Impact of Personal Income
Tax on the taxation
of residence
“without earnings”
| December 2013 |
index
1 | General questions
1.1 | How does Personal Income Tax work?
1.2 | Who does it affect?
1.3 | What does it burden?
1.4 | Does having a residence permit mean being fiscal
resident of Andorra?
1.5 | What does the transitional regime for Passive Residents
consists of?
2 | Taxation of income obtained from savings products
2.1 | How is income from savings taxed?
2.2 | Will income from savings be subject to withholding?
2.3 | What happens if the returns are generated in relation
with an asset located abroad?
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3 | Taxation of income obtained from retirement pensions
3.1 | Which types of income are included in the concept
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of retirement pensions?
3.2 | How is a pension coming from abroad taxed?
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4 | Taxation on property income
4.1 | How is the sale of a property where there is a capital
gain taxed?
4.2 | How is income from real estate rentals taxed?
5 | Other questions to take into consideration
5.1 | What happens if I have income of professional origin from other
countries – returns on a professional activity or remuneration as
member of a Board?
5.2 | What formal obligations are generated by the fact of being
a taxpayer for Personal Income Tax?
5.3 | Do I have to declare all my assets both in Andorra and abroad? 5.4 | What happens if Andorra signs a Convention to Avoid Double
Taxation with my country? 5.5 | Why would it suit me to be resident in Andorra rather than
in other countries with favourable regimes? … 13
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Impact of Personal Income Tax on the
taxation of residence “without earnings”
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General questions
1.1 | How does Personal Income Tax work?
Andorran Personal Income Tax, like most tax systems in comparative law,
burdens worldwide income. It is configured, then, as a direct tax which burdens
the income obtained by individuals resident in the Principality of Andorra,
independently of where this income is obtained.
The Law on the tax establishes an exempt minimum of €24,000 for income
included in the general taxation base, rising to €40,000 if the taxpayer has
a dependent spouse. And it establishes a reduction for income from savings
(interest, dividends and capital gains) of €3,000 per annum, which works as an
exempt minimum for this type of income.
Impact of Personal Income Tax on the
taxation of residence “without earnings”
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General questions
1.2 | Who does it affect?
All individuals resident in the Principality of Andorra. Those people for whom any
of the following circumstances apply are considered as such:
• Remaining for more than 183 days during the calendar year in Andorran
territory.
• That the principal focus of their activities or financial interests is located in
Andorra.
IIs presumed, unless proven otherwise, that a person is physically a fiscal resident
in Andorra if all second parties, partner (not separated) sons who are under age
are as well.
Also considered as tax residents in Andorra are those Andorrans, spouses not
legally separated and underage children, whose normal residence is abroad, due
to being members of diplomatic missions or the representations of international
bodies.
Not considered as tax residents are crossborder workers, although it is envisaged
that some rules of Personal Income Tax will be of application to them for some
income obtained in Andorra.
Impact of Personal Income Tax on the
taxation of residence “without earnings”
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General questions
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1.3 | What does it burden?
The obtaining of income by the taxpayer, which is classified as follows:
1.
Base for general taxation:
a) Income from employment (wages, salaries, pensions, etc)
b) Income from the exercise of financial activities (practitioners
of liberal
professions, company administrators, business
exploitation, rentals from real estate, etc)
c) Income from fixed capital, such as real estate rents, when it has
been opted expressly to consider this as income from fixed capital
2. Base for savings taxation:
a) Income from investment capital (interest, dividends, etc)
b) Capital gains and losses arising from transfers of all kinds of assets
(except when the transfer is expressly classified as returns from
investment capital)
Not subject to tax, and therefore not burdened, are acquisitions of assets and
rights by inheritance, legacy or other type of succession, free donations or
acquisitions among the living, and sums received by the beneficiaries of life
assurance when the holder is not the beneficiary.
Impact of Personal Income Tax on the
taxation of residence “without earnings”
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General questions
1.4 | Does having a residence permit mean being a fiscal resident
of Andorra?
In accordance with the Personal Income Tax regulation, if an individual does not
reside more than 183 days in Andorra that person will not be considered as a
fiscal resident of Andorra.
1.5 | What does the transitional regime for Passive Residents
consists of?
It is permitted for those who have obtained residency without a lucrative activity
and before the IRPF law was approved, a special transitory regime consisting of
an annual fee of 30.000 €.
This option is for those who are already resident and therefore will not be
subject to the IRPF, until 2018, however they will not be given the right to use
the conventions to avoid the double taxation that Andorra has signed.
This special regime could be renounced and therefore they will pay the IRPF.
Impact of Personal Income Tax on the
taxation of residence “without earnings”
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Taxation of income obtained from
savings products
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2.1 | How is income from savings taxed?
According to the Project for the Law on Personal Income Tax, the taxation of
these returns will take place 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, whether dealing with private
or public issues.
These types of returns are subjects to Personal Income Tax, enjoying the
exemption referred to of the first 3,000 euro obtained.
• Dividends: Dividends from entities resident in Andorra, and also from
Andorran Collective Investment Funds (CIFs) which are subject to the Law
7/2013, of 9 May, are exempt from Personal Income Tax.
Dividends from quoted entities will be subject to Personal Income Tax and
not exempt when dealing with companies not resident in Andorra.
• Capital gains: The gains obtained from the transfer of equity units or shares
of an enterprise 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, has been in the same ownership for 10 years or more,
the gain obtained will be exempt from Personal Income Tax.
This rule also applies to the sale of holdings in CIFs.
Impact of Personal Income Tax on the
taxation of residence “without earnings”
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Taxation of income obtained from
savings products
2.2 | Will income from savings be subject to withholding?
Yes, the Personal Income Tax Law envisages that income from investment capital
will be subject to withholding by the entity which pays the income a fixed rate of
10% (only income paid by Andorran entities will be subject to withholding).
The taxpayer can take the option that the Andorran financial entity which pays
the returns may directly apply the reduction of 3,000 euro, that is to say, it will
not start to apply the withholding on investment returns paid until having passed
this figure during the year.
The option for this system has to be communicated to the financial entity, in
accordance with the procedure which will be established by regulation.
Impact of Personal Income Tax on the
taxation of residence “without earnings”
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Taxation of income obtained from
savings products
2.3 | What happens if the returns are generated in relation with
an asset located abroad?
These returns will be subject to Andorran Personal Income Tax, since they are
obtained by a resident in Andorra who is taxed on worldwide income. Further, it
is likely (depending on the country of origin) that they are also taxed in the State
where the asset is “located” (which will normally be the country of the provider
or issuer of the instrument), in accordance with its internal fiscal regulations.
If this country has signed a DTC (Double Tax Convention) with Andorra, this will
in all probability contain rules to reduce the rate of withholding which has to be
applied to the returns at source, and it is even possible that this withholding will
be nil (as happens in the domestic regulations of many countries). The standard
rate of withholding envisaged in the OECD model of DTC is 10%.
Andorran taxation on returns can be attenuated through the application of the
threshold of 3,000 euro per annum that the Law sets out for returns on savings
(interest, dividends and capital gains) obtained by the taxpayer.
Impact of Personal Income Tax on the
taxation of residence “without earnings”
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Taxation of income obtained from
savings products
2.3 | What happens if the returns are generated in relation with
an asset located abroad?
Further, if the returns have suffered a withholding at source, this will be deductible
in Andorra. Therefore, if the aforesaid withholding determined in the source
State applies a rate of at least 10%, the corresponding deduction will allow the
Andorran tax on the returns to be absorbed (calculated at a rate of 10%) and
remove any additional taxation in Andorra.
With regard to capital gains, in the event that there is a DTC with the State in
which the asset which has generated the gain is situated, there will be the
possibility (as, in fact, results from the OECD model of DTC) that the power of
burdening the gain could be attributed exclusively to the State of residence of
the transmitter (that is, Andorra), which would exclude taxation at source.
The possible taxation in the State where the transferred asset is situated will
grant the taxpayer a tax credit consisting of the deduction of the foreign tax paid,
to be applied on the quota of Andorran Personal Income Tax corresponding to
the gain taxed.
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taxation of residence “without earnings”
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Taxation of income obtained from
retirement pensions
3.1 | Which types of income are included in the concept
of retirement pensions?
Benefits for retirement subject to Personal Income Tax are both those received
from public entities, such as for example Andorran Social Security (or similar in
the State of origin of the taxpayers); and those received from private entities,
resulting from the taxpayer’s savings.
This type of income is classified as a return from work and enjoys an exempt
minimum of 24,000 euro, as it forms part of the general base.
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taxation of residence “without earnings”
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Taxation of income obtained from
retirement pensions
3.2 | How is a pension coming from abroad taxed?
To the degree that these receipts have a high probability of being subject to
withholding at source, the right to a deduction for international double taxation
arises in favour of the pensioner resident in Andorra, and this could reduce his
quota of Personal Income Tax on the pension obtained by the amount of the
foreign tax, with a limit of 10%. In consequence, if the withholding at source is
10% or over, there would be no Andorran tax on this income.
Impact of Personal Income Tax on the
taxation of residence “without earnings”
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Taxation on property income
4.1 | How is the sale of a property where there is a capital gain taxed?
Property in Andorra:
If the property sold by the taxpayer is located in Andorra, the gain would be
subject to the Tax on Capital Gains on Real Estate Transfers, and would fall
outside the objective field of Personal Income Tax.
Property located abroad:
On the other hand, if the property is located abroad, the gain would be burdened
by Andorran Personal Income Tax, although the tax which would, with all
probability, be demanded by the State of source in relation with this gain could
be deducted from the quota of Andorran Personal Income Tax corresponding to
the gain, and would remove all taxation under Andorran rules if this foreign tax
demanded was at a rate of 10%, at least.
The possible losses generated in these types of transactions could be the subject
of set-off against the positive income from savings obtained by the investor
during the same tax period and burdened in Andorran Personal Income Tax, with
any possible excess able to be set off during the 10 following tax periods.
However, the gains and losses resulting from the sale of a property located
outside of Andorra are exempt if you owned the entire property , at least during
the 10 years prior to the sale.
Impact of Personal Income Tax on the
taxation of residence “without earnings”
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Taxation on property income
4.2 | How is income from real estate rentals taxed?
Property situated in Andorra:
Before the introduction of Personal Income Tax, this type of income was burdened
by tax on income from financial activities (“IAE”), provided that the gross amount
of income obtained from property rentals was over 40,000 euro per annum.
In the Project for the Law on Personal Income Tax, the income corresponding to
rentals will be included under the heading of income from financial activities or
income from investment capital, with repeal of the IAE.
Property situated abroad:
The same considerations as for the above section would also apply in the event
that the property is abroad. In the same way as noted in the above sections, it
would be possible in this case to deduct from the quota of Personal Income Tax
the taxes demanded in the country where the properties are located in relation
with income from rentals.
Impact of Personal Income Tax on the
taxation of residence “without earnings”
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Other questions to take into
consideration
5.1 | What happens if I have income of professional origin from other
countries – returns on a professional activity or remuneration
as member of a Board?
This income would be fully subject to Personal Income Tax and classified as
income from carrying out financial activities, for inclusion in the general income
for the tax. Both types of income were previously included under the scope of
IAE, and will now be burdened in Personal Income Tax, although under rules
essentially similar to those pre-existing.
The possible burdening of this income in the State of source would give the right
to a deduction for international double taxation, to be applied on the quota of
Andorran Personal Income Tax corresponding to this income.
Where there is a DTC between Andorra and the State of source, normally the
burden in that State on income from a professional activity would be excluded,
if it were carried out from Andorran territory; that is, without having a fixed
presence (offices, etc.) in the other State.
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taxation of residence “without earnings”
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Other questions to take into
consideration
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5.2 | What formal obligations are generated by the fact of being
a taxpayer for Personal Income Tax?
• Obtaining an NRT: Everyone who is a taxpayer for Personal Income Tax has
the obligation to obtain an NRT (Tax Registration Number), which they can
apply for using the form approved for the purpose.
• Obligation to file self-assessments:
There are a number of cases in which the obligation to file a tax return is
excluded; in particular, when the taxpayer obtains one or any of the following
types of income: (i) income from work and income from investment capital
which are subject to withholding in Andorra or (ii) exempt income.
In consequence, situations can occur in which an investor exclusively obtains
financial income which leaves him outside the obligation of filing a tax return;
for example, interest paid by Andorran banks, dividends of Andorran source
(or corresponding to shares deposited in Andorran banks) and capital gains
obtained from the transfer of shares quoted on the stock markets.
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taxation of residence “without earnings”
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Other questions to take into
consideration
5.3 | Do I have to declare all my assets both in Andorra and abroad?
No. The Andorran tax system has no tax on assets or similar burden, which would
oblige residents in the Principality to declare the assets or rights making up their
personal wealth, whether they are in Andorra or outside.
5.4 | Do I have to declare all my assets both in Andorra and abroad?
The DTC contains mechanisms to resolve potential conflicts of residence between
States. These tools allow that, if the internal tax regulations of your country
of origin consider you as tax resident through there being some circumstance
which determines it (e.g. through your focus of financial interest being in that
country) and the Andorran rules also do so (e.g. because you live in Andorra for
more than 183 days), the situation of double residence which emerges can be
avoided through the DTC, which will resolve it in favour of one or the other State.
All this would mean that, having a DTC applicable to the resident “without lucrative
activity”, the latter would be better equipped to resolve possible discussions on
tax residence with the authorities of the country of origin (or any other) than if
there were no DTC or if, existing, it were not applicable.
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taxation of residence “without earnings”
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Other questions to take into
consideration
5.5 | Why would it suit me to be resident in Andorra rather than
in other countries with favourable regimes?
Tax residence in Andorra and taxation under the general rules of Personal
Income Tax guarantee access to the benefits of the DTCs signed by Andorra. In
the same way, residents “without lucrative activity”, in spite of being subject to
Personal Income Tax and not enjoying any specific tax regime (with exception to
the regime for the first three exercise mentioned above), can benefit from the
reductions and exemptions envisaged in the provisions of the Law on Personal
Income Tax; in particular, those referring to savings income, the type of income
which will be predominant in this situation.
In contrast to what happens with the regimes existing in other countries, access
to a favourable tax regime (that arising from the general rules of the Tax) will
not be subject to any specific requirement, nor have any exceptional nature or,
as happens in some countries, be temporary.
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taxation of residence “without earnings”
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