Although many people will not know it, the Principality of Andorra has been carrying out an ambitious process of international economic opening for more than a decade, started in 2010 with the tax information exchange agreement with Spain and deepened with the new 2012 foreign investment law, thus initiating legal and fiscal changes to bring the country into line with international standards, becoming homologated and able to enter into negotiations.
One of the consequences of this transformation was the signing of the Monetary Agreement for which Andorra acquired the euro as its official currency and also represented a great advance in the possibility of signing Double Taxation Agreements (CDI)Since to ensure the proper functioning of a CDI signed by any two states, it is necessary that the tax system, the legislation on transparency, and the accounting laws be compatible.
What is a double taxation agreement (CDI)?
A convention to avoid double taxation (CDI) is an international convention or treaty that establishes mechanisms to prevent the same income obtained by a taxpayer from being taxed by two or more states (double international taxation), for the same tax event and for identical periods.
Globalization in modern societies is implying that economic relations are internalized and that their subsistence depends largely on foreign markets, thus collapsing state borders in the face of the dynamism of the economy. As each State is sovereign to develop its tax legislation, there is an overlap of fiscal sovereignties that may not be compatible with each other.. This situation can cause:
- A single person (natural or legal) is taxed in two different countries for the same income
- The same income is taxed on two different people from two different countries
- a single asset is taxed in two different countries.
A first solution to this are unilateral measures taken by the tax administrations of each state, which usually consist of deductions for such double taxation cases. But when these are insufficient, then it requires bilateral provisions such as agreements to avoid double taxation or CDI. Its objective is to clarify, unify and guarantee the fiscal situation of taxpayers who carry out economic activities in other countries.
These conventions They are usually based on models proposed by supranational organizations such as the OECD and the UN and it should be noted that have primacy over the internal law of the country as they are framed in the field of international law. Its structure usually includes, among other things, the scope of application, legal definitions and taxation rules, methods to eliminate double taxation, the protocol and some other special provisions.
¿Why CDIs are important?
CDIs facilitate the promotion of foreign investments and favor the competitiveness of national companies abroad. Its measures apply to natural and legal persons residing in any of the signatory states and affect taxes on income, on wealth or on business profits. These taxes are required by each of the contracting states and / or their political and administrative subdivisions, and in these treaties it is established which two states have the competence to tax income.
Specifically for the Principality of Andorra, its relevant importance lies, for example, in the end of the tax on withholdings at source that certain administrations, like the French or the Spanish, applied to Andorran companies that wanted to export their services to these countries. It therefore represents a great advance for the international economic opening of the country.
The Double Taxation Agreements of Andorra
As we have indicated, in order to fully consider the taxation of non-residents, it is necessary to take into account, in addition to the internal legislation on income tax for non-residents, the different international treaties and agreements that a country has signed in force. . The Principality of Andorra has signed in recent years, a series of agreements with other countries to avoid tax evasion and double taxation (CDI) of all taxes of a direct nature on income:
- corporate income tax
- the income tax of natural persons
- the income tax of non-tax residents
- capital gains tax on property transfers
The provisions of the CDI are incorporated into the legal system from their publication in the Official Gazette of the Principality of Andorra (BOPA), and cannot be modified or repealed by law. According to the Constitution, Andorran tax law recognizes the normative priority of international tax treaties or conventions as in this case the agreements to avoid double taxation. The laws of each specific tax also recognize the primacy of these agreements over the internal order.
Andorra currently has 9 CDI signed and in force with France, Spain, Luxembourg, the United Arab Emirates, Portugal, Liechtenstein, Malta, Cyprus and the latest incorporation, San Marino, with the prospect of continuing with this type of agreement to continue with its international opening process. Five more CDIs are currently being established by Andorra: those of Hungary, the Netherlands, the Czech Republic, Croatia and the United Kingdom. In addition, one is also being developed with Kazakhstan, the Asian country.
The UK agreement is still being negotiated and the one with Kazakhstan is only an intention at the moment, but those of the Netherlands, the Czech Republic, Hungary and Croatia are only pending signature and ratification procedures for them to come into force. Thus, the international collaboration that the Government of Andorra is making in its foreign policy is advancing very quickly.
San Marino Convention
On May 25, 2021, the Andorran Finance Minister, Eric Jover, and his counterpart from the Republic of San Marino, Marco Gatti, signed a double taxation agreement (CDI) on income and wealth taxes with the aim of to solve double taxation and prevent tax evasion. As part of an official visit from Andorra to San Marino, a Memorandum of friendship and general cooperation and a specific health protocol have also been signed.
Andorra already had a tax information exchange agreement with San Marino, but this new agreement laid the foundations for future trade relations between the two countries. CDIs are vital instruments for the economic diversification of the Principality of Andorra, the attraction of foreign capital and the internationalization of Andorran companies.
In addition, both delegations held several bilateral working meetings to specifically address the negotiation process for the Association Agreement with the EU, which both countries work jointly with Monaco. Espot explained the meeting he held last week with the president of the European Council, Charles Michel, and where they discussed the agenda for the coming months. A calendar that continued with the visit to Andorra of the ambassador of the European Union, Didier Lenoir, in the month of June.
Since January 1, 2022, the agreement to avoid double taxation between the Principality of Andorra and the Republic of San Marino is already in force, as reported by the Government of Andorra. This is one more step in relations between the two countries, which was previously fortified due to the negotiations for an Association Agreement with the European Union.
This agreement is one more step to promote trade relations between the two countries. It should be noted that relations between Andorra and San Marino have been strengthened in recent years, due to common objectives such as the negotiations that they carry out together with the European Union to reach the next Association Agreement.
International tax planning
Notwithstanding the foregoing, to carry out a transfer and subsequent establishment in the Principality of Andorra, as well as to operate internationally, strict compliance with all national and supranational regulations is essential. One last point we can give is that the fact that there is no CDI between Andorra and the country of origin does not necessarily mean full and effective double taxation of the income to be received. It will depend in any case on the internal legislation of each state regarding non-residents.
With a international tax planning at the hands of good professional experts lawyers, prosecutors and economists, you will not only have guaranteed the correct execution respecting all applicable legislation, but also an optimal tax strategy that will avoid excessive impositions always outside the law. At Abast Global we specialize in establishing people and businesses from all over the world in the Principality of Andorra, offering comprehensive support.