UK and Andorra Sign Landmark Tax Agreement to Mitigate Double Taxation

In a noteworthy advancement aimed at boosting economic collaboration and curtailing tax evasion, the United Kingdom and the Principality of Andorra have officially established a Convention for the Elimination of Double Taxation concerning Taxes on Income and Capital. This pivotal agreement was signed in London on February 20, 2025, by UK representative James Murray and Andorran representative Noëlia Souque Caldato, signifying a commitment to creating a stronger bilateral economic framework while promoting fair tax practices.

As detailed in a report by Global Tax News, this article highlights the essential features of the convention, the resulting implications for taxpayers, and how it aligns with international tax standards.

Objectives and Scope

The primary goal of the convention is to eradicate the issue of double taxation on income and capital, ensuring that individuals and businesses in both the UK and Andorra are not subjected to taxation on the same earnings or assets in both jurisdictions. Importantly, the agreement also addresses the pressing challenges of tax evasion and avoidance, particularly concerning treaty-shopping arrangements that could permit third-country residents to exploit the benefits of the convention indirectly.

This move reflects the growing global trend towards tax transparency and compliance, consistent with frameworks such as the OECD’s Base Erosion and Profit Shifting (BEPS) initiative. The agreement is relevant to individuals, corporations, and various entities that reside in one or both contracting states, as well as to fiscally transparent entities. Crucially, it ensures that income or gains obtained through such arrangements are taxed according to the residency of the beneficial owners.

Taxes Covered

The convention addresses an extensive array of taxes on income and capital imposed by both jurisdictions, including:

• In Andorra: Corporate income tax, personal income tax, income tax for fiscal non-residents, and tax on capital gains derived from immovable property transfers.
• In the UK: Income tax, corporation tax, and capital gains tax.

The agreement is future-focused; it encompasses any similar or identical taxes that may be introduced after its inception, with authorities required to inform one another about significant changes in legislation.

Key Provisions

1. Residency and Tie-Breaker Rules (Article 4): Residency is determined by domestic laws, with tie-breaker rules for dual residents based on various factors, such as permanent home and nationality. When entities are involved, governmental authorities will resolve residency disputes through mutual agreement.
2. Permanent Establishment (Article 5): Defines a permanent establishment (PE) as a fixed place of business—this includes offices, factories, and sites for resource extraction, with a 12-month criterion for construction projects.
3. Income Taxation:
   • Immovable Property (Article 6): Earnings from real estate can be taxed where the property resides.
   • Business Profits (Article 7): Taxation occurs primarily in the business’s home country unless profits are generated through a PE in the other jurisdiction.
   • Dividends (Article 10): Generally exempt from source-state taxation, unless they are from real estate investment vehicles, which have a capped 15% tax unless paid to a pension fund.
   • Interest and Royalties (Articles 11-12): These are taxable solely in the state of the recipient, except where linked to a PE.
4. Capital Gains (Article 13): Gains from immovable property or shares significantly related to such property can be taxed where the property is located, while other gains are taxed in the seller’s residential state.
5. Employment and Pensions (Articles 14-17): Employment income is taxed in the location of work, with exemptions for short-term assignments. Pensions are primarily taxed where received, barring specific exceptions for government service pensions.
6. Elimination of Double Taxation (Article 22): Both jurisdictions offer a system of credits or exemptions for double taxation, allowing Andorra to deduct UK taxes while the UK provides credits for Andorran taxes.
7. Anti-Abuse Measures (Article 27): Any benefits may be negated if the principal purpose of a transaction is to obtain such benefits unless it aligns with the convention’s intent.
8. Information Exchange (Article 25): The agreement requires the bilateral exchange of relevant tax information, aimed at promoting integrity while ensuring protections for confidential data.

Entry into Force and Timeline

The convention will come into effect once ratified by both nations and after notifications are exchanged via diplomatic channels. Important milestones include:

• Andorra: Applicable to taxes withheld at source starting from January 1 of the calendar year following the convention’s entry into force, and for other tax collections beginning on that effective date.
• UK: The agreement will apply to taxes withheld at source beginning two months post-entry, with income and capital gains tax becoming effective on April 6 of that year, and corporation tax on April 1.

This substantial agreement not only fortifies tax relations between the UK and Andorra but also emphasizes mutual commitment to enhancing fiscal responsibility and compliance in an increasingly complex global economy.

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