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 13 CDIs signed and in force with France, Spain, Luxembourg, the United Arab Emirates, Portugal, Liechtenstein, Malta, Hungary, Cyprus, Croatia, San Marino and the latest additions: Monaco and the Czech Republic. With prospects, furthermore, of continuing with this type of agreements to continue with its process of international opening. Four more CDIs are currently being finalized by Andorra: those of the Netherlands, Belgium, Iceland and the United Kingdom. In addition, they are also being developed with South Korea, Italy, Guatemala, Uruguay, Paraguay, Mexico and even 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 and Iceland are only pending signature and ratification procedures for them to come into force. Treaty negotiations with Belgium have recently concluded, and also the respective one to South Korea. Thus, the international collaboration that the Government of Andorra is doing in its foreign policy is advancing very quickly. In fact, those of Hungary, Croatia, Monaco and the Czech Republic have been signed and ratified recently.
Further, Andorra is negotiating and having bilateral relations with numerous other countries like Iceland, Latvia and Lithuania, Chile, Paraguay or even Sweden. It is very possible that in the near future these relations will bear fruit in CDIs with these countries as well.
The double taxation agreement with Iceland
The last Andorran CDI was that of Iceland, when the acting Minister of Foreign Affairs of the Government of Andorra, Maria Ubach, and her Icelandic counterpart, Þórdís Kolbrún Reykfjörð Gylfadóttir, signed a double taxation agreement in February 2023 regarding taxes on income and capital and prevent tax evasion and avoidance (CDI). They did so in Geneva, coinciding with the 52nd session of the United Nations Human Rights Council.
Ubach and Gylfadóttir agree that the text should benefit the process of opening up and economic diversification of the Principality of Andorra and strengthen economic relations with Iceland. The signature comes after a delegation from the Nordic country visited Andorra in December to carry out the respective negotiations. Once the text is signed, both States will have to approve it and it will then enter into force.
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, not only will you have guaranteed correct execution in compliance with all applicable legislation, but also an optimal tax strategy that will avoid excessive taxation always outside the Law. At Abast we specialize in establishing people and businesses from all over the world in the Principality of Andorra, offering comprehensive support.