The new system for taxing property transfers in the Principality of Andorra.
Starting on 1st January 2024, most of the taxation changes included in Law 5/2023 of 19th January on measures to reform direct taxation and change other taxation and customs rules will come into force.
One of these changes will be the repeal of the tax on valuation gains in property transfers (IPTPI). This does not mean that they will no longer be taxed, rather that the taxable event will be incorporated into Corporation Tax (IS), Personal Income Tax (IRPF) and Non-Resident Income Tax (IRNR).
With some slight differences, as we will see below, we can conclude that there will not be many significant changes with respect to the previous regulations. In fact, the final level of taxation will be very similar, although it will no longer be possible to apply the update coefficients to the purchase cost.
We will focus on the most significant changes with respect to the previous system.
Firstly, the transfer of a property will be treated in a similar way to the transfer of shares or holdings in entities, as well as the constitution or assignment of rights in rem over them, when at least 50% of the assets of said entities directly or indirectly consist of real property located in the Principality. Under the previous regulations, valuation gains were only taxed when 20% of the entity was purchased, whereas this will now occur in all cases.
As a result, the exemption from gains in the IRPF and IRNR will not apply, despite there being less than a 25% stake in said entities with a property substrate, nor will the one provided for in the IS when a 5% stake in a property company is owned.
Secondly, the concept of “speculative capital gains” is introduced. These are defined as any gains stemming from the transfer of property located in Andorra before a period of two years has elapsed since its date of purchase. In these cases, a special surcharge of 5% will be applied to the IRPF and IS, which will result in final taxation totalling 15%. In the case of the IRNR, the applicable rate will be 15%.
Thirdly, under the former system, certain rates of taxation were applied in accordance with the years of ownership of the property, which ranged from 15% to 0% after ten years in the cases of resident physical persons without any economic activity and non-residents without permanent establishment. Now, when the gains have been generated after five years and a day, instead of applying the reduced rates based on the generation period, multiplying coefficients will be applied to reduce the gains. As a result, the taxation will be the same as with the previous system five years and one day after the generation.
Fourthly, the IRPF regulations will determine when leasing property is regarded as an economic activity. It used to be possible to choose whether property rental was an economic activity or a return on property assets. However, now, in order to provide greater legal certainty, the regulations will stipulate that economic activity occurs when the IRPF payer: (i) obtains more than €100,000 from rentals or (ii) owns six or more properties that are leased or available for lease. This is significant because, in these cases, the taxation of the gain generated in a transfer will be at least 10%. In other words, the multiplier coefficients to reduce the gain that only apply to payers of IRPF who do not carry out any economic activities or those of IRNR when they operate without permanent establishment cannot be applied.
Finally, we should mention that the new system to tax speculative property purchases by foreign investors will see the light of day shortly, complementing the taxation mentioned above for property transactions in the Principality of Andorra.
Diari d’Andorra 13.12.2023