The Spain-Andorra double taxation agreement

The reason for double taxation agreements is that when income, assets, a product or service, or in short, an action subject to taxation, is likely to be taxed in two or more different jurisdictions, a double taxation conflict. The two countries feel the separate power to apply their legislation and regulations to the taxable event, and the taxpayer may be left helpless and unfairly mistreated, and may cause withholdings both at origin and destination.

On the other hand, states usually apply a tax on income generated by both individuals and legal entities within their territory that are not tax residents within it through a tax figure that is usually called IRNR (Income Tax for Non-Residents). This tax assumes that when a person or entity operates or works internationally, this type of conflict always occurs double taxation, since income can be taxed in the jurisdiction where it was generated (by IRNR) or in the country where said person or entity resides for tax purposes (the usual criterion).

The conflict is born by two generating facts that overlap: that of the source of the income and that of the residence of the recipient of said income. The tax on non-residents, in English called "withholding tax" or "retention tax", when applied taking into account the location of the source and therefore the payer of the income and not the recipient of the same, causes some withholdings to be made by the payer, therefore called withholdings at source, since the tax is withheld or deducted from the income to be received in advance in the country of origin.

As if that were not enough, in most states there are also "withholding tax" or taxes on the source of income applied to residents in that jurisdiction, such as the famous personal income tax withholdings, causing withholdings at destination, in such a way that a payer who issues an income internationally has to pay taxes and withhold for the same income twice, counting separately what has to be taxed on said income by the receiver of the same. That is the reason why it is called double taxation.

To alleviate this problem is why the double taxation agreements or CDI between the different countries, in which it is agreed how the income from international operations is taxed as long as it benefits both jurisdictions and the taxpayers by avoiding the payment of the same income twice. It is because of that CDIs, withholdings and taxes on the income of non-residents or IRNR are topics or concepts that always tend to go together.

On this page we already talked about the double taxation agreements that Andorra had signed with numerous countries after the process of economic opening made and that allowed him to approach positions. These conventions usually follow the OECD model so that, in case interpretation is required, it is carried out based on this and they usually apply to both natural and legal persons, and assess the cases in both directions, establishing in each one which state has the power to tax income and how it must.

Well, after this introduction, today we are going to see in greater depth the CDI of Andorra with Spain that also you can check here, so that we can see how income is taxed, if withholdings are applied and how they are applied, and when double tax exemptions can be applied due to IRNR.

The Double Taxation Agreement between Andorra and Spain

As we have said, CDIs are essential for a country that wants to open up internationally, since they facilitate the promotion of foreign investments and favor the competitiveness of national companies when operating abroad. In this sense and after many negotiations, On January 8, 2015, Andorra and Spain finally signed their double taxation agreement, to enter into force on February 26, 2016.

The signing of this agreement put an end to the tax on withholdings at source that the Spanish administration applied to Andorran resident companies, entrepreneurs and employees who wanted to export their services to Spain, thus being one of the best incentives for attracting people, capital and businesses to the Principality of Andorra.

The agreement currently clarifies the fiscal treatment of the following taxes:

• Corporate tax
• Personal income tax
• Income tax for non-tax residents
• Capital gains tax on property transfers

Dual residency conflict

Before addressing the application of taxation according to the different income obtained in the countries, we have to comment on another important point that the CDI addresses between Spain and Andorra. And is that each jurisdiction applies its own rules and requirements to consider a natural or legal person as a tax resident, and these criteria may vary and the so-called dual residence conflict may pass, according to which a person is considered a tax resident in two different jurisdictions at the same time.

As we have said, double taxation agreements also try to avoid this by establishing a protocol and a system of common requirements to be followed to establish where a person or entity is resident. Roughly speaking and without going into more details, the requirements to be assessed are:

1. A person shall be considered a tax resident of the State where he has permanent home at your service.
2. If you have permanent housing available to you in both States, the first would be considered center of economic interests to establish in which State you reside (where you exercise economic activity) and in case you cannot discern the center of vital interests (that is, where you have the closest personal and economic relationships).
3. If criterion 2 cannot be determined, he would be considered a resident of the State where you usually spend the night, where I spend more nights.
4. If he habitually stayed overnight in both States, did not do so in either of them or could not be determined, it would be considered a resident of the State of which he is a national.
5. Finally, if the person were a national of both States or neither, the competent authorities would resolve the case of mutual agreement between them.

So, as we see the criteria are quite subjective all except the first, to have permanent housing at your disposal. That is why we always highlight, remember and recommend to all residents in Andorra that in the first place they fulfill their obligations, such as that of residing 183 days or more in the country, and that they dissociate themselves as far as possible from their previous activities in Spain. In the latter as we see It is essential to have permanent housing only in Andorra and NOT in Spain.

How to avoid double taxation

Before starting to see how the different incomes are approached according to their typology, it should be noted that there are different methods of avoiding or eliminating double taxation carried out. Although in this article we are not going to go into the differences between deductions, reductions, bonuses, compensations, etc. we do want to qualify the way it is done in general.

The way to proceed is as follows:

• First, establish whether in the country or state where the income originates, these are subject to tax, to withholdings.
• If so, then withholdings are established that must be applied in the source state of income.
• Once established, in the country or state where the recipient of the income resides, the result of Subtract from the amount that these income should be taxed if the amount paid in the jurisdiction of origin of the income were generated in said state, up to the maximum of what they would be taxed in the state of residence (it cannot be negative).

That is why, since in Andorra in general the general rates on the income of both companies and individuals is 10%, when income is withheld at source in more than one 10% in Andorra, they are not taxed, since the tax is completely deducted for having paid an amount greater than what would correspond if these income had been generated in Andorra.

However, they are taxed in Spain when they originate in Andorra, since their rates are always greater than 10%. Thus, similarly, if a Spanish resident collects income received from Andorra, only a maximum of 10% can be deducted from their taxes (either IRPF or Corporate Income Tax), which is what that income is taxed at source in Andorra. .

Treatment of company profits

According to the aforementioned CDI, Taxes on corporate profits can only be applied in the State in which the company that obtains them resides, unless the activity from which they have been obtained is carried out in the other State through a permanent establishment (EP). That is, the business profits of Andorran companies are exclusively taxed in Andorra unless they operate with a PE in Spain, which in that case will be taxed to the Spanish state as if it were an independent entity.

We recommend accessing the previous one or searching the internet to find out what a permanent establishment is in tax matters, as long as they can have a better understanding. Next we will explain how double taxation is solved for different types of income.

Previously, when an Andorran company issued an invoice to individuals or legal entities in Spain, a withholding of 24% was applied by the Spanish IRNR, and after the entry into force of the agreement said income is taxed only in Andorra. For example, for an invoice of € 10,000 issued by an Andorran company to a Spanish one:

• Before the CDI: Taxation at source in the State where the income is obtained (Spain, 24%, € 2,400) and taxation in Andorra, with the possibility of applying double taxation exemptions (effective rate of 24%, only in Spain).
• After the CDI: Exclusive taxation in the Principality of Andorra (effective rate of 10% after deducting expenses).

Income from real estate and artistic and sporting events

On the one hand real estate, as its name indicates, is considered in the territory where it is registered, and therefore their income must be taxed in that same country. It should be noted that agricultural or forestry properties are included in this mention. The same happens with events or activities of athletes and artists within the territory of a jurisdiction, which are required to pay tax in that same jurisdiction regardless of whether afterwards the jurisdiction of residence applies its own taxes on the income received.

The only exception to this case is when the state of residence finances the activities carried out by artists or athletes through public funds in such a way that this is the main form of financing of the activity, which despite being carried out in the other state, it is the state of residence that has the power to apply its taxes (that of the origin of the funds).

For example, for real estate returns or a normal artistic or sporting event in Spain for which € 10,000 is received:

• Before the CDI: withholdings at source in the State where the income is obtained (Spain, 24%, € 2,400) and taxation in Andorra, with the possibility of applying double tax exemptions (effective rate of 24%, only in Spain).
• After the CDI: Taxation in Spain (Spain, 24%, € 2,400) and taxation in Andorra obtaining tax credits for taxes paid in Spain (effective rate of 24%, only in Spain).

On the other hand, if a cultural event is held in Barcelona related to Andorra and financed mainly by the Government of Andorra:

• Before the CDI: Taxation at source in the State where the income is obtained (Spain, 24%, € 2,400) and taxation in Andorra, with the possibility of applying double taxation exemptions (effective rate of 24%, only in Spain).
• After the CDI: Exclusive taxation in the Principality of Andorra (effective rate of the 10% after deducting expenses or with an exemption of € 3,000 of income if it is a natural person).

Withholdings for dividends of companies

Despite the entry into force of the CDI, lThe receipt of dividends is still subject to withholdings, although at a much lower rate. Thus, if an Andorran resident receives dividends from a Spanish company, assuming an amount of € 10,000:

• Before the CDI: Taxation at source in the State where the income is obtained (Spain, 19%, € 1,900) and taxation in Andorra, with the possibility of applying double taxation exemptions (effective rate of 19%, only in Spain).
• After the CDI: Tax a 5% at source (Spain, € 500) if the beneficiary is a company and participates at least in a 10% of the company that distributes dividends, and a 15% (Spain, € 1,500) in other cases. After that, in Andorra, double taxation exemptions can be applied (effective rate of 10% being 5% in each country / 15%, only in Spain).

Capital gains withholdings

This is one of the best points of the double taxation agreement between Andorra and Spain, although it is more difficult to establish the treatment. Specifically, it is established that Capital gains will be taxed exclusively in the country of residence of the recipient, whether he is a natural or legal person, except in the following cases that may involve taxation in both states:

• Profits from the sale of real estate.
• The gains from the sale of movable property that are part of the assets of a permanent establishment.
• Profits from the sale of ships, aircraft or movable property related to the exploitation of these.
• Gains from the sale of shares / participations or similar rights in a company in which more than 50% of its value comes directly or indirectly from real estate.
• Gains from the transfer of shares representing a participation of at least 25% of the capital in an unlisted company resident in the other state.
• The gains from the sale of shares or other rights that grant the right to enjoy real estate located in the other state.

Thus, it should be noted that in the case of listed shares of a company in one of the contracting states, profits will only be taxed in the state of residence of the person who gets the profit.

Therefore, in the case of the sale of a property in Spain, an unlisted company in which it participates in more than 25% of the capital or a company whose main asset is real estate located in Spain, assuming that they leave a € 10,000 capital gain:

• Before the CDI: Taxation at source in the State where the income is obtained (Spain, 19%, € 1,900) and taxation in Andorra, with the possibility of applying double taxation exemptions (effective rate of 19%, only in Spain).
• After the CDI: Taxation in Spain (Spain, 19%, € 1,900) and taxation in Andorra obtaining tax credits for taxes paid in Spain (effective rate of 19%, only in Spain).

On the other hand, if a natural or legal person residing in Andorra sells shares of a Spanish company listed on the stock market or in which it participates in less than 25% of the total capital, obtaining a net gain of 10,000 euros for capital gains:

• Before the CDI: Taxation at source in the State where the income is obtained (Spain, 19%, € 1,900) and taxation in Andorra, with the possibility of applying double taxation exemptions (effective rate of 19%, only in Spain).
• After the CDI: Exclusive taxation in the Principality of Andorra (10% effective rate after deducting expenses in case of being a company, effective rate of the 10% with € 3,000 exempt income in the case of a natural person per Personal income tax).

Taxation of interests and royalties

With the CDI The withholdings applied to all types of interest and royalties are maintained, but since it reduces them to a rate of 5%, effective taxation is reduced by double tax exemptions to 10%: 5% in Spain and 5% in Andorra.

However, this taxation does not apply yes:

1. The beneficial owner of the interests or royalties, resident in one of the states, exercises in the other State from which the income from said interests or royalties comes, an economic activity through a permanent establishment, and
2. The right or good generating the royalties is effectively linked to said permanent establishment.

On the other hand, royalties are the amounts paid for the use or concession of the use of copyright including cinematographic films and telefilms, and recordings intended for broadcasting by radio or television, of patents, trademarks, designs, plans, formulas or secret procedures, or information relating to industrial experience, commercial or scientific.

And finally there are a couple of exceptions to consider that interest exempts from taxation when they are from public administrations:

• The interest received by a state, one of its political subdivisions, one of its local entities or legal persons of public law wholly owned by these bodies cannot be taxed in the source state of the interest income.
• The interest paid by one of these states, political subdivisions or local entities cannot be taxed either.

Thus, assuming that an Andorran resident obtains € 10,000 in interest for a loan to a Spanish company or royalties for the exploitation of a brand in Spain:

• Before the CDI: Taxation at source in the State where the income is obtained (Spain, 19%, € 1,900) and taxation in Andorra, with the possibility of applying double taxation exemptions (effective rate of 19%, only in Spain).
• After the CDI: Tax a 5% at source (Spain, € 500). After that, you are taxed in Andorra applying double taxation tax credits (effective rate of 10% being 5% in Spain and 5% in Andorra).

Withholdings for wage income as a worker

The so-called earned income, which includes wages and other similar income, is subject to the taxes of the country of residence from which they are received, unless the work carried out was carried out in the other state. In addition, in the latter case, the income is also subject to the country of residence if these three conditions are met:

• The person who receives them remains in the territory of the state where they work for a period or periods whose duration does not exceed a total of 183 days in any twelve-month period that begins or ends in the fiscal year considered.
• The payroll of wages is an employer who does not reside in the state where the work was performed, or they are paid on behalf of an employer who does not reside in that state.
• The remuneration is not supported by a permanent establishment that the employer has in the state where the work has been carried out.

Thus, if an Andorran resident performs work in Spain for 5 months for a non-resident Spanish company or person, and receives € 10,000, their tax treatment is:

• Before the CDI: Taxation at source in the State where the income is obtained (Spain, 24%, € 2,400) and taxation in Andorra, with the possibility of applying double taxation exemptions (effective rate of 24%, only in Spain).
• After the CDI: Exclusive taxation in the Principality of Andorra (effective rate of the 10% after deducting expenses or with an exemption of € 3,000 of income if it is a natural person).

Administrators and positions in company administration bodies

The remuneration received by administrators and other positions on the boards of directors of a company are subject to Taxation both in the State of residence of the board member (be it a natural or legal person) and that of the paying entity.

For example, if an Andorran resident is a manager of a Spanish company and receives a remuneration for his work in that position of € 100,000:

• Before the CDI: Taxation at source in the State where the income is obtained (Spain, 24%, € 24,000) and taxation in Andorra, with the possibility of applying double taxation exemptions (effective rate of 24%, only in Spain).
• After the CDI: Taxation in Spain (Spain, 24%, € 24,000) and taxation in Andorra obtaining tax credits for taxes paid in Spain (effective rate of 24%, only in Spain).

Compensation, retirement pensions and others

Although the treatment of this type of income is not only determined by the double taxation agreement but also by the social security agreement between Spain and Andorra, in general, both agreements establish that retirement pensions and other pensions and similar remunerations paid in respect of a previous job, are subject to taxes exclusively in the state of residence of the beneficiary, thus being free from withholdings. Before these agreements they were taxed in both states.

Regarding the income received for work performed for a state or one of its subdivisions or local entities by a resident in the other state, they are taxed in this state, source of income and where the work is performed, although there are certain exceptions.

Finally it is also established that lThe income received by students, apprentices or trainees is not taxed in the State where the studies are carried out as long as:

• These rents are to cover your maintenance, study or practical training expenses.
• The income comes from sources external to this state.

As we can see, this agreement or CDI is very important to avoid double taxation on income originating in both countries. In principle, it benefits both countries that sign it because it establishes clearly and with legal certainty how to pay this income and, above all, residents, who do not see their income even more unfairly reduced due to the lack of agreement on the matter. .