Firstly, it is worth remembering that in Andorra we do not have an Inheritance and Gift Tax (ISD) that taxes individuals when they receive goods or rights through a lucrative transfer.
A lucrative transfer is a transfer in which no valuable consideration is made, whether due to the death of the transferor (mortis causa lucrative transfer) or due to the will of the donor during their lifetime (inter vivos lucrative transfer).
While the heir or beneficiary is not taxed as there is no ISD in Andorra, the law on Personal Income Tax (IRPF) would allow the income associated with assets transferred by inheritance or gift to be taxed, with the exception in both cases of capital gains.
Capital gains are generated by changes in the value of the taxpayer’s assets that are revealed by a change in their composition, unless they are considered income under the Andorran Personal Income Tax (IRPF) Act. For example, if shares, jewellery or works of art are transferred, capital gains or losses would arise.
Law 5/2023 of 19 January on measures for the reform of direct taxation and amending other tax and customs regulations, published in the andorran state gazette (BOPA) of 8 February 2023 (Law), sets out a tax reform that will increase the tax burden or, at least, aims to guarantee a minimum revenue for the State in line with international trends. Although most of the provisions of this Law will enter into force on 1 January 2024, it provides for an amendment that entered into force upon its publication and, importantly, with retroactive effect from 1 January 2015.
I will go into more detail on this retroactive provision because it affects the treatment of lucrative transfers in relation to personal income tax. Let me begin by saying that this change is beneficial for the tax payer and it is a departure from the main thrust of the Law to increase taxation.
Before the entry into force of the Law, unrealised capital gains on the deceased person’s assets were exempt from the personal income tax of this party, provided the heir received them at their market value at the date of death. In the case of gifts between family members up to the third degree, it was understood that there was no capital gain on the assets transferred by the donor, although the original cost of the assets held by the donor was maintained.
The situation remains the same with the Law, but technically it is treated as an exemption not only in inheritances but also in family gifts. However, the most relevant change is that the exemption now (and always) extends to any income associated with the assets transferred. In other words, it includes increases in the value of the transferred assets.
For example, if the transfer concerns a business asset, the income would qualify as economic activity and would now be exempt from taxation on the deceased and the donor in the case of family gifts. An example of income from movable capital would be the transfer of a bond or treasury bill, and the income that may arise from its transfer would also be exempt. On this point, it is important to note that consultation CV0187-2020, of 28 July 2020, issued by the Department of Tax and Borders (DFT), established that the transfer of a business, whether by inheritance or family gift, resulted in the income from economic activity being taxed because it was not a capital gain, which was the only case that the regulations left exempt from tax. In the same sense, but in relation to fixed income products, the DTF ruled in consultation CV0229-2021, of 15 December 2021, also confirming that the rule did not protect income from movable capital from inheritances or family gifts unlike with capital gains in the terms mentioned above.
In summary, since the publication of the Law, and with effect from the entry into force of IRPF in Andorra (i.e., 1 January 2015), any type of income associated with assets transferred by inheritance or family gift will be exempt from personal income tax for the transferor. In the case of inheritance, the recipient will receive the assets at market value on the date of death, whereas in the case of a gift from a family member up to the third degree, the date of acquisition and the original tax value for the donee will remain the same. Any other type of donation outside the family sphere, as previously provided for, will give rise to the corresponding income or capital gain, which will be taxed in the personal income tax of the donor, while the donor will receive the assets at market value.
This regulatory change gives greater legal certainty to lucrative transfers, which, as we have seen, had generated controversy in the aforementioned tax consultations, confirming the literal wording of the original regulation. Now, retroactively, the regulatory change clears up the situation. This new legal framework not only opens up possibilities for better planning of inheritance and gifts in Andorra, but also may open the door to claiming a refund on income tax paid on behalf of the deceased or by the donor in family gifts, in accordance with the previous criterion which has now been superseded and repealed.