Dividends transferred by a foreign company to Andorra: towards a holding or a physical person?
Expert of International desk of Augé Grup Anna Jaworski answers:
The Andorran Department of Statistics counts 43,654 immigration authorizations in force in 2016 out of 73,105 inhabitants.
The new Andorran residents chose to settle in the country due to its various advantages. Generally, the people who settle in Andorra already have interests abroad: companies, real estate, investments…
The tax system in Andorra is certainly attractive, but is it necessarily interesting to transfer the totality of assets located abroad to Andorra?
In the case of a holding company already active outside of Andorra: let us take a concrete example of a French citizen, who is the owner of a holding company in France owning 100% of the capital of its 3 subsidiary companies. We have already explained the concept of a holding company in our previous articles.
The French businessman is granted the permit for self-employed work and residency and sets up a company in Andorra. The dividends received by the Andorran company are exempt from corporate tax.
As part of the distribution of dividends, the entrepreneur who now resides in Andorra has two options. He then has the choice: receive the dividends of the French companies as a physical person (Hypothesis 1) or the new Andorran company buys the shares of the French parent company, and the dividends will be paid to the Andorran company (Hypothesis 2).
Regardless of its choice, the subsidiary companies that operate in France are subject to French taxes (Cf. Code Général des Impôts). Thus, the Corporate Income Tax (IS) is 15% out of its first 38.120 € of profits, then 33,1/3% on the rest of the profits. The special rate (of first 38.120€) is possible under 2 conditions: that the 75% of the company or holding are owned by physical persons and that the annual turnover does not exceed 7.630.000 € (without value added tax). Note that the 2017 Finance Law provides for a gradual reduction in the standard corporate tax rate to 28% by 2020.
Supposing that the subsidiary companies have an annual result of 100.000 € in our example. According to the law, on the first bracket, on the 38.120 €, the Corporate Income Tax (IS) is 5.718 €, on the rest of the 61.880 €, the Corporate Income Tax (IS) amounts to 20.627 € (a total of 26.345€).
The holding company located in France thus receives dividends that amount to 73.655€.
Dividends paid to a holding company in France are exempt from Corporation Income Tax (IS), except for a 1% share for fees and expenses where the standard rate is applied. This rate was 5% until 2016.
(See article 223A of the CGI and Article 40 of the Finance Act amended in 2015 following the Stéria judgment no. 386/14 of 2 September 2015 rendered by the Court of Justice of the European Union which thus ruled that the 5% were contrary to the principle of freedom of establishment provided for in Article 49 of the Treaty on the Functioning of the European Union).
As a result, € 73,655 is taxed at a rate of 1%, which represents € 243 of tax only.
When dividends are paid from the French holding to the Andorran Holding, the Treaty to avoid double taxation signed between France and Andorra applies (see BOPA 14/10/2015 article 10). The French businessman has two alternatives.
Hypothesis 1: If the beneficiary is a natural person, he must pay 15% as a withholding tax on the 73.412€, which is 11.012€. He therefore receives 62.400€. Then, he has to pay the income tax (IR) in Andorra (in force since 2016) because the source of the dividends comes from a non-Andorran company (Llei 5/2014, del 24 d’abril, de l’impost sobre la renda de les persones físiques). Thus, 0% is applied to the first bracket of 3000, and 10% to the rest, which is 59400, which is 5940€.
However, since a higher sum has already been paid as a withholding tax in France (i.e 11.012 €) he benefits from a tax credit and does not have to pay any income tax in Andorra. To conclude, the Andorran tax resident will receive 62.400€ in Andorra (73.412€ – 11.012€).
For information, if the person were a French tax resident and had to receive dividends, as a general rule, he would have to pay levy at source of 21% and 15.5% of CGS (general social contribution), unless it receives an amount equivalent to 10% of the share capital of the company (in this case, the rate is preferential). Then, said amount would be submitted to the income tax with its progressive scale (for example, for a single person the bracket from 26.818 € to 71.898 € is taxed at 30%). At the end, the French tax resident would receive a small amount in comparison to the dividends initially received.
Hypothesis 2: Now let’s consider that the new Andorran company holds 100% of the shares of the French holding company. Still according to the Treaty to avoid double taxation between France and Andorra, 5% withholding tax is applied is applied on the 73.412€, which corresponds to the amount of 3.671 €. The dividends included by Andorran are exempt from tax. Since dividends payed from an Andorran company to an Andorran tax resident are exempted from taxation. The shareholder therefore receives 69.741€.
However, the purchase of the share capital of the French holding company by the Andorran company is complex (valorization of the company, administrative procedures…) especially in the case where there is an added value or if there are undistributed dividends. We will talk about in next articles. The legal and tax consultants of Augé Legal & Fiscal can advise on these operations whatever the country involved.
In conclusion, the expected profit must be sufficiently important for the shareholders.