Problems with tax residency in Andorra? The Principality is negotiating to resolve conflicts
Obtaining tax residency in Andorra is one of the main attractions for thousands of people who decide to move to the Principality each year. However, the process is not always free of complications. One of the most delicate situations arises when the home country of a new resident refuses to recognize their tax departure and continues to claim tax payments. To address these cases, Andorra has activated a diplomatic mechanism and is currently engaged in five formal “discussions” with other countries to determine where certain taxpayers should pay taxes.
These procedures, known as “amicable arrangements” or “friendly procedures,” are a key tool to avoid double taxation and provide legal certainty to those who have decided to live in Andorra. If you are planning to move or have already started the process, it is essential to understand how these mechanisms work and what they imply for your tax situation.
What is a double residence conflict?
A double residence conflict occurs when two different countries consider that a person is a tax resident in their territory according to their internal laws. This can happen, for example, if you spend a significant amount of time in both places or if you maintain strong economic and personal ties to your home country after moving to Andorra.
When this happens, both states may demand the payment of taxes on your entire worldwide income, leading to a double taxation situation. To resolve these conflicts, Double Taxation Treaties (DTTs) exist, establishing rules to determine a single tax residence.
Andorra activates “arrangement procedures” to prevent double taxation
The news that Andorra has five such procedures underway demonstrates the country’s commitment to defend its residents and properly apply international treaties. Although these mechanisms have always been included in DTTs, it was not until 2023 that a specific regulation was approved to regulate them, facilitating their activation.
Currently, Andorran authorities are actively negotiating to clarify the tax situation of several taxpayers. While it has not been specified with which countries these negotiations are ongoing, it is a crucial step to provide clarity and security. The key points of these procedures are:
- Interstate negotiation: The tax agencies of Andorra and the involved country discuss to reach an agreement on the taxpayer’s residence.
- Legal basis in the DTTs: They can only be activated with countries with which Andorra has a signed Double Taxation Agreement, such as Spain, France, or Portugal.
- Recent process: Being a mechanism regulated since 2023, the five open cases are still in progress and no final resolution has been reached.
- Protection for the taxpayer: The ultimate goal is to prevent a person from paying taxes on the same income in two different countries.
A real case: retired resident in Andorra vs. Spanish tax authorities
To understand the importance of these procedures, just analyze a recent case that reached the courts. A retired banker, with tax residence in Andorra, was sentenced by the High Court of Justice of Catalonia to pay over 100,000 euros in IRPF and penalties to the Spanish tax agency.
The Spanish authorities argued that, despite having a residence and domicile in the Principality, his center of vital and economic interests (family, pensions, properties) remained in Spain. This case is a clear example of how a poorly planned relocation or persistent strong ties with the home country can generate serious tax conflicts.
The taxpayer’s advisors expect that their situation can be reviewed through one of these friendly procedures between Andorra and Spain, seeking recognition of their tax residency in Andorra as the sole valid one for all purposes.
How is tax residence determined in case of conflict?
When a dispute arises, Double Taxation Treaties set out “tie-breaker rules” that are applied in a strict order to determine where a person should pay taxes. The amicable arrangement process is based on interpreting these rules:
- Permanent residence: Analyzing in which country the individual has a permanent residence.
- Center of vital interests: If they have residences in both places, the country where they have the closest personal and economic relations is examined. This is often the most contentious point.
- Habitual residence: If the center of interests cannot be determined, the country where they reside most frequently is considered.
- Nationality: If the previous criteria are inconclusive, nationality may be the decisive factor.
- Friendly agreement: As a last resort, if none of the above points resolve the situation, the competent authorities of both countries must resolve the case through a friendly agreement. This is precisely what Andorra is doing in the five current cases.
The importance of impeccable tax planning when moving to Andorra
These conflicts highlight an undeniable reality: to enjoy the tax advantages of residence in Andorra, the move must be genuine, effective, and carefully planned. It’s not enough to buy a property and obtain a residence permit; you must demonstrate that your center of life has genuinely shifted to the Principality.
This involves severing significant economic ties with your home country, spending most of the year in Andorra, and being able to document that your social and family life develops here. Poor management of the move or insufficient tax planning can lead to audits and multi-million dollar claims.
At Andorraway, we specialize in managing residence transfers to Andorra, ensuring each step of the process is carried out correctly and securely to avoid future tax problems. From obtaining residency to tax planning and comprehensive move management, we offer complete support.
If you are considering Andorra as your next home and want to guarantee your tax residence is indisputable, do not hesitate to contact us. We will help you build your new life in the Principality with the tranquility and legal security you deserve.