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Andorran Government Adopts Amendment to Tax Act, Incorporates BEPS Measures — Orbitax Tax News & Alerts

The government of Andorra on 28 June 2017 adopted a proposed amendment to the Tax Act. The amendments are intended to incorporate a number of BEPS-related measures and adapt Andorran legislation to the EU ECOFIN Code of Conduct.

The measures include the following:

Country-by-Country (CbC) Reporting

The Tax Act would be amended by adding new articles 16 bis to 16 quater. The articles provide for the obligation for resident parent companies with annual consolidated revenues in excess of EUR 750 million to file CbC reports. The reports would then be exchanged with Andorra’s qualifying partners. In the case of foreign-parented groups, local filing would be required if (a) the foreign ultimate parent company is not required to file CbC reports in its jurisdiction of tax residence; or (b) it is required to do so but there is no agreement for the automatic exchange of tax information between that jurisdiction and Andorra, or (c) it is required to do so, but although there is an agreement for the automatic exchange  of tax information between that jurisdiction and Andorra, there is a systemic failure to exchange.

The information released to date does not clarify various important issues including effective dates, filing formats and filing process.

Proposals Related to BEPS Action 5

The proposal would amend Andorran legislation to comply with recommendations under BEPS Action 5 on IP management regimes (so-called patent boxes). The proposal would introduce the “nexus approach” as a condition to qualify for the patent box regime. Further, the current patent box rules whereby 80% of income derived from cross-border exploitation of qualifying IP rights are excluded from the taxable base (thus resulting in an effective tax rate of 2%) would be revised. The exempt portion of qualifying income would be reduced by 25% each year and fully phased out by 1 January 2021. The grandfathering clause would be restricted to structures already in operation by 1 July 2017 or for which an application was lodged before the same date. Further, it would be restricted to IP rights that had been acquired by the taxpayer prior to 1 July 2017.

Amendment of Foreign Participation Exemption Regime

Under the current rules, local holding companies dedicated to the holding of foreign affiliates are exempt from tax on dividends and capital gains derived from/on such holdings. The regime would be revised as follows:

a. The regime would be extended to cover participations in local subsidiaries as well. In order to qualify for the regime, however, the local subsidiary may not be exempt from tax.

b. Eligibility of holdings in foreign affiliates to the regime would be made subject to a number of conditions. Hence, the holding company must hold at least 5% in the capital of the foreign affiliate for at least 1 year. Further, the foreign affiliate must be subject to a profits tax at a rate which is not lower than 40% (from 10% currently) of the Andorran tax rate (effectively not lower than 4%).

Pursuant to a grandfathering rule, structures in place prior to 1 July 2017 or for which an application was lodged before the same date would continue to qualify under the current rules until 31 December 2020.

Amendment of Trading, Intra-group Finance and Investment Companies Regimes

The current regime for trading companies, intra-group finance companies and investment companies, whereby 80% of income derived from qualifying activities is excluded from the tax base (thus resulting in an effective tax rate of 2%) would be revised by lowering the exempt portion of qualifying income by 25% each year until it is fully phased out by 1 January 2021. This transitional rule would be restricted to structures that were in place prior to 1 July 2017, or for which an application was filed before the same date.

The proposal can be accessed here (in Catalan).