2018 sees the second year of IRPF declarations in Andorra. There have been no significant changes since the implementation that would affect passive residents except that it is the banks who are policing the international obligations for each person to have a country of a fiscal residency. If you are applying for an account in Andorra you now need that proof.
With this in mind what is the position for passive residents?
- Not all passive residents automatically have or will become fiscal residents. The law states that anybody remaining over 183 days in Andorra becomes a fiscal resident; however the minimum requirement for passive residency is 90 days. Each resident needs to consider the question of fiscal residency and their own personal circumstances. The times when you could avoid paying any tax anywhere are over.
- The most important factor notwithstanding that a double taxation treaty may or may not exist with a third country is that any tax paid already to that third country is 100% allowable against any tax obligation in Andorra, and as Andorra invariably has the lowest rate of 10%, no tax may ever be legally payable in Andorra. Furthermore as and when Andorra signs the double taxation treaties as a resident here the 10% rate is going to be a lot less than most if not all third countries, so the benefits of an Andorran resident look set to continue.
- The Capital Gains ( as opposed to income gains as explained below) will not be payable for those for example who trade financial instruments such as shares unless you own more than 25% of that entity ( or if you own more than 25% you will not pay Capital Gains Tax if you have held the shares for more than 10 years). In other words for those passive residents who self-trade, there should be no income tax payable since the shares traded would amount to a micro fraction of the company and therefore be exempt from Capital Gains and also do not fall under the earned income bracket.Self trading thouh now is a red line for local banks and in theory you need a trading license which you will not get.
- For those fiscal residents the personal allowances are also very generous. Although the headline tax rate is 10% with the personal allowances the maximum rate will not reach that maximum limit.
So what is the law on IRPF ?
There are two types of taxation: there is general or earned income which includes (not exhaustively):
· Income from employment (wages, salaries, pensions, etc.)
· Income from the exercise of financial activities (self-employed and professionals, company administrators, property rentals, etc.)
And there is Savings or Capital Gains income which includes (not exhaustively):
· Income from investment capital (interest, dividends)
· Capital gains and losses arising from transfers of all kinds of assets (except when the transfer is expressly classified as returns from investment capital)
How is General Income taxed?
Taxation on income from employment in Andorra is not going to affect passive residents, however there may be areas concerning pensions, salaries from employment of companies overseas, and rental income from property wherever it be situated.
Please note once again the effect of the no double taxation doctrine under the IRPF in that those earning salaries or pensions which are taxed at source in their country of tax domicile will most likely pay no tax in Andorra.
For salaried employees in Andorra the CASS (Andorran Social Security system) is responsible for monitoring liability and making appropriate retentions.
How is income from savings taxed?
This category includes, amongst others, interest earned on loans, current accounts or bank deposits, also returns (premiums, coupons, etc.) arising from the subscription, reimbursement, repayment, conversion, exchange or transfer of financial instruments, private or public. This is not a tax on the amount of capital it is on the profits arising therefrom at 10% over the personal allowance.
It should be noted that bank investment funds in Andorra for those passive residents who invest to fulfill residency requirements under Category A should largely be unaffected since return on investment funds through the bank are already subject to existing taxes, however those with simple savings accounts for example will still be liable.
Please note for this type of bank savings tax there is a further personal allowance of € 3,000 separate from the main personal allowances as below and at current interest rate returns any tax liability should amount to little. Please note that the tax here is on interest earned, it is not a tax on the capital amount.
Dividends from Andorran entities and also from Andorran Collective Investment Funds (CIFs) are exempt from Personal Income Tax. This means that those with Andorran Companies once the profits have been declared and paid under the Company tax law will not be then subject to IRPF upon dividend distribution.
Dividends from companies not resident in Andorra may be subject to Personal Income Tax (however, subject again to exemption under the double taxation rule of a third country)
• Capital gains:
The gains obtained from the transfer of equity or shares of a company in which the holding is more than 25% will pay tax under Personal Income Tax. However, if the holding in the company is less than 25% or, when higher and has been under the same ownership for 10 years or more, the capital gains will be exempt from Personal Income Tax. This rule also applies to the sale of holdings in CIFs. For those sole traders this is good news in that profits derived do not fall under IRPF since the shares traded would amount to a fraction of the entity traded.
The same applies for property held overseas. In most countries capital gains is paid where the property is situated and in that case under the doctrine of no double taxation there should be no tax payable in Andorra. This is different in the UK for example where those “non-resident for tax purposes” are not currently liable for capital gains tax in the UK. In which case if they have held the property for less than 10 years under the IRPF regulations they may be liable for capital gains on any capital increase.
A summary of personal allowances for General Income:
- Income of up to €24,000 per annum is exempt.
- Income between €24,000 and 40,000€ at 5%.
- Income above €40,000 at 10%.
Married or legally constituted couples:
- Income of up to €40,000 per annum is exempt.
- Income above €40,000 per annum at 10%.
There is some further relief for dependents, incapacitated dependents and mortgages.
A summary of personal allowances for Savings Income:
For all residents there is a € 3,000 allowance for interest earned on savings. It is understood though that the bank will automatically retain this tax from € 0, 00 unless the tax payer applies to the Bank for exemption.
There remains no inheritance tax and all assets bequeathed are not subject to IRPF. There is also no wealth tax on assets such as exists in Spain or France to name but a few.
What does the future have in store?
As for passive residents there continues to be a fundamental issue in that after paying a non interest bearing bond and making a significant investment in the country and then being required to pay income tax on worldwide earnings leads to the question as to what they should get in return? Currently they are not offered any medical assistance, requiring private medical insurance nor are they entitled to any pension amongst other things. This in essence may amount to discrimination and contrary to the constitution as any tax payer in any country is entitled to benefits by right.
Any information welcome:
If any reader can offer any specific information that they have gleaned from official sources, I would be delighted to hear from you, so please do email me, we are all in the same boat!
This article contains general information about legal and financial matters. The information is not advice, and should not be treated as such.