Advantages of Investing in Tenerife, Canary Islands
The Economic and Fiscal Regime of the Canary Islands, a tax framework that is incomparable in the world
Tenerife, like all of the Canary Islands, has traditionally enjoyed certain significant tax advantages within Spain, in order to provide compensation for the additional costs arising from its island character. The entry of Spain into the European Union in 1986 forced the modernization and updating of the advantageous tax regime of the islands. This was all established in the bases of the Economic and Fiscal Regime (EFR) of the Canary Islands. This guarantees certain exceptional conditions to the islands in promoting investment and trade. This all falls within the legality of the European Union. However, the assumption of its special geographical situation, assessed as an "ultra-peripheral region", enables it to enjoy a series of advantages and exceptions within community law.
In summary, the chief advantages of the EFR, apart from the "Canary Islands Special Zone" which is contained in another section on this web page, are the following:
Reserve for Investments in the Canary Islands (RIC)
A tax incentive that makes it possible to have a reduction in the taxable base of the Corporations Tax of up to 90% of undistributed profit, by means of a Special Reserve for Investments (RIC). The undistributed profit must come from establishments located in the Canary Islands. Without it being possible, under any circumstances, for the application of the reduction to lead to a negative taxable base.
The reserve must be materialize in one of the following investments:
Acquisition of fixed assets.
Subscription of securities bonds or annotations on account of the Canary
Islands.
Subscription of stocks or shares in the capital of companies that invest
in the Canary Islands.
Furthermore, this investment has to meet a series of requirements and conditions:
This maximum period for this materialization is 3 years, from the date
of the accrual of the tax corresponding to the financial year of the provision.
The fixed assets have to remain in the company for 5 years, or during the
useful life of the element should that be a lesser time period. The remaining
investments have to be kept in the company for 5 years.
The RIC must appear in the balance sheet, being wholly separated and having
its own heading.
The form of payment of the materialization may be that which is chosen by
the tax payer: in cash, outside financing or leasing, provided that in this
latter case, there is no doubt whatsoever about the financial year of the
option to purchase.
Those companies and other legal entities that are subject to Corporations
Tax in relation to their establishments located in the Canary Islands may
make use of this tax incentive. Likewise. The private individuals subject
to Personal Income Tax (PIT) in relation to business and professional activities
carried on through establishments located in the Canary Islands can make
use of this incentive, provided that make their net returns by direct calculation.
Allowance for production of corporate goods in the Canary Islands
A fiscal allowance that consists of an allowance, of 30% in the year 2003, on the Corporations Tax payment or on the Personal Income Tax payment. In the case of PIT taxpayers, this allowance shall be applied on the part of the whole payment that proportionally corresponds to the returns on which allowances are made.
The goal of this allowance is to provide incentives for the production of corporate goods in the Canary Islands archipelago. Those tax payers levied for Corporations Tax and the Personal Income Tax are able to benefit from said allowance, provided that the latter make their returns on a direct calculation basis. These persons or entities will have to be domiciled in the Canary Islands or in other territories provided that, in this latter case, they are involved in the production of corporate goods in the archipelago through a branch office or permanent establishment.
Deduction for Investments in the Corporations Tax
This deduction consists of a reduction of the whole payment subsequent to the application of the deductions for double taxation and the possible allowances. The amount of the deduction is calculated in each case by applying the percentage of deduction legally stipulated for each modality of investment on the total amount of the investments made. It shall be possible for the following to make use of the special Deduction for Investments regime in the Canary Islands:
The companies and other legal entities subject to the Corporations Tax
with tax domicile in the Canary Islands, in relation to the investments
that are made and that are permanent in the Canary Islands.
The companies and other legal entities that do not have their tax domicile
in the Canary Islands, with respect to the permanent establishments located
in the Canary Islands Archipelago, provided that the corresponding investments
are made and are permanent in the islands.
The private individuals who carry out business and professional activities
in the Canary Islands, provided that they comply with the restrictions and
conditions imposed by the PIT regulations.
Other exemptions
The EFR recognizes exemptions from the Property Transfer and Certified Legal Documents Tax for the societies domiciled in the Canary Islands. These exemptions will be applied to newly created companies or those already incorporated in the period of 3 years from its incorporation or extension, and provided that the investment goods are located in the Canary Islands, they can decide to widen their capital or modernize, extend or transfer their installations.
Freeports
Delimited areas where it is possible to store, transform and distribute merchandise without the application of duties, tariffs or indirect taxes.
These zones are suitable for those companies that import or export part of their merchandise, in the same way as for those that are involved in international trade; offering a set of advantages in exports and imports and facilitating commercial trade with the Canary Islands. Two freeports are currently being created on the island of Tenerife, one at the Port of Santa Cruz de Tenerife and the other at the future Port of Granadilla.
Advantages for the Freeports
The freeport has important customs advantages for the companies that operate in the same:
Exemption from import duties during the period that the merchandise remains
in the Zone
Exemption from the payment of special taxes for merchandise introduced into
the Zone
Exemption from IGIC (Sales Tax) for the merchandise in freeports and for
the services rendered on them
Advance receipt of refunds on the exporting of the community merchandise
for which these benefits are applicable
Non-application of community commercial policy measures as contingencies
or restrictions of any class
The possibility of bringing in any merchandise regardless of its nature,
quantity, origin, source or destination, without limitation on the duration
of its stay
Operations subject to Inward Processing Traffic in that non-community merchandise
which is to be subject to processing and that is re-exported, without the
demand of guarantees, securities or other costs
Processing operations under customs control with merchandise originating
from third countries, that require processing prior to its introduction
in community territory
Triangular trade operations
One additional advantage of this Zone over most freeports in the rest of
the European Union is the exemption from compliance with the economic conditions
that regulate the inward processing system. Thus the operations of inward
processing carried out in the freeports are not subject to the requirement
of not prejudicing the essential interests of other producers of the European
Union. Therefore, such operations enjoy maximum possibilities in terms of
the international storage referred to in that Zone.
On the other hand, the companies established in the Canary Islands freeports are further able to make use of the particular tax incentives of the Economic Fiscal Regime of the Canary Islands (EFR) associated with the creation of real investment and the development of business activities.
Special Register of Vessels and Ship owning Companies (RVC)
An incentive conceived of to improve the competitiveness of the Canary Islands ports and ship owning companies, by means of exemptions and tax allowances for those ship owning companies and vessels registered in the RVC.
The following can register themselves in the RVC: the merchant vessels that carry out external or extra national coastal sailing, and the ship owning companies whose effective center of control of exploitation is located in the Autonomous Community of the Canary Islands or that have, at least, one establishment or permanent legal representative in the Canary Islands.
Indirect Taxes
In spite of the fact that Tenerife is integrated into the European (EU) customs territory, the community Sales Tax (Value Added Tax) is not applied, nor is any of the special community taxes. In its place there is the IGIC (General Indirect Canary Islands Tax), which is levied on the final consumption with rates of 5%, very much lower than that existing in the rest of Spain (where rates go from 6% to 16%). Additional advantages: lower rate of assessment, application of a 0 rate to determinate products or services, exemption for the telecommunications services that are provided and for the acquisition of investment assets by a company that is domiciled or that has a permanent establishment in the Canary Islands.