10 keys to preparing your personal income tax return in Andorra

In Andorra, personal income tax (IRPF) is still very recent so it might be worth considering some important aspects before filing your tax return.

Every year at this time, taxpayers are required to take appropriate steps to file their income tax return.

Below is a list of 10 key questions that you may ask yourself when preparing your tax return for 2016.

1. What is the purpose of personal income tax? What is it levied on?

Personal income tax is levied on all income and capital gains and losses, regardless of where they were generated or where the payer is resident for tax purposes. This means that your tax return should include all income earned worldwide, even if a deduction is subsequently applied to avoid double international taxation.

2. Who is liable to income tax?

Any individual who is a tax resident in Andorra is deemed to be liable to personal income tax. To qualify as a “tax resident in Andorra”, an individual must meet either of the following criteria:

a) they must reside for more than 183 days a year in Andorra; or

b) the centre of their activities or economic interests must be situated in Andorra, whether directly or indirectly.

3. What is the personal income tax rate?

The general tax rate is 10%.

Please bear in mind the following points regarding the general tax base:

a) If your net income is below 24,000 euros (exemption threshold), you are not liable to tax;

b) If your net income is between 24,001 and 40,000 euros, the effective tax rate is 5% (a reduction of 50% is applied to 10% of the general rate, subject to a maximum of €800); and

c) If your net income is above 40,001 euros, the tax rate is 10%.

As far as savings income is concerned, a tax rate of 10% applies, bearing in mind that the first 3,000 euros are exempt and therefore not liable to tax.

4. What expenses and deductions can I apply?

The following expenses can be deducted from your employment income:

– CASS contributions (paid by the employee); and

– 3% of overall expenses for certain gross income, subject to a maximum of €400.

Reductions may also apply to the general tax base:

– Subject to meeting certain personal and family circumstances: exemption threshold of 24,000 euros and up to 40,000 euros if the spouse doesn’t earn any income.

– Family allowance: 750 euros per year for each dependent ascendant or descendant (multiplied by 1.5 in case of disability).

– Allowance for investments in your main residence. Maximum of 1,000 euros per year.

– Allowance for payments into pension plans and other savings instruments and for compensatory support or alimony paid to the spouse.

Some allowances also apply to savings income, as the tax base is reduced by 3,000 euros (minimum exemption).

5. What forms of income are exempt from personal income tax?

Certain forms of income are exempt from tax.

For example, you won’t have to pay any tax on the following sources of income:

a) Income derived from government debt issued by the Principality of Andorra;

b) Dividends and other forms of income derived from stock holdings, where they are paid by entities resident in Andorra for tax purposes or by Andorra-based collective investment schemes, provided these are liable to Andorran corporate income tax; and

c) Capital gains and losses arising out of the transfer or redemption of shares or stock, provided certain legal requirements are met.

Therefore, it is important to bear in mind Article 5 of the IRPF Act, which lists the different kinds of income exempt from income tax.

6. What about the deposits, current accounts and savings accounts held with Andorran banks?

The funds deposited with an Andorran bank, understood as the account capital/balance, are not liable to tax.

The income (including interest, coupons, etc.) generated by the account capital/balance is liable to tax if it exceeds 3,000 euros per annum.

Therefore, the savings income tax base is reduced by a minimum allowance of 3,000 euros. It should be noted that this allowance is applied once all net investment income and capital gains and losses have been incorporated into the tax base.

7. What about my pension and savings plans?

The funds paid into or withdrawn from pension plans are liable to tax as employment income and are included in the general tax base.

A pension plan may only be redeemed in limited cases (retirement, death, disability, serious disease, etc.).

However, these payments may be reduced provided they meet the criteria set out in the IRPF implementing regulations, subject to a maximum amount which cannot exceed the smaller of the following amounts:

a) 30% of the sum of net income from employment and economic activities; or

b) €5,000 per annum.

The savings plan will be liable to tax as investment income and included in the tax base. Tax will be due on the income generated by the deposited funds. In such cases, the €3,000 allowance may be applied.

8. What is the €3,000 allowance for income tax purposes and how does it work?

This allowance is considered as a reduction and applied to the savings income tax base. The taxpayer may ask the Andorran bank that paid the income to apply this allowance directly (by submitting form 345 to the bank).

In that case, the bank will be responsible for providing the Ministry of Finance with relevant information about the allowance applied.

9. What should I do if I only earn employment income?

You should follow these steps:

a) Apply for a certificate detailing the withholding tax applied by your employer; if you own financial assets, you can also request a tax certificate setting out your financial income from your bank;

b) Request your draft tax return from the Department of Taxes and Borders; and

c) Submit or confirm your tax return.

Steps a) and b) can be completed online via the website www.impostos.ad or in person by visiting the offices of the Department of Taxes and Borders (Baixada del Molí, núm. 26 in Andorra la Vella).

10. When should I file my tax return?

Taxpayers are required to submit and sign their tax return between 1 April and 30 September in the year following the end of the taxation period.

Please note:

You can download your Andorran IRPF tax certificate via your MoraBanc Online Bank without having to visit your branch. The post available on our blog “Download your Andorran IRPF certificate from MoraBanc Online” explains how to generate a certificate in two simple steps.

If you need more information about our products or services, please contact your account manager directly. You can also telephone TeleBanc on +376 884 884 or send us your queries using our contact form.

For more information about personal income tax, please visit the Andorran Government’s web page on “Taxes”.