Andorra tax and the personal tax IRPF 2015 - living in Andorra relocation guide

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Andorra tax and the personal tax IRPF 2015

General Information

Latest IRPF news from the Tax Office

Many people have asked about fiscal residency certificates? The tax office has now issued (March 2016) a brand new application form especially for this purpose and it is the only acceptable form now to get a fiscal certificate. In fact it is so new it is not even uploaded to their website, so if you need one, please print from here. Note that they request you to either declare that you are here for more than 183 days per year or that the certificate is for the reason of a double taxation treaty ( currently only France and Spain). They have informed me that this does NOT oblige the applicant to submit a tax return pursuant to requesting this fiscal residency certificate. The actual words used was that the tax office are not going to "hunt" people for tax (read what you like into that). All you need with the application form is a copy of your residency card or passport ( I would take both for the meantime!). You do not now need a residency certificate from the Comú as previously advised.
We now have a sample of a fiscal residency certificate, this is not the format for double taxation treaty purposes, as yet I have no sample of that although there is an alternative box to tick if so required. Please click here for a sample fiscal residency certificate.
You are exempt from IRPF and are not required to make any declaration whatsoever if you are not in Andorra for more than 183 days per year and there are no plans as yet to ask you to sign a declaration on your movements.
You do NOT have to be here 183 days per year if you wish to be a fiscal resident, on the tax return they do not ask how long you are or are not here.
I have been professionally advised now that you can be a fiscal resident and be here for less than 183 days per year AND not pay any tax. If that sounds strange then yes it is, I can arrange for you professional advice on this, more and more residents and potential residents are asking just where they stand on tax.
In effect the tax office have agreed that the declaration is voluntary in the absence of any monitoring of presence here or not here and in the absence of border controls.

What happens in the future is unknown, there are no current plans to increase or make any important changes to this new tax system. If changes are proposed or suggested I will of course post it here.

Check your bank deductions, IRPF... and EU withholding tax??

A warning from one long term resident here that one bank in Andorra not only applied the IRPF savings 10% tax after the allowance of 3,000 euros but also then went on to deduct the EU withholding tax at 35%. Of course this was an oversight on the part of the bank and the 35% EU tax was quickly refunded, but this carries an advisory bulletin in that everyone must pay attention to what the banks are up to. A new system has errors, be warned !!

What am I obliged to do as a passive resident?

In effect the Government is offering a fairly liberal choice, do you want to be a tax paying resident or not ? Remember, they kindly reduced the number of days you are required to legally be here for residency from 183 days per year to just 90 days per year ( inspite of vociferous complaints at the time by France and Spain). There still remains a yet to be resolved difference between passive and fiscal residency in practice in spite of the law clearly stating that all residents are fiscal.

So first and foremost decide if you are or are not wanting to become a tax paying fiscal resident, most passive residents will probably decide that they are not spending more than 183 days per year here, in this case you do not need to do anything. However IF you have a bank deposit or savings account the banks will automatically calculate the retention of 10% on interest and deduct from your interest payments. Now this only applies to savings accounts and not investment funds or any other accounts. If you wish to exercise your right to the first €3,000 tax free under the personal allowance you have to seek prior approval to the Bank. To do this you need to download the form 345 here, fill in the declaration that you do not expect to earn more than €3,000 in interest income and return to the bank. They will then not deduct the automatic 10%. ( unless in their entity the € 3,000 ceiling is reached, in this day and age of low interest rates that is unlikely). Remember investment funds and other accounts are not affected). This tax on savings income affects you whether or not you you are at this stage a tax paying fiscal or a passive resident.

For practical purposes all residents automatically have a tax number, it is "F" preceeded by- 123456 X ( where those 6 figures and one letter are your residency number as on your residency card marked "Número identificació").

You should decide if you actually need fiscal residency in a country such as Andorra with such a low tax rate since the goal of the OECD is for all financial institutions is to demand a fiscal residency somewhere, that though is further in the future and that decision may be safely deferred for now in many cases.

If you are here in the tax net (kids at school, principle base etc.) then do some personal calculations and use the generous exemptions to the best advantage. Remember you are not going to have to list or prove anything in the returns, just figures, although as with any where an investigation later may require those supporting documents. Again there is nothing at this stage for you to be doing officially other than doing some calculations personally if you decide it is advantageous to go the fiscal residency route or you really are and have to be here more than 183 days per year by virtue of family etc. If you wish to familiarise yourself with the forms that you may be required to complete in due course, please have a look at FORM 340 that is the declaration for capital gains, and FORM 310 for the declaration from sources of income where the CASS does not make retentions. The simplicity is on the surface pleasing, no supporting documents need to be presented nor specific sources declared. The problem is that Catalan remains the operative language.

As yet there are no regulated financial advisors in Andorra, I can put you in contact with lawyers and accountants who can advise professionally. I am unable to give individual and specific advice, but I can outline the principles for you.

I can help you to seek advice in your country of tax domicile to maximise the advantages of Andorran Residency

I am pleased to say that I have teamed up with a UK based but International team of experts who are in a position to advise you on matters that may concern you in your country of tax domicile, wherever that may be, when considering a relocation to Andorra. This will be done on a free and without obligation introductory chat with an advisor to find the best way for you to take advantage of potentially minimal income tax regime of passive residency in Andorra. Whether you are concerned about or wish to legally avoid paying company taxes, income taxes, VAT or the setting up offshore companies, trusts etc, this website is a one stop service to advising you and putting theory into practice, and without obligation.

So If I declare that I am a Fiscal resident what taxes am I looking at in Andorra?

For those looking for detailed and specific advice on the small print of the IRPF and how it may affect you I have reproduced a circular from the International Club courtesy of Desmond. Please note the disclaimer, along with this website it is not intended for professional advice. It details specifically the areas mentioned below and may be of interest for those considering a declaration. I have not verified the contents in detail, however in paragraph 2 regarding a declaration that you are not a fiscal resident, there is according to my source at the tax office no requirement to make any declaration or return if you are exempt from tax by virtue of the 183 day rule. I agree this may well change in the coming years but for the moment, no form or declaration is required.

As far as passive residents are concerned the only paragraph specifically mentioned in the Regulations for implementation so far is that for those passive residents wishing to choose the alternative method of taxation that is to pay €30,000 per year for three years in lieu of a tax declaration must apply within the first three months of that tax calendar year. That means for those residents choosing this option they must do so before 31^st of March 2016 for the tax year 2016. I am aware of one such application having been made for the year 2015.

It has also been confirmed by government that:-

The IRPF law will not infringe upon the current banking secrecy.
No resident and that includes passive residents will be required to declare or disclose any specifics of current assets held and wherever held and that includes financial instruments, property etc.

It should be understood that the IRPF law is very different from the tax laws in countries with well-established financial systems. The sole reason Andorra is introducing the IRPF is to satisfy the requirements of the OECD with a view to double taxation treaties being introduced as quickly as possible on the back of the IRPF. Andorra is not a country that intends to rely on income from tax; it actually has no need for income tax so the bottom line is that Andorra wants to be seen to have in place a basic form of taxation that satisfies OECD guidelines. The government keeps stressing that this tax system is the most simple possible, will affect very few people, and that very few people will be required to make any returns at all.

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. Just what the litmus test for this will be remains to be seen as also mentioned is having fiscal residency in another country, suffice to say monitoring of presence in Andorra passive residents has never been a serious issue.

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.

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 envisaged by the new tax Department in Andorra is 7%.

So what does the law on IRPF say as we know it?

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 will General Income be 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) will be responsible for monitoring liability and making appropriate retentions.

How will income from savings be taxed?

According to the IRPF law, the tax will be as follows:

• Interest:

This category includes, among 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:

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:

Single person:

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 will 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.

The Government recently announced that there is no plan to increase the amount of staff in the tax office. How all of this is to be processed, monitored, checked, enforced etc remains to be seen.

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.

EU Withholding Tax and Financial Disclosure Agreements

I plan to keep an explanation of recent tax agreements very simple:

Before these agreements Andorra enjoyed one of the most secretive banking systems in the world, and after these agreements that in most cases remains as is (although the word secret should be replaced with say "private"). Residents of Andorra are not affected firstly by the EU Witholding Tax, and that includes passive residents no matter where their previous country of residence.

From July 2011 any resident of an EU country who is not a resident of Andorra and who has a bank account in Andorra has 35% of all interest or profit earned on investment retained by the bank who will pass the funds to the Fiscal Department here in the Andorran Government.
Then, 75% of that money will be remitted to the country of residence of the EU National, and 25% retained by Andorra. Contrary to rumour, absolutely NO information on the identity of or details of the account holder WHATSOEVER will be passed to whichever country where the funds are remitted. In other words "private" banking continues as normal, albeit with a penalty tax.

Andorra opted for this route rather than the sharing of information which some other offshore jurisdictions have. As a resident you will NOT be liable for any witholding tax whatsoever.

Secondly there are the agreements signed between Andorra and other countries called Financial Disclosure Agreements. As at March 2012 a total of 17 bilateral agreements have been signed between Andorra and:-

France, Portugal, Spain, Austria, Belgium, Netherlands, Denmark, Sweden, Finland, Norway, Iceland, Liechtenstein, San Marino, Monaco, Argentina, the Faroe Islands and Greenland.

However Andorra’s former Head of Government, James Bartumeu, announced on May 3rd 2010 that Andorra had opened negotiations with Australia, the US and Britain regarding new treaties. Nothing has been heard since, and it is debatable whether the will for more treaties is there as the total of 17 countries was the minimum number of agreements that Andorra had to sign to be removed from the list of financial paradises demanded by the EU. As at May 2012 no further news has been received concerning further negotiations.

The criteria for Andorra to be removed from the blacklist has now been satisfied.

So why the do I say that the secrecy (privacy !) has been retained ?

Any request for financial information is not a fishing expedition and strictly must derive from a judicial request relating to the evasion of tax by an individual (resident or non-resident in Andorra) from one of the signatory jurisdictions. The Ministry of Finance in Andorra will consider the request and either issue the disclosure order to the relevant bank or not. As at July 2012 not one single disclosure request has been received from the Ministry of Finance. So unless you are criminally evading tax payable in one of these countries and it is so proven to the Andorran authorities, your banking here remains (very) "private".

In fact it remains a criminal offence here for any person to disclose any information on any account to anyone, and that goes as far as confirming the person even has an account. There will continue to be no liaison directly with tax authorities in any jurisdiction in the world except as explained above on a judicial request.

The advice laid out here is my personal advice and does not constitute legal advice.

Other taxes that may affect you as a Resident (or Non Resident) in Andorra

EU Withholding tax        (Fiscalitat dels rendiments de l’estalvi)

A tax of 35% is withheld on all interest and profits derived from bank accounts held in Andorra by non residents and who are residents of an EU country. The purpose of this was to remove Andorra from the list of financial paradises as cited by the European Parliament. Andorra chose this route rather than direct financial disclosure of accounts of non-residents as some countries chose to do. This has retained a degree of privacy especially as a portion of the tax collected, currently 75%, is sent to the resident country of the account holder but without any form of identification whatsoever of the individual or account dealings. This system will be replaced from 2018 ( with the exchange of financial information rules).

The Principality of Andorra established a procedure allowing beneficial owners to avoid the withholding tax, if the beneficial owner referred to produces a certificate issued in his name by the competent authority of his Member State of residence.

Indirect Taxes

On January 1st 2013 the new indirect tax system was introduced called IGI (Impostos generals Indrectes) of 4.5%. This is the start of the VAT or IVA, a general levy on (most) goods and services. There are varying rates but you should mainly be concerned with the 4.5% band.

Non resident tax on Services              (IRNR - Impost sobre la renda dels no-residents fiscals)

This applies to non resident individuals and companies who have derived a financial benefit in Andorra through services, repairs, maintenance etc which has been provided to an Andorran company or individual. There is the example of a non resident owner of an appartment earning rental income from a resident (or other non resident). The Agent is now obliged to reatin and declare 10% of the renatl income and pay the same to the Government.
On all non resident entities earning money in Andorra there is a 10% tax declarable and payable in Andorra. The law also provides that the non resident company or individual must appoint a tax representative in Andorra to declare and arrange for payment.

Capital Gains Tax           (Plusvàlua)        ( For Andorran Property only)

This applies to the sale and transfer of property only and is not a general tax. It is payable on the difference in the purchase and sale price and diminishes to from 15% to 0% liability over a period of 11 years. If the property is a main residence and the person purchases another within six months, no tax is payable. There is a complicated calculation formula compiled by Notaries upon a property transaction. There is no other capital gains tax on financial instruments or sale of assets outside Andorra where the proceeds are remitted here except under the provisions of the forthcoming IRPF.

Tax on business activities             ( Impost activitats econòmiques)
From 2013 the IAE tax has been introduced at 10% on profts. There is an allowance of the first €40,000 profit derived from these economic activities. This is specifically aimed at individual residents who provide services in Andorra for Andorran companies or individuals, for example a person who is paid for designing websites for an Andorran company, a cleaner, a self-employed mechanic etc. This is separate from Corporation tax explained below. This is to be replaced with the arrival of IRPF

Corporation Tax                     ( Impost sobre les societats)

From 2013 the Corporation Tax has been set at 10% and is unlikely in the near future to change. It is direct tax on profits earned by any company registered in Andorra without any allowance on profits as in the IAE category. Returns to the Government are set down for each July.

Personal Income Tax                              (IRPF)

As above starting from Jan 1st 2015