Andorra Income Tax (IRPF)
One of the most important taxes in Andorra is the personal income tax. With an effective rate that never exceeds 10%, personal Andorra income tax stands out for being one of the lowest in Europe even though it maintains the principle of progressivity. In this guide, we describe one of the newest taxes in Andorra, that came into force on January 1, 2014, as until then there was no personal income tax in Andorra.
Income Tax in Andorra: Rates
The income tax rate in Andorra can change based on three levels of tax brackets and a list of credits and deductions. For individuals, rates are as follows:
- €0 – €24,000: 0% tax
- €24,001 – €40,000: 5% tax
- €40,001 +: 10% tax
Married couples are taxed in slightly different bracket:
- €0 – €40,000: 0% tax
- €40,001 +: 10% tax
Example of personal tax income calculation:
- €23,950 in income pays no personal income tax at all
- €39,000 pays €750 in income tax (effective rate of 1.9%)
- €60,000 pays €2,800 in income tax (effective rate of 4.6%)
What is Personal Income Tax?
Income tax is a type of taxation used by jurisdictions to tax the income of individuals, companies, or other legal entities. Specifically, personal income tax (IRPF) is levied on income received by individuals (not business entities).
Personal income tax is generally calculated as the product of a tax rate multiplied by the taxable income. The tax rate usually varies according to the type or characteristics of the taxpayer and especially increases as the taxable income increases (graduated or progressive rates) and this is usually divided by brackets or bands.
Besides, the rate usually also varies according to the origin of the income (salaried work, capital gains, etc.), taking into account the overlap with other taxes. To modify the total amount taken from the taxpayer, jurisdictions can basically do two things:
- Modify the tax rates (applied on the tax base).
- Modify the tax base (the total amount of income on which the rate is applied).
To do this, governments usually make use of a whole web of classifications and exceptions (income measure, minimums, exemptions, allowances, reductions, deductions, etc) that change both as they see fit. The tax law, like almost all laws, grows as legislators modify it to try to make it fairer, to stimulate a sector of the economy, or simply to increase revenues.
Also, tax credits of various types are often given that reduce taxes. This tax was implemented in Andorra as a measure of harmonization during its transformation and international opening with the sole purpose of getting out of blacklists, negotiating double tax treaties, collaborating with other countries in the world, and that is why IRPF is extremely low anyway.
IRPF in Andorra
The Andorran IRPF is the tax levied on the income of persons who are tax residents in the Principality of Andorra. Through the IRPF all incomes subject to the tax are taxed regardless of the place where they have been produced and the state where the payer is established. In other words, the worldwide income obtained by the Andorran resident taxpayer is taxed.
A taxpayer is an individual who obtained tax residency in Andorran territory. An individual is considered to be a tax resident if, among others and in a simple manner, person complies with one of the following two conditions:
- Live more than 183 days in Andorran territory during the calendar year.
- Settle in Andorra the main core of economic activities or economic interests, directly or indirectly.
Andorra Personal Income Tax Return
Individuals who are tax residents in Andorran territory are obliged to file an income tax return in the following cases:
- Income is obtained from economic activities.
- Income comes from real estate investment and/or income from work obtained is a full amount equal to or greater than €24,000.
- Income obtained from movable capital has not been withheld and exceeds €3,000.
- If capital gains and losses are obtained.
Exempt income, whether earned income, capital gains, and losses (such as stock market transactions) are not taxable. Andorran personal income tax is divided into two main taxable bases: the general base and the savings base. Thus, the following types of income are subject to personal income tax:
- Employment income: all payments derived from an employment relationship. For example, wages and salaries.
- Real estate income: income derived from the exploitation of real estate or rights over real estate. For example, the rental of real estate.
- Income from economic activities: income derived from business or professional activities and the functions of their administrators (self-employed and entrepreneurs, formerly in the IAE Economic Activities Tax).
- Income from movable capital: income derived, among others, from the participation in the equity of entities (e.g. dividends), from the transfer to third parties of own capital (e.g. interest), from capitalization operations, and life or disability insurance.
- Capital gains and losses: income derived from changes in the composition of shareholders’ equity. Free acquisitions (inheritances, donations), as well as income derived from the transfer of real estate that is subject to capital gains tax on real estate transfers (except when this income is considered as income from the economic activity).
Period of Settlement and Withholdings
According to the Andorra tax system, the period of liquidation of personal income tax is from April 1st to September 30th. Taxpayers must file the Personal Income Tax return between April 1 and September 30 of the fiscal year following the one in which it is the subject of the return (in 2021 the 2020 return).
Regarding withholdings, payers of earned income and income from movable capital are obliged to make the corresponding withholding and pay it to the ministry of finance. Depending on the origin of the income and taking into consideration the reductions and bonuses to which the payer is entitled, some withholdings or others must be applied, ranging from 0% for salaries of less than €27,000 to 7% for salaries of more than €150,000. In any case, we recommend dealing with professionals who provide good tax advice, legal and accounting services.