Tenerife Tax Regime: Canary Islands Taxes
A tax regime that is exceptional in Europe: the advantages
of making use of the ZEC Zone
For many investments, the Island of Tenerife offers a tax regime that is
exceptional in the whole of the European Union, the incentives encompassed
in the so called "Canary Islands Special Zone" and known by its
Spanish abbreviation ZEC. The "Canary Islands Special Zone" (ZEC)
is a low taxation regime, created within the framework of the Economic and
Fiscal Regime of the Canary Islands with the goal of promoting the economic
and social development of the archipelago and diversifying its productive
structure.
The Canary Islands Special Zone was authorized by the European Commission in January 2000 and is initially in effect until December 31, 2008, with it being possible to extend it on authorization from the European Commission. The authorization of the entry in the Official Register of ZEC Entities (ROEZEC) will have an initial temporary limit of December 31, 2006.
The ZEC accepts industrial, commercial and service companies
Companies with industrial, commercial or service activities that fall within the list of permitted activities and that are described in the appendix to the Royal Decree Act 2/2000 can make use of the advantages of the ZEC.
The ZEC extends across the whole of Canary Islands territory with certain particular features:
Companies whose purpose is the carrying out of service activities will
be able to establish themselves in any part of Canary Islands territory.
Companies whose purpose is the production, transformation, handling and
commercialization of merchandise: the establishment of these companies will
be limited to certain specific areas used for this purpose.
Conditions for making use of ZEC benefits
The existing rules can be summarized in the following conditions:
Being a newly created entity with domicile and effective management headquarters
in the geographical area of the ZEC.
At least one of the directors shall reside in the Canary Islands.
To make a minimum investment of 100,000 euros in fixed assets related to
the activity within the first two years from the time of its authorization.
To create at least five job positions within the six months following the
time of the authorization, and to maintain this average during the years
for which it is associated with the ZEC.
Incorporating the undertaking of one of the activities described in the
appendix to the Royal Decree Act 2/2000 into its company purpose.
Main tax advantages
The companies using ZEC enjoy significant tax advantages:
A. Corporations Tax:
The ZEC Entities are subject to the Corporations Tax in effect in Spain, but at very reduced taxation rates compared to the general rate in Spain which is 35.25% for large companies, or 30.32% for Small and Medium-sized Companies (SMEs).
In the case of companies using the ZEC, this rate is reduced to a band that ranges between 1 % and a maximum of 5 % on the basis of:
The net creation of employment
The time of incorporation into the Register
Whether the activity is new or pre-existing
Whether the activity is barely implemented in the Canary Islands
In order to determine the special rate of assessment applicable to the ZEC,
the period for which the regime is active will be divided into three sections,
which will be of variable duration depending on the year in which the entity
has become authorized. These tax rates will be applied on the part of the
taxable base derived from the operations that are materially and effectively
carried out in the geographical area of the ZEC.
B. Non-resident Income Tax:
One very important aspect are the advantages for the fiscal nature of non-residents in Spain, with use being made of the tax treaties on this question signed by Spain in the context of the European Union and other international bodies. Given that Tenerife, along with the whole of the Spanish State, forms part of the European Union:
It will be possible for the ZEC Entities to make use of the treaties for
avoiding Double Taxation signed by Spain.
It will be possible for the ZEC Entities to make use of the Parent - Affiliate
Company Directive of the European Union in such a way that the dividends
distributed by ZEC entity affiliate firms to their parent companies resident
in another country of the EU shall be exempt from withholdings.
There is exemption from taxation, departure retention or withholding tax
on the interest received by EU residents: this covers the interest and the
other return obtained by the assignment of own capital to ZEC entities,
along with the capital gains deriving from real estate, obtained without
the intervention of a permanent establishment, by residents in another EU
country.
C. Property Transfer and Certified Legal Documents Tax:
ZEC entities will be exempt from assessment for this tax in the following cases:
The acquisition of assets and rights used in the development
of the activity of the ZEC Entity in the geographical area of the ZEC.
The corporate operations carried out by the ZEC Entities, except for their
dissolution.
The certified legal documents associated with the operations carried out
by said entities in the geographical area of the ZEC.
D. General Indirect Canary Islands Tax (IGIC):
The IGIC is the indirect Canary Islands tax that is levied on end consumption, and which replaces the Sales Tax (VAT) of the European Union. The nature of the IGIC is similar to that of the Sales Tax, although there are important differences, such as that of they are being lower taxable rates, with the general IGIC rate being 5%. Under the ZEC regime, the delivery of goods and the provision of services carried out by ZEC entities between themselves will be exempt, along with the importing of goods carried out by the same.