Spain-Andorra Double Taxation Agreement or DTA: What should I know?

Double Taxation Agreements (DTAs) are necessary for a country seeking to open up internationally. This facilitates the promotion of foreign investments and promotes the competitiveness of national companies operating abroad.

Andorra and Spain have signed a double taxation agreement, but do you know what it consists of?

Spain-Andorra Double Taxation Agreement or DTA, new developments and how it affects individuals and corporations

The truth is that after many negotiations, on January 8, 2015, an agreement was reached between Spain and Andorra for the double taxation agreement, which finally came into force on February 26, 2016.

This agreement put an end to the withholding tax that Spain applied to companies, employees and entrepreneurs who resided in Andorra and wanted to export their services to Spain, which was an incentive to attract people and businesses to Andorra.

The agreement includes these taxes:

  • Corporate income tax
  • Personal income tax
  • Income tax on income of non-residents for tax purposes
  • Capital gains tax on the transfer of real estate assets

It must be taken into account that each jurisdiction applies its own rules and requirements to consider a natural or legal person as a tax resident. A double residence conflict may even arise, considering a person as a tax resident in two different jurisdictions.

However, the purpose of these agreements is to prevent this from happening by means of a protocol and a series of common requirements to verify where the person or company really resides. To this end, the following will be taken into account:

  • Permanent housing of the person
  • In the case of having a permanent residence in both countries, check in which State the economic activity is carried out and where the person usually spends the night. If this cannot be determined, you will be considered a resident of the State of which you are a national. If you are a national of both, the authorities will decide.

How to avoid double taxation?

The first thing to do is to see if the country where the income originates is subject to a tax and withholding rate. If so, the withholding taxes are established.

Once fixed, in the country where you reside you are taxed the result of subtracting to the amount that these incomes should be taxed in that state, what you are paying in the country of origin of the income up to a maximum. For example, in Andorra it is 10%.

Taxes on profits are only applied in the State where the company is resident. Business profits of Andorran companies are taxed only in Andorra, unless they operate with a PE in Spain, because in that case they will be taxed in the Spanish state.

Before the agreement was reached, when an Andorran company issued an invoice to individuals or legal entities in Spain, it applied a withholding tax of 24% of Spanish IRNR. After the entry into force of this, this income is now only taxed in Andorra.

If a company in Andorra issues an invoice to a company in Spain, it is only taxed in the Principality of Andorra, at an effective rate of 10%.

How is real estate taxed?

In this case, the income received is taxed in the same country. Real estate, as its name indicates, is considered to be in the territory where it is registered, and its income must therefore be taxed in the same country. If real estate income is received in Spain, after the CDI the taxation in Spain would be 24%.

What is the withholding tax on corporate dividends?

Dividends are still subject to withholding taxes. After the entry into force of the DTA, it is taxed at 5% at source and if the beneficiary is a company and participates in 10% of the company making the distribution and 15% in other cases. Andorra may apply double taxation exemptions.

What are the capital gains withholdings?

Capital gains will be taxed exclusively in the country of residence of the recipient, whether an individual or a legal entity. Unless specific cases are contemplated, such as gains from the purchase and sale of real estate, ships, shares, participations, transfer of shares, among others. That is why it is important that you consult with our legal advisors.

After the entry into force of the DTA, taxation in both countries would be 19%. If less than 25% of the capital is held, we are talking about an exclusive taxation in the Principality of Andorra of an effective rate of 10%.

How are interest and royalties taxed?

Withholding taxes are maintained but taxation is reduced to 5%. If there is double taxation we are talking about 5% in Spain and 5% in Andorra.

How is wage income per employee taxed?

Regarding this type of income, taxes are linked to the country of residence in which the income is received, unless the work is done in another state. In fact, they would be subject to such country in some cases: if the person does not reside more than 183 days in the country, the payer does not reside in the state or the remunerations are not supported by a permanent establishment.

Following the entry into force of the double taxation agreement, the exclusive taxation in the Principality of Andorra is 10%.

Withholdings of directors and positions in the administrative bodies of corporations

In this case they are also subject to taxation in the State of residence of the board member and in that of the paying entity. We are talking about 24% in Spain and a taxation in Andorra obtaining tax credits for the taxes paid in Spain.

How are pensions and retirement taxed?

Finally, this also includes the social security agreement between Spain and Andorra, which are subject to taxation exclusively in the state of residence of the beneficiary, without payment of withholdings.

If they are received by students, apprentices or trainees, they are not taxed in the State where the studies are being carried out if the income is to cover maintenance, study or training expenses or comes from external sources.

Do you have any doubts? Our team of advisors specialized in Andorran taxation will be pleased to help you.

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