taxation in Europe.
The existence of agreements to avoid double taxation (DTA) is essential to promote foreign investment in Andorra or Andorran investment abroad, as they provide legal certainty to investors and reduce the tax burden of those investments.
All agreements to exchange tax information foresee their replacement by agreements of avoidance of double taxation and the commitment to start negotiations after their entry into force.
The agreement to avoid double taxation between Andorra and France has already been signed (April 2013), the agreement to avoid double taxation between Andorra and Spain has already been signed too (January 2015) and finally, the DTA between Andorra and Luxembourg was entered into on the 2 of June 2014.
And now, the government has already started negotiations and / or contacts with Portugal, Belgium, Switzerland and Austria, with whom it is expected to sign separate agreements at the beginning of 2015.
Furthermore, the campaign throughout 2013 on this matter is expected to be very important towards the signing of other agreements to avoid double taxation with other countries which have already signed agreements to exchange tax information and those that are strategic for the international relations of Andorra.