Canary Islands: The best Tax System in Europe

Various motives make the Canaries a destination not to be overlooked. Their constant mild temperatures all year round, astonishing nature, rich history and mixed culture, excellent infrastructures and frequent connections by air and sea to all the main international ports and a large number of international airports within Europe and Africa are only a few of the reasons which make the region a leading European tourist destination.

Moreover, the Canary Islands is not only well-known between Europeans but is especially familiar to Latin Americans. In fact, many Latin Americans countries have been closely connected to the Canaries for centuries. The constant migrations either way between Canary Islands and Latin America (e.g., Venezuela, Cuba, Dominican Republic etc.) for centuries shaped the cultural similarities to the point of sharing gastronomy, vocabulary, lifestyle traits and even linguistic similarities. This cultural siblinghood undoubtedly positions the Archipelago as the most welcoming bridge to Europe and Africa, with the icing on the cake being the beneficial tax regime the Canaries has to offer to investors.

The Canary Islands are known for having the best taxation regime in Europe, having a tax system of their own, approved by the EU to minimize its constraints caused by its remoteness, so as to encourage industrial activity and safeguard its competitiveness against outside products. As an example, the Canaries are not part of the European VAT but instead they have a local consumer tax with a standard rate of 7% (much lower than the minimum 15% rate set by EU to each of their member states), besides this, without a doubt, the principal attraction for investors is that the region has by far the lowest corporate rate of Europe (4%), which application is subject to various requirements and limitations.

How to benefit from a 4% corporate tax rate? For this, first step is to become a ZEC (Special Canary Economic Zone) member.

1. Which companies can join ZEC? All those newly created companies that intend to carry out an industrial, commercial or service activity in the islands, and which are framed within a list of permitted activities, can join. The ZEC regime, however, is not valid for pure holding companies nor for companies which activity is carried out elsewhere (e.g., a company registered in the Canary Islands which business activity is to install solar panels only in Italy by Italian employees).Despite there being a list of permitted economic activities, our experience is that where the project has a real economic impact to the Canary Islands (e.g., relatively significant job creation and/or investment), there is a high likelihood to be approved by the ZEC Board.
2. Do any other major benefits apply to ZEC companies apart from a low corporate tax? Dividends paid by ZEC subsidiaries to parent companies’ residing in another country (not considered a tax-heaven), are exempt from taxation.
3. Which requirements must be met by the project in order to be approved by the ZEC Board?
   1. A registered address and effective management in the Canaries.
   2. At least one company Director effectively residing in the Canaries.
   3. Development of a listed permitted activity.
   4. Minimum investment of €100,000 (Gran Canaria and Tenerife) or €50,000 (remaining islands) in fixed assets related to the activity within 2 years following company registration. In some cases, companies can be exempt from this requirement (e.g., innovative startups and/or companies within the information and communication sector or cases where the employment rate or economic impact is significant), or benefit from a much reduced one (e.g., where the employment rate reaches certain figures).
   5. Job creation (and further preservation) within 6 months following company registration: a minimum of 5 job positions for the main islands (Gran Canaria and Tenerife) and 3 job positions for the remaining islands. These minimums increase to 6 and 4 respectively, in cases where the above-explained investment requirement does not apply.
   6. Filing of an extensive report justifying solvency, viability, and a positive contribution to the Canary economy.
4. What limitations apply to the reduced tax rate (4%)? The reduced tax rate (4%) is limited to a tax base of € 1,800,000 for companies which only just meet the minimum job creation requirement. For companies with employment creation rates exceeding the min. but up to max 50, an additional € 500,000 applies per job position, the tax base being unlimited where the employment rate exceeds the figure of 50. Any excess of the beforementioned tax bases shall be taxable at the standard Spanish corporate tax rate (25%).

If you are interested in learning how your company can enter the European market from a strategic location within the Canary Islands to benefit from the best tax climate in Europe, the advisors at ECOVIS Legal Spain – Canary Islands will be pleased to respond all your questions and assist you throughout your investment operation.

Natalia Bonilla
ECOVIS Legal Spain
Canary Islands
natalia.bonilla@ecovis.es