Canary Islands Special Zone (ZEC)
The Canary Islands Special Zone (ZEC) is an economic policy instrument authorised by the European Commission. It consists of a set of tax advantages and benefits created within the framework of the Economic and Fiscal Regime of the Canary Islands (REF), whose purpose is to promote the economic and social development of the archipelago and the diversification of its productive structure.
From 25% down to 4%
Among all the tax advantages provided by the ZEC, the application of a tax rate of 4% to Corporate Tax stands out significantly, as opposed to the general rate in mainland Spain of 25%. This reduced tax rate will be applied over certain limits of the tax base based on the creation of employment.
Requirements accessing 4% Corporate Tax
Originally, the requirements to access the incentive could be summarized as follows:
Be a newly created entity or branch with domicile in the geographical area of the ZEC .
Reside in the Canary Islands, at least one of the administrators .
Make a minimum investment of €100,000 (for the islands of Tenerife and Gran Canaria) or €50,000 (in the case of La Gomera, El Hierro, La Palma, Fuerteventura or Lanzarote) in fixed assets related to the activity, within the 2 first years from registration.
Create at least 5 or 3 jobs, depending on whether they are in the capital islands or not , within the 6 months following the time of registration and maintain this average during the years operating within the ZEC.
That the business activity would would be within the activities permitted within the framework of the ZEC.
Modification: Lower investment, more employees
Well, these requirements are maintained, but the aforementioned legislative modification allows replacing the minimum investment requirement of €100,000 for the capital islands or €50,000 for the rest of the island by hiring more employees . In this way, more options are opened to access this significant tax incentive.
What kind of business projects can benefit from this change in investment?
The exemption is applicable to new business projects in three cases :
Societies of "intensive knowledge activity": entities that have the status of innovative small and medium-sized enterprises (SMEs).
Companies that carry out "activities related to priority sectors" for the development of the Canary Islands (e.g., audiovisuals, video games, technology, and science).
All those companies of "intensive activities in human resources" that increase their recruitment above the minimum requirement (5 and 3 employees depending on the chosen location). In this case, the minimum investment will be reduced proportionally depending on the number of employees hired.
How many employees should be hired?
Both knowledge-intensive activity companies and those that carry out activities related to priority sectors must create at least six jobs on the capital islands and four jobs on the non-capital islands . That is, one more job than the minimum requirement.
Other advantages of the ZEC
The tax advantages offered by the Canary Islands Special Zone to companies include benefits for other direct taxes such as Income Tax for non-residents and indirect taxes such as the IGIC, and the Tax on Patrimonial Transfers and Documented Legal Acts.
Non-Resident Income Tax
In relation to the Non-Resident Income Tax, the following concepts will be exempt from withholding in Spain :
dividends distributed by subsidiaries of ZEC entities to their parent companies residing in another country,
interest and other income obtained from the assignment of own capital to third parties
capital gains derived from personal property obtained without the mediation of a permanent establishment
For these purposes, this exemption applies to income obtained by residents in any state when said income is paid by a ZEC Entity and comes from operations materially and effectively carried out in the geographical area of the ZEC.
Transfer tax and stamp duty
Likewise, the ZEC Entities will be exempt from taxation in the Tax on Patrimonial Transfers and Documented Legal Acts in the following cases:
The acquisition of goods and rights destined to the development of the activity of the ZEC Entity in the geographical scope of the ZEC.
The corporate operations carried out by the ZEC Entities, except for their dissolution.
The documented legal acts linked to the operations carried out by said entities in the geographical area of the ZEC.
IGIC taxation scheme
Canary Island General Indirect Tax (IGIC), is an indirect tax applicable to sales and service providers in the Canary Islands. The general rate is 7% as opposed to 21% VAT.
In the ZEC regime, the deliveries of goods and provision of services made by the ZEC Entities among themselves, as well as the imports of goods made by them, will be exempt from IGIC.
Lastly, taking into account the limits established by community regulations regarding the accumulation of aid, under certain conditions, the ZEC is compatible with other REF tax incentives such as the Reserve for Investments in the Canary Islands (RIC), or the deduction for assets new fixed (the DIC).
Activities allowed within ZEC framework
There are many activities that can be carried out under the protection of the ZEC, with particular attractive those with a contribution to the modernisation of the productive and commercial apparatus of the Islands. In this way, the following business opportunities compatible with the ZEC are proposed:
Business services and outsourcing: consulting and business management activities, engineering, architecture, design, public relations, marketing and communication, etc.
Audiovisual: feature films, short films, television series, animation and cartoons, computer consulting, data processing, web hosting and web portals, etc.
Maritime sector: repair, assembly, maintenance, transport and logistics, supplies, provisioning, provisioning, construction of pleasure boats, inspection and control, etc.
Transport, logistics and distribution: warehousing, storage and handling of merchandise call centers to receive orders, provide information on products, postal activities, etc.
Tourism: Tour operators, travel agencies, reservation services and organization of excursions, theme parks, manufacture of all kinds of tourist products for hotels and restaurants that expand the majority offer of sun and beach, maintenance and cleaning of hotel and leisure complexes , private security activities, etc.
ICT: software and digital services, telecommunications services, network providers, GPS location, technological platforms, etc.
Summary The ZEC is a highly attractive tax benefit for investors operating within the EU, especially highlighting those developed online.
Overall, the ZEC is a low-tax (4%) favorable regime in a strategic location, with a well maintained infrastructure, and a large affordable workforce, which make the Canary Islands an appealing destination for international investors looking to set up a company.