The elimination of double taxation in Andorra in the absence of a tax treaty

In the absence of bilateral tax treaties aimed at eliminating double taxation, each jurisdiction can apply its own rules according to domestic law. This may result in double taxation when the same taxpayer is taxed on the same income both in the country where the income is generated and in the taxpayer's country of fiscal residence.

Although Andorra has signed several tax treaties regarding income tax to avoid double taxation (CDI) with certain countries, there are cases where no treaty applies. In this scenario, Andorra allows, under certain conditions in its domestic legislation, the deduction of taxes paid abroad against Andorran taxes to avoid double taxation, in accordance with Articles 48 of the Personal Income Tax (IRPF) and 43 bis of the Corporate Tax (IS).

Note: The different countries with which Andorra has signed a tax treaty regarding income tax so far are: Belgium, Cyprus, South Korea, Croatia, the United Arab Emirates, Spain, France, Hungary, Iceland, Malta, Monaco, Montenegro, Latvia, Liechtenstein, Lithuania, Luxembourg, the Netherlands, Portugal, the Republic of San Marino, and the Czech Republic. Andorra is also negotiating to expand its CDI network with other jurisdictions.

Deduction mechanisms to eliminate double taxation

1. Tax deductions for individuals

When an individual taxpayer receives income or capital gains abroad and these are included in their taxable base in Andorra, it is possible to benefit from a deduction of the tax paid abroad (also known as a "tax credit") against Andorran taxes to avoid double taxation.

How is this deduction determined?

According to Article 48 of the IRPF, the deduction is determined by the lesser of the two following amounts:

• The amount effectively paid abroad for a tax with characteristics similar to the Personal Income Tax (IRPF) or, as applicable, the Non-Residents Income Tax (IRNR).
• The theoretical amount of tax that would be payable in Andorra if this income had been received in Andorra and, therefore, were subject to the rules of the IRPF or IRNR, as applicable.

Example: An Andorran tax resident receives income of €150,000 abroad and effectively pays a tax of €45,000 in that country. In this scenario, the maximum tax rate in Andorra is 10%; the theoretical Andorran tax would be €15,000 on this foreign income. In this case, the amount of the tax deduction against Andorran taxes would be limited to €15,000 (being the lesser value compared to €45,000), which completely nullifies the Andorran tax to avoid double taxation. The remaining tax paid abroad, i.e., €30,000, cannot be deducted from Andorran taxes nor benefit from an additional tax credit.

To benefit from this tax deduction in Andorra, the affected taxpayer must provide the necessary evidence of the taxes paid abroad.

The example presented above is a simplified example; each case may require a detailed analysis according to individual circumstances and applicable regulations.

2. Tax deductions for legal entities

The same principles apply to legal entities. According to Article 43 bis of the IS, the amount of the deduction is determined by the lesser of the two following amounts:

• The amount effectively paid abroad for a tax with characteristics similar to Andorra's IS.
• The theoretical amount of Andorran IS on this foreign income.

In addition to these standard mechanisms, Andorra also offers specific deductions or exemptions for both individuals and legal entities in order to promote investments and cross-border economic activity.

This information is provided solely for informational purposes and does not constitute a recommendation or legal advice. It is based on the current regulations at the time of its drafting.

At Carlota Pastora Advocats, we are available to answer any questions related to the elimination of double taxation in Andorra. Our team of tax law experts will be happy to offer personalised and detailed advice to meet your specific needs. Please feel free to contact us to schedule an appointment and benefit from tailored support for your international tax obligations.