New Tax on Foreign Real Estate Investment in Andorra

Authors: Berta Bonet, Laura Lobón

On 28 February 2024, the Official Gazette of the Principality of Andorra (BOPA) published Law 3/2024 on the Tax on Foreign Real Estate Investment in the Principality of Andorra.

The new legislation introduces a specific tax on certain real estate investments carried out by foreign investors and entities with foreign capital participation, establishing a new tax framework for this type of transaction.

The Law entered into force on 29 February 2024 and marks the end of the temporary suspension of foreign real estate investment authorisations that had been in place since September 2023.

Background to the New Measure

Since the opening of the Andorran economy to foreign investment in 2008, the Principality has experienced sustained growth in international investor interest.

One of the sectors that has seen the most significant growth has been the real estate sector, particularly following the COVID-19 pandemic.

Given the continuous increase in foreign investment in property and considering the specific characteristics of the Andorran market, the legislator considered it necessary to introduce a new tax aimed at contributing to public policies and managing the impact of this type of investment.

What Is the Foreign Real Estate Investment Tax?

The Foreign Real Estate Investment Tax (IIEI) is an indirect tax levied on foreign investments made directly or indirectly in real estate located in the Principality of Andorra.

Its purpose is to tax certain real estate transactions carried out by individuals and entities that require foreign investment authorisation.

Who Is Subject to the Tax?

The legislation provides that, among others, the following taxpayers may be subject to the tax:

• Non-resident individuals.

• Individuals resident in Andorra for less than three consecutive years.

• Non-resident legal entities.

• Andorran companies with direct or indirect foreign ownership.

• Entities financed directly or indirectly by foreign capital in certain circumstances.

The law significantly broadens the scope of taxation with the aim of capturing any real estate investment involving foreign capital.

Transactions Subject to the Tax

The following transactions may be subject to the IIEI:

• Acquisition of real estate.

• Acquisition of real property rights.

• Administrative concessions relating to real estate.

• Ownership interests in companies holding real estate assets.

• Urban development and real estate development projects.

Main Exemptions

Law 3/2024 provides for several exemptions applicable to specific transactions.

These include:

• Acquisitions by inheritance.

• Transfers between close family members without consideration.

• Transfers resulting from divorce or matrimonial property settlements.

• Certain financial transactions related to the enforcement of security interests.

The legislation also provides an exemption for certain investments intended for business, professional, commercial or industrial activities, provided that the legal requirements are met.

Tax Base

The tax base is determined by the actual value of the real estate investment.

In the case of Andorran companies with foreign participation, the taxable base is calculated proportionally according to the percentage of foreign ownership or foreign financing involved.

Tax Rates

The Law establishes a progressive tax system based on the number of real estate units acquired.

The applicable tax rates are:

• 3% for the acquisition of a first property.

• 5% for the acquisition of a second to fifth property.

• 8% for the acquisition of a sixth to ninth property.

• 10% for all other cases and for real estate development projects.

For tax calculation purposes, certain related-party transactions must be aggregated.

90% Tax Relief for Rental Housing

To encourage the creation of residential rental housing, the legislation introduces a 90% tax reduction.

This benefit applies where the investment is intended for the acquisition or construction of residential properties that will be made available for long-term rental as a primary residence for a minimum period of ten years.

Failure to comply with this requirement will result in the repayment of the tax benefit received.

Compliance Obligations

The Law establishes several compliance requirements for taxpayers.

These include:

• Filing a tax return before completing the transaction.

• Paying the tax liability before obtaining the foreign investment authorisation.

• Providing proof of payment before a notary.

Notaries may not execute public deeds relating to foreign real estate investments unless compliance with these obligations has been demonstrated.

Other Relevant Amendments

Law 3/2024 also introduces amendments to Law 10/2012 on foreign investment.

The most relevant changes include:

• The expansion of transactions requiring prior authorisation.

• An extension of the administrative review period to two months.

• The introduction of negative administrative silence.

• The creation of a €300 fee applicable to foreign investment applications.

Conclusion

The entry into force of the Foreign Real Estate Investment Tax represents one of the most significant developments in recent years regarding foreign investment in Andorra.

The new framework introduces a specific tax burden on foreign real estate investments and requires investors, developers and companies with foreign participation to carefully assess the economic and tax implications of future real estate transactions.