Tourists all over the world associate the Canary Islands with good weather all year round, nice beaches, enough theme parks to fill even the most frenzied agenda, superb nature and perfect holidays.
For savvy investors (and of course now for all members of the Ecovis family), the Canary Islands also mean the place with the best taxation system in Europe, without this special regime being considered a tax haven.
The Canary Islands are 7 islands in the middle of the Atlantic Ocean, off the African coast near Morocco, in the middle of a triangle comprising the West-African coast, Southern Europe and South America. They form an integral part of Spain, constituted as one of the 17 regions of the country, and are therefore also an integral part of the European Union.
However, due to their distance from mainland Spain (approximately 1,300 kilometers as the dolphin swims), the Canary Islands have always had some tax and other kinds of privileges to compensate for the problems derived from their insularity and long distances. These privileges include lower VAT (called IGIC), subsidies for residents in the islands to travel to and from mainland Spain (50% reduction), subsidies for maritime transport, lower taxes on fuel, etc.
After Spain became a member of the European Union, a special regime was agreed with the European Commission in the year 2000 to attract investors to the Canary Islands, promote its diversification (the economy of the islands depended heavily on tourism, agriculture and port activities) and socio-economic development. As this regime derives from an agreement with the European institutions and carries with it some major restrictions which we will describe in detail below, the advantages of the system are not considered equivalent to a tax-haven with all the negative implications this has on local tax and investment regulations in the investors’ countries of origin.
The Special Economic Zone – ZONA ESPECIAL CANARIA (ZEC)
The biggest advantage is in corporate income tax, applicable to benefits obtained by a member company of the ZEC. The special reduced rate is only 4%, although it applies to the maximum amount of the tax base of the company, depending on the number of jobs that the company has created and whether the company is situated on the two main islands of the Canaries (Tenerife and Gran Canaria) or on any of the rest. (For the sake of clarity, we have equated tax base to benefits, although as you all know this is not 100% correct and has to be adjusted on a case to case basis.)
a. For the two main islands (which are also the most highly developed and have better infrastructure), if the company has created 5 jobs, the first 1,800,000 euros of the tax base will be taxed at 4%. The rest of the tax base will be taxed at the general Spanish rate of 25% (with some special cases that are not the subject of this report, otherwise we would never end.)
b. If the company has created 6 to 50 jobs, the company can add 500,000 euros per created job to the first 1,800.000 euros at the special rate, up to a maximum of 24,300.000 euros.
c. If the company has created over 50 jobs, the special tax rate of 4% will apply to all the tax base of the company.
Also, as an additional benefit, the companies in the ZEC can transfer dividends, interest and other capital gains from property to their parent companies free of any withholding tax (except transfer to tax-havens).
Finally, the companies that form part of the ZEC are also exempt from property transfer tax and stamp duty for their corporate actions in the Canary Islands (capital increase, transfer of property) or the acquisition of goods that are going to be used in the activities of the company (if subject to this tax and not to the Canaries equivalent to VAT).
Depending on the nature of the activity of the company, this general taxation regime can even be compatible with other tax incentives and subsidies that are generally available to investors in the Canary Islands, especially for R+D, audiovisual productions or investments in Africa. (We would have to study the specific needs of the investor to see if he or she can apply for further public support or not.)
Therefore, generally speaking, we have a taxation regime where benefits are taxed at 4%, with no withholding obligations, no indirect corporate taxes, lower VAT and compatibility with other incentives. Sounds good?
Now to the not such perfect news: This regime is not applicable to ALL investors and companies, as there are some strings attached. Let us look at the requirements that have to be fulfilled in order to be able to become a ZEC entity.
First of all, to get this out of the way first, this regime is not valid for pure holding companies. It is applicable only to companies with real economic activity in the Islands, who create jobs, invest money and carry out industrial, commercial or service activities. It is also not applicable to companies with addresses in the Canary Islands but whose activities are performed outside the islands, for example, a company registered in the Canary Islands to install solar panels but which installs them only in Italy with Italian workers.
This special and privileged tax-regime is only applicable to certain activities and they have to be carried out in the islands. The scope of the activities is very wide and includes most industrial production and commercial and service activities, but no purely financial services. Also, neither pure tourism activities, like hotels, are included, nor general construction work, as these activities are already strongly present in the islands.
Included are such activities as fishing, the whole food industry, textiles, chemistry and pharmaceutical industry, metal structures and construction products, electronics, machinery of all kinds, boats and vehicles, renewable energies, renovation of buildings, video production, wholesale trade, transportation, legal, consultancy (excluded intra-group services and coordination centers) and accounting activities (for all Ecovis members wanting to work in paradise), R+D, theme parks, training and other professional, scientific and technical activities, etc.
We can certainly provide a list of activities to any of you who may be interested. Our experience is that, if the project looks solid to the board, is not related to tourism, construction or finance, and includes a report that shows that there will be real activity in the islands, with job creation and investment, normally a way will be found to include the project in the activities listed in the regulation. What the board does not want are projects which only aim to derive tax benefits without making any real impact in the islands.
In order to be a ZEC entity and therefore be able to be taxed at the reduced rate, companies have to obtain authorisation from the board of the ZEC. To obtain this authorisation, the investor has to present a report with a description of the activities that are going to be carried out in the islands, means to be used, jobs to be created and investments to be realised and all other information that may lead the board granting authorisation. The investor also has to pay 850 euros for the authorisation process. (This amount changes from year to year, unfortunately normally only upwards.)
Once authorisation is granted, the investor has to incorporate a company in the Canary Islands. Only new companies can benefit from the ZEC regime; it is not possible to transfer the address from a company in another part of Spain or from a foreign country to the Canary Islands: a new company has to be created.
The third requirement is that the management of the company is effectively located in the Canary Islands. In order to ensure this, at least one director of the company must reside in the Canary Islands. This residence has to be real, it is not sufficient to have a vacation house there, but to have the islands as the legal residence.
The fourth requirement concerns the minimum investment that the company has to make. This investment has to be at least 100,000 euros during the first two years since the incorporation of the company in the case of the two principal islands and 50,000 euros for the rest of the region.
Fifth, there is the job creation requirement. In order to be a ZEC entity, at least five permanent jobs have to be created in the two main islands, or three in the case of an investment in the other islands. In order to continue to get tax benefits, this average must be maintained all the years in which the benefits are going to be enjoyed. This means that if the average of any one year lies below this minimum, the special tax rate of 4% will not be applicable and the general Spanish corporate tax rate will apply in that year. If employment increases the next year, the reduced rate will be applicable again.
Therefore, if a company fulfills all these requirements you are welcome to the best tax regime in Europe:
1.Activity included in list
2.Incorporation of new company
3.One director resident in the islands
4.Minimum investment of 100,000 euros (50,000 in the smaller islands)
5.Creation of at least 5 jobs (3 in the smaller islands)
In any case, we hope that this brief introduction has allowed you to learn something about the best tax regime in Europe, with its advantages and disadvantages. And of course, if you have any questions or queries, we will be more than happy to assist you.
Author:
Christian Koch, Partner, attorney at law, ECOVIS Legal Spain v. Carstenn-Lichterfelde Abogados, Madrid, Spain
christian.koch@ecovis.es
For savvy investors (and of course now for all members of the Ecovis family), the Canary Islands also mean the place with the best taxation system in Europe, without this special regime being considered a tax haven.
The Canary Islands are 7 islands in the middle of the Atlantic Ocean, off the African coast near Morocco, in the middle of a triangle comprising the West-African coast, Southern Europe and South America. They form an integral part of Spain, constituted as one of the 17 regions of the country, and are therefore also an integral part of the European Union.
However, due to their distance from mainland Spain (approximately 1,300 kilometers as the dolphin swims), the Canary Islands have always had some tax and other kinds of privileges to compensate for the problems derived from their insularity and long distances. These privileges include lower VAT (called IGIC), subsidies for residents in the islands to travel to and from mainland Spain (50% reduction), subsidies for maritime transport, lower taxes on fuel, etc.
After Spain became a member of the European Union, a special regime was agreed with the European Commission in the year 2000 to attract investors to the Canary Islands, promote its diversification (the economy of the islands depended heavily on tourism, agriculture and port activities) and socio-economic development. As this regime derives from an agreement with the European institutions and carries with it some major restrictions which we will describe in detail below, the advantages of the system are not considered equivalent to a tax-haven with all the negative implications this has on local tax and investment regulations in the investors’ countries of origin.
The Special Economic Zone – ZONA ESPECIAL CANARIA (ZEC)
The biggest advantage is in corporate income tax, applicable to benefits obtained by a member company of the ZEC. The special reduced rate is only 4%, although it applies to the maximum amount of the tax base of the company, depending on the number of jobs that the company has created and whether the company is situated on the two main islands of the Canaries (Tenerife and Gran Canaria) or on any of the rest. (For the sake of clarity, we have equated tax base to benefits, although as you all know this is not 100% correct and has to be adjusted on a case to case basis.)
a. For the two main islands (which are also the most highly developed and have better infrastructure), if the company has created 5 jobs, the first 1,800,000 euros of the tax base will be taxed at 4%. The rest of the tax base will be taxed at the general Spanish rate of 25% (with some special cases that are not the subject of this report, otherwise we would never end.)
b. If the company has created 6 to 50 jobs, the company can add 500,000 euros per created job to the first 1,800.000 euros at the special rate, up to a maximum of 24,300.000 euros.
c. If the company has created over 50 jobs, the special tax rate of 4% will apply to all the tax base of the company.
Also, as an additional benefit, the companies in the ZEC can transfer dividends, interest and other capital gains from property to their parent companies free of any withholding tax (except transfer to tax-havens).
Finally, the companies that form part of the ZEC are also exempt from property transfer tax and stamp duty for their corporate actions in the Canary Islands (capital increase, transfer of property) or the acquisition of goods that are going to be used in the activities of the company (if subject to this tax and not to the Canaries equivalent to VAT).
Depending on the nature of the activity of the company, this general taxation regime can even be compatible with other tax incentives and subsidies that are generally available to investors in the Canary Islands, especially for R+D, audiovisual productions or investments in Africa. (We would have to study the specific needs of the investor to see if he or she can apply for further public support or not.)
Therefore, generally speaking, we have a taxation regime where benefits are taxed at 4%, with no withholding obligations, no indirect corporate taxes, lower VAT and compatibility with other incentives. Sounds good?
Now to the not such perfect news: This regime is not applicable to ALL investors and companies, as there are some strings attached. Let us look at the requirements that have to be fulfilled in order to be able to become a ZEC entity.
First of all, to get this out of the way first, this regime is not valid for pure holding companies. It is applicable only to companies with real economic activity in the Islands, who create jobs, invest money and carry out industrial, commercial or service activities. It is also not applicable to companies with addresses in the Canary Islands but whose activities are performed outside the islands, for example, a company registered in the Canary Islands to install solar panels but which installs them only in Italy with Italian workers.
This special and privileged tax-regime is only applicable to certain activities and they have to be carried out in the islands. The scope of the activities is very wide and includes most industrial production and commercial and service activities, but no purely financial services. Also, neither pure tourism activities, like hotels, are included, nor general construction work, as these activities are already strongly present in the islands.
Included are such activities as fishing, the whole food industry, textiles, chemistry and pharmaceutical industry, metal structures and construction products, electronics, machinery of all kinds, boats and vehicles, renewable energies, renovation of buildings, video production, wholesale trade, transportation, legal, consultancy (excluded intra-group services and coordination centers) and accounting activities (for all Ecovis members wanting to work in paradise), R+D, theme parks, training and other professional, scientific and technical activities, etc.
We can certainly provide a list of activities to any of you who may be interested. Our experience is that, if the project looks solid to the board, is not related to tourism, construction or finance, and includes a report that shows that there will be real activity in the islands, with job creation and investment, normally a way will be found to include the project in the activities listed in the regulation. What the board does not want are projects which only aim to derive tax benefits without making any real impact in the islands.
In order to be a ZEC entity and therefore be able to be taxed at the reduced rate, companies have to obtain authorisation from the board of the ZEC. To obtain this authorisation, the investor has to present a report with a description of the activities that are going to be carried out in the islands, means to be used, jobs to be created and investments to be realised and all other information that may lead the board granting authorisation. The investor also has to pay 850 euros for the authorisation process. (This amount changes from year to year, unfortunately normally only upwards.)
Once authorisation is granted, the investor has to incorporate a company in the Canary Islands. Only new companies can benefit from the ZEC regime; it is not possible to transfer the address from a company in another part of Spain or from a foreign country to the Canary Islands: a new company has to be created.
The third requirement is that the management of the company is effectively located in the Canary Islands. In order to ensure this, at least one director of the company must reside in the Canary Islands. This residence has to be real, it is not sufficient to have a vacation house there, but to have the islands as the legal residence.
The fourth requirement concerns the minimum investment that the company has to make. This investment has to be at least 100,000 euros during the first two years since the incorporation of the company in the case of the two principal islands and 50,000 euros for the rest of the region.
Fifth, there is the job creation requirement. In order to be a ZEC entity, at least five permanent jobs have to be created in the two main islands, or three in the case of an investment in the other islands. In order to continue to get tax benefits, this average must be maintained all the years in which the benefits are going to be enjoyed. This means that if the average of any one year lies below this minimum, the special tax rate of 4% will not be applicable and the general Spanish corporate tax rate will apply in that year. If employment increases the next year, the reduced rate will be applicable again.
Therefore, if a company fulfills all these requirements you are welcome to the best tax regime in Europe:
1.Activity included in list
2.Incorporation of new company
3.One director resident in the islands
4.Minimum investment of 100,000 euros (50,000 in the smaller islands)
5.Creation of at least 5 jobs (3 in the smaller islands)
In any case, we hope that this brief introduction has allowed you to learn something about the best tax regime in Europe, with its advantages and disadvantages. And of course, if you have any questions or queries, we will be more than happy to assist you.
Author:
Christian Koch, Partner, attorney at law, ECOVIS Legal Spain v. Carstenn-Lichterfelde Abogados, Madrid, Spain
christian.koch@ecovis.es
