The General Council of Andorra (Consell General) adopted the last 19 January 2023, the Law on Measures to Reform Direct Taxation and Amendments of Other Tax and Customs Regulations.
The main objective of this reform is to promote fiscal consolidation, to continue with convergence processes to pursue international standards and to simplify and make the Andorran tax system.
One of the measures that will have the greatest impact on business men and HNWIs residing in Andorra is the approval of the CFC rules or international tax transparency rules, which, although they existed in most of Europe, did not exist in Andorra until now.
What are the CFC rules?
Controlled Foreign Company rules or CFC rules are tax regulations that aim to prevent taxpayers from avoiding taxes by shifting profits to foreign companies or subsidiaries in countries with lower tax rates.
The basic idea is that if an individual or a company is controlling a subsidiary in a foreign country that has a significantly lower tax rate -or no taxation-, then the profits of that company or subsidiary should be taxed as if they were earned by the shareholder or parent company.
In general terms, CFC rules were created to address offshore or shell companies that have no real activity or economic substance in low-tax jurisdictions or tax havens.
Therefore, if you live in a country that enforces CFC rules, it doesn’t make sense to have shell companies in countries like BVI, Seychelles, or similar places.
This is because, according to the CFC rules, such entities would be tax-transparent, and the profits would be attributed to the shareholders.
How Andorran CFC rules can affect me?
The new Andorran CFC rules essentially provide that an Andorran individual or company must be taxed in Andorra on income obtained abroad by a foreign company or subsidiary under certain circumstances.
Regarding foreign companies or subsidiaries, the CFC rules only apply when:
- The Andorran individual or corporate taxpayer, by itself or jointly with certain related persons or entities, holds 50% or more of the share capital, equity, voting rights or results of the non-resident
- The tax (CIT or similar) paid by the non-resident entity on the attributable net income is less than 50% of that which would have been payable under Andorran CIT (which means that the tax rate of the foreign company should be less than 5%).
When CFC rules do not apply
Notwithstanding the above, the CFC rules shall not apply if the non-resident entity develops a significant economic activity for which it has personnel, equipment, assets, and facilities and can prove the same.
Additionally, the CFC rules shall not apply when only one-third or less of the income obtained by the non-resident entity consists of certain categories of income,
The mentioned category of incomes are incomes from passive real estate investments, interest, dividends from non-qualifying subsidiaries, insurance income, passive IP income, and income from derivative instruments.
When the Andorran CFC rules enter into force?
CFC rules measures shall be applicable for fiscal years beginning on or after 1 January 2024.
Thus, that means that individuals holding assets through offshore entities such as companies in BVI, Bahamas, Cayman or other countries with no taxes or low taxes.
What to do in view of the entry into force of these CFC rules?
In order to comply with Andorran tax regulations on CFC rules, it is necessary to analyse its asset situation and its investment portfolio.
The holding of offshore companies with the entry into force of the CFC rules will render these structures obsolete, as the holders of these companies will be obliged to pay 10% tax on their Andorran personal income tax.
Considering the exemptions that exist in the Andorran personal income tax law, the liquidation of the offshore companies and the attribution of the portfolio in a personal capacity could be an interesting and plausible option.
In this regard, if you want to regularize your situation in order not to have problems with the Andorran tax office before the entry into force, do not hesitate to contact us by email [email protected]
Our experts in international and Andorran taxation will be able to help you.