2020 was a year beset by the twists and turns of the SARS-CoV-2 pandemic and it’s hard to imagine that our hopes for the new year now under way won’t be geared towards putting the health crisis behind us, thanks to the arrival of the vaccine.
However, what impact has the collateral damage had and what will it have on our financial investments? As you all know, this is a space where we discuss taxation and the above damage is exactly what I’d like to explain to you.
With the pandemic crisis two scenarios have emerged, involving different groups of people: 1) those who made financial investments before the arrival of the crisis or at its height for different reasons (risk concentration, falls in asset valuations, liquidity needs, etc.) - and 2) people who capitalised on the falls in the financial markets as a result of the crisis by making investments in that period.
The situations in terms of taxation are very different in each scenario, and this is what I’d like to explain to you, because when a financial investment is sold or materialised, it’s always subject to taxation, the effects of which may be positive or negative.
In scenario one, resulting from divestment when the markets underwent exceptional declines, there were capital losses and negative returns on movable capital which, in Andorra, in accordance with Article 32 of the Personal Income Tax Law, may be offset in the following ten tax periods if there is a negative amount following the integration and compensation with the year's profits, provided that this income can be integrated.
This compensation scheme is lenient if we compare it with those of neighbouring countries, where compensation limitations between capital gains and losses and returns on movable capital are established and the time limitation on the compensation is lower in future years.
The opposite applies in scenario two. The above-mentioned investment portfolios will have undergone significant revaluations, thus displaying positive capital gains or returns on movable capital subject to taxation in the year in which the sale or amortisation occurs.
Thanks to the tax system in Andorra, where low or zero taxation is applied to variable income products upon receipt of the return and the sale of the asset, tax residents in Andorra shouldn’t be too worried about the above. However, fixed income products, which always generate returns on movable capital (in terms of income received and amortisation), will be subject to taxation.
Owing to the existing compensation rules in the Principality, it’s important to make an assessment and a forecast of the investment portfolio for tax purposes. The financial perspective is as important as the fiscal standpoint when it comes to assembling or dismantling a portfolio and making investment-related decisions to optimise our personal goals.