The Canary Islands Special Zone: Lowest Tax Area of EU

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

Javier Galvan Falcon

Javier Galván Falcón Diligens Tax Consulting, Spain

Javier Galván Falcón, Partner, Diligens Tax Consulting, Spain

Spain's Canary Islands Special Zone was approved by the European Commission in January 2000. What benefits can companies expect and how can they register?

For the purposes of the economic and social development of the region, the European Commission approved, in January 2000, the implementation of the Zona Especial Canaria – ZEC (Canary Islands Special Zone) (“ZEC”) within the frame of the Canary Economic and Fiscal Scheme (“the ZEC Tax Scheme”). Considering the location of the Canary Islands and its remoteness from the rest of the Spanish and European territories, the Canary regional government and the Spanish government, with the support and approval of the European Commission, implemented a low tax area with the aim of stimulating the economic development of the region by promoting the incorporation of entities and attracting foreign capital for investment.

Tax Framework

The tax framework for the Canary Islands is mainly regulated in the ZEC Tax Scheme, which sets out the application of special tax benefits for taxpayers operating in the territory: the ZEC Tax Scheme also regulates the requirements for taxpayers registered in the ZEC. Among other benefits, the Canary Islands is not part of the European VAT territory, which means that the Canary General Indirect Tax (“IGIC”), at a general tax rate of 7 percent, applies for transactions carried out in the territory, instead of VAT at 21 percent as for the Iberian Peninsula and Balearic Islands.

However, even though probably the lowest tax area (except for territories classified as tax havens by the EU) in comparison with the rest of the EU territories, and despite the attractive tax benefits for multinational companies, the ZEC is not a familiar tax scheme worldwide. Aside from the last few years, it has not been heavily promoted, and there are demanding requirements in order to be registered as a ZEC company. However, for various reasons this trend has changed in the last few years, with promotional activities being undertaken by the regional Canary government which have given more visibility to the ZEC Tax Scheme worldwide. As a result, there has been a significant increase in multinational companies taking their business to the ZEC.

In this regard, there are industries that can take considerable advantage of the ZEC Tax Scheme when considered together with other factors, such as the geographic location of the territory or the protection of European legislation. For instance, business opportunities arise for the maritime industry with regard to repair and maintenance services for ships, logistics and transport or scrapping; also for the information communications technology sector, since the territory has developed important infrastructure and resources in terms of communication or technology research (the regional government is highly focused on the promotion of the territory and relevant infrastructure for the establishment of e-sports activities, with recent successful cases).

What are the ZEC Benefits and who can Apply?

It should be noted that, even though this is an area linked to a geographical territory, not all taxpayers operating in the Canary Islands benefit from the ZEC Tax Scheme. Like other tax schemes, any company which is interested must apply for ZEC registration and meet the relevant material and formal requirements to be accepted as a ZEC entity. Only those taxpayers eligible to be a ZEC entity are registered as such. The taxpayer must be a newly incorporated company or branch situated in the Canary Islands.

The ZEC Tax Scheme is configured as a combination of a low tax rate for corporate income tax purposes and tax exemptions for both direct and indirect taxes. This set of tax benefits, which can be applied together with other tax benefits of the region, makes the ZEC the most beneficial tax scheme in the European territory and, importantly, subject to European jurisdiction in terms of legal security. For instance, companies that have strategic interests in Africa can operate in such territory from the Canary Islands, safe under the umbrella of EU legislation, and with the tax benefits of the ZEC Tax Scheme.

Tax benefits for entities operating under the ZEC Tax Scheme are as set out below.

  • Corporate income tax rate of 4 percent versus 20 percent average tax rate in the EU: this rate applies over the taxable base up to 1.8 million euros. However, this limit is increased in 500,000 euros of taxable base for each additional employee over the minimum number of employees required (five), up to 50 employees. From 50 employees, the 4 percent reduced tax rate applies across all the taxable base.
  • Withholding tax: Withholding tax does not apply over dividends and interest paid by ZEC subsidiaries to parent companies established in any other country, except in the case of a country without an agreement on exchange of information in place with Spain.
  • Transfer tax and stamp duty exemption: ZEC entities are exempted from transfer tax and stamp duties due on the acquisitions of goods and rights aimed at the business activity of the company in the ZEC area.
  • IGIC exemption: ZEC entities are exempt from import IGIC for goods imported into the Canary Islands, as well as from IGIC due on transactions carried out between ZEC entities (this exemption does not limit the right to deduct input IGIC).

Planning Point

To enjoy these tax advantages it is mandatory to be registered as a ZEC entity prior to the commencement of the activity: this is therefore an administrative procedure which requires special attention. For such purposes the relevant application form with the required documentation must be filed with the ZEC Consortium, as well as a full descriptive memo with information on the activity to be developed, parties involved, representatives, and other relevant information. The Consortium Board shall then authorize or deny the registration and, if authorized, the applicant has a deadline to register the entity in the Official Register of the Canary Islands Special Zone Entities (“ROEZEC”).

It should be noted that the purpose of the ZEC Tax Scheme is to promote the economic and social development of the region: this means that the registration process is thoroughly monitored by the body in charge and companies which may not have an actual business purpose would not be accepted.

Requirements to Become a ZEC Entity

As mentioned above, the ZEC Tax Scheme has an economic and social purpose and the requirements to become a ZEC entity are clearly defined by the legislation.

  •  Only a newly-incorporated entity or branch can apply for registration. A permanent establishment or a mere tax registration of a nonresident company is not valid for such purposes.
  •  This company or branch must have its legal address and effective place of management (board of directors) located in the Canary Islands. This means that it is not possible to manage the company abroad; legal and strategic decisions as well as the board of directors must be effectively situated in the Canary Islands.
  •  One of the members of the board of directors must be resident in the Canary Islands. A mere domicile is not valid, but rather an effective residence is demanded.
  •  An investment of 100,000 euros (in Gran Canaria or Tenerife) or 50,000 euros (in the rest of the islands) in fixed assets allocated to the business activity must be undertaken in two years from registration.
  •  As regards employment, the creation of five jobs (in Gran Canaria or Tenerife) or three jobs (in the rest of the islands) in the first six months from registration is requested. This job creation average must remain during the period the ZEC registration is in place.
  •  The business activity to be performed must be included in the activities list considered by the ZEC.

Consequently, despite the tax benefits of the ZEC Tax scheme, this is not aimed at the creation of vehicles or tax structures that can be used for tax evasion but, on the contrary, is focused on companies which undertake a real business activity in the region, investing in material and human resources for such purposes. This is the case for multinationals that have decided to channel part of their business through the ZEC. Moreover, with the rapid growth of the IT companies' sector, the Canary Islands has become one of the most attractive tax schemes for companies involved in the telecommunications, digital economy and electronic services, such as the e-sports or film production industries.

Javier Galván Falcón is a Partner with Diligens Tax Consulting, Spain.He may be contacted at: j.galvan@diligens.es

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax