What fiscal advantages do the Canary Islands offer?
The Canary Islands have traditionally enjoyed a special fiscal and commercial treatment due to their situation as islands and their geographical distance from the rest of Spain and Europe. For this reason the islands have their own Economic and Fiscal Regime (REF), subject to the Spanish law and fully authorized by the European Union (EU).
The REF contains several incentives related to the creation and development of business, among them:
The opportunity to pay less in Corporate Tax
- Deductions for investments Multiple exemptions in INDIRECT TAXATION
- For the incorporation of the company
- For capital increase
- For the acquisition of capital goods
Installation in FREE TRADE AREAS with special economic advantages
- Economic advantages from the practice of export and import and from the active perfecting of goods.
The Canary Islands Special Zone (ZEC) is a low tax zone created within the framework of the Canary Islands Economic and Fiscal Regime (REF) for the purpose of promoting the economic and social development of the Islands and diversifying their production structure.
ZEC was authorised by the European Commission in January 2000. The 3 benefits provided by the Canary Islands Special Zone will initially remain in force until 31 December 2019.
These companies will have the following advantages:
- ZEC Companies are subject to corporation tax in force in Spain, but at a reduced rate of 4% (compared to 25% on average in Europe).
- Are exempt from withholding of dividends paid by subsidiaries ZEC to their parent companies in another European Union country through the Parent-Subsidiary Directive and with other countries with which Spain has signed an agreement to avoid double taxation (more fifty countries.)
- Exemption from taxation in the Transfer Tax and Stamp Duty.
- Exemption from Canarian General Indirect Tax (IGIC) (equivalent to VAT) for deliveries of goods and services between ZEC and imports.
The requirements for companies to qualify for the ZEC are:
- Being a new entity with domicile and place of effective management in the geographical area of the ZEC.
- At least one of the administrators must be resident in the Canary Islands.
- Make a minimum investment of 100,000 euros (Gran Canaria and Tenerife) or 50,000 euros (in the other islands) in fixed assets within the first two years after enrollment in the ROEZEC.
- Create at least five jobs (Gran Canaria and Tenerife) or three (in the other islands) during the first six months of enrollment in the ROEZEC and maintain this average along the benefits period.
- Develop activities allowed in the ZEC área.
The benefits provided by the Canary Islands Special Zone will initially remain in force until 31 December 2019, and this time frame may be extended by an authorisation of the European Commission.
The ZEC covers the whole territory of the Canary Islands, with the following specifications:
- Entities whose corporate purpose is the undertaking of service activities may set up anywhere within the territory of the Canary Islands.
- Entities whose corporate purpose is the production, transformation, handling or trading of goods can only set up within certain areas designated for these purposes. In April, the European Union will decide on the proposal to eliminate that restriction.
More information about the tax advantages of the ZEC Corporate Income Tax ZEC Entities are subject to the Corporate Income Tax in force in Spain, at the reduced rate of 4%.
Since 2008, the tax rate in Spain is established at a rate ranging between 25% and 35%.
The special rate of 4% will apply to a maximum amount of the income tax, depending on the number of jobs created and the kind of activity of the the ZEC Entity.
Double Taxation Agreements, Parent-Subsidiary Directive and the Income Tax Nonresident (IRNR)
The Canary Islands are part of Spanish territory and community:
- ZEC Entities are eligible for agreements which avoid double taxation, signed by Spain.
- ZEC Entities are eligible for the Parent-Subsidiary Directive of the European Union, so that dividends paid by ZEC subsidiaries to parent companies resident in another EU country are exempt from withholding.
- ZEC legislation provides that the exemptions described below, shall also apply to incomes from the residents of not members states of the EU, where such income is paid by a corporation ZEC and come from operations and effectively in the material geographical area of the ZEC.
- Natural persons: interest and other income from transfers to third parties of capital and capital gains from property, obtained without a permanent establishment.
- Corporations: benefits from subsidiaries resident in the Spanish territory to their parent companies.
These exemptions do not apply when the income is obtained through offshore or territories with which there is no an effective exchange of tax information, or when the parent company has its tax residence in one of these countries or territories.
Property Transfer Tax and Stamp Duty (ITP and AJD) ZEC entities are exempt from these taxes in the following cases:
- Acquisition of goods and rights for the activity development of the ZEC Entity in the geographical area of the ZEC.
- Corporate operations done by the ZEC entities, except their dissolution.
- Documented legal acts related to transactions of these entities in the geographical area of the ZEC.
Canary Islands General Indirect Tax (IGIC)
IGIC is the Canarian Indirect Tax charged on final consumption, and replaces the Community Value Added Tax (VAT). The nature of the IGIC is similar to VAT, but with important differences, such as lower tax rates, with a general rate of 7%.
In the ZEC the supply of goods and services done within ZEC entities, as well as imports of goods made by them, shall be exempt from taxation by the IGIC.
Canary Islands Investment reserve (RIC)A
The RIC allows to reduce the tax base, up to 90% of the Undistributed Profits (BND), in Corporation Tax for the amount that the establishments located in the Canary Islands devote from their profits to the contribution to the RIC in the Canary Islands.
The quantities which are devoted to the RIC have to be materialised in the purchase of fixed assets, new or used, within the maximum period of three years.
Deduction for Production of Tangible Goods in the Canary IslandsA
This fiscal incentive is an allowance of 50% of the total tax liability which proportionally corresponds to the profits deriving from the sale of tangible goods produced in the Canary Islands with the above-mentioned requirement.
Such persons or entities must be domiciled in the Canary Islands. They must have a permanent establishment or branch in the Canary Islands, nevertheless of the place where they are domiciled.
Deduction for investments in the Canary IslandsA
The Deduction for Investments in the Canary Islands is a fiscal incentive, equivalent in its operation with that on Spanish territory, but with considerable advantages with respect to the intensity of the fiscal benefit.
This special regime of deduction for investments in the Canary Islands is applicable to the following persons and entities:
- All companies and other legal entities subject to Corporation Tax for the investments they make which remain in the Canary Islands, provided that:
They have their registered address in the Canary Islands, If they do not, they must at least have a permanent establishment in the Islands.
- The individuals that carry on business and professional activities in the Canary
Islands , provided that they fulfil the conditions imposed by the regulations of Income Tax for the application of the incentives to the investment set down in Corporation Tax.
REF grants exemptions in the Transfer Tax and Stamp Duty and in the Canary Islands General Indirect Tax incentives to invest in the Canaries.
These exemptions are granted under certain conditions to entities subject to corporation tax with tax residence in the Canary Islands and entities acting through a permanent establishment in the Canary Islands.
A) Canarian Free Trade Areas
These areas are ideal for companies that import or export their goods, as well as for those engaged in international trade, offering a number of advantages in exports and imports and facilitating the comercial trade with the Canary Islands.
Currently, they are running the Free Zones of Gran Canaria and Tenerife, with some advantages over the rest of the located in the European Union. In addition, The Free Trade Area of Santa Cruz de Tenerife is a free Trade Area for type II control. That means it is a Open Free Trade Area in Santa Cruz de Tenerife Port without restriction, the first in Spain and the second of its kind in Europe. It should be noted that the tax benefits derived from the Free Zones and the ZEC are compatible which creates an interesting framework for businesses.
B) Special Register of Ships and Shipping Companies
The purpose of this register is to improve the competitiveness of the shipping companies and that of the Canarian ports by a series of measures consisting of different exemptions and fiscal allowances that can be taken advantage of by both registered Companies and ships.
Any merchant ship with mercantile aims which carries on either coastal trading or external or extra-national trading.
All the Shipping Companies which have their effective centre of control of the operation in the Region of the Canary Islands, on Spanish national territory or abroad, provided that in the last two cases there must be an establishment or permanent legal representative in the Region, accredited by means of public deed.
- Property visit
- Signing a deposit contract ( leaving a deposit approx.10 000 Euros)
- Opening a bank account in Tenerife( 1 day, banks: Bankinter, Santander,Barclays, etc.)
- Signing up for property registration in the regional database.
- Getting a personal registration Number in Police ( NIE)- 1 day.
- Signing a purchase contract in the Notary ( or on behalf of an authorized person with Power of Attorney) . Purchase Contract is signed in 30-40 days after leaving a deposit.
- Transference of all the community bills to the account of a new owner.
- Property Registration Certificate on the name of a new owner.
Expenses on New Developments:
- I.G.I.C. a el 7%
- Legal acts expenses – 0,75%
- . Notarization 0,4% -0,5% from the purchase price
- Contract registration – 0,2% from the purchase price
- Fiscal expenses – 0,3% from the purchase price
Total expenses: 9% -10% from the purchase price
Expenses on Resales:
- Patrimonial transmission – 6.5%
- Notarization 0,4% -0,5% from the purchase price
- Contract registration – 0,2% from the purchase price
- Fiscal expenses – 0,3% from the purchase price
Total expenses: 8% -9% from the purchase price
1.- Municipial anual tax IBI , is calculated according to cadastral price and paid between 1 jan 20 June.
2.- Impuesto sobre la Renta de las Personas Físicas (IRPF)
Taxable base: 20% from cadastral price
Tax rate: 2%
- Example: Purchase Price 1 000 000 €,
- Cadastral Price: 500 000€,
- Taxable base -100 000€, anual Tax IRPF , is due to be paid before 31 Dec: 2 000€
Should the tax s not paid there will be paid a fine as a penalty. Also while selling the Property in the future the owner will not be returned 3% tax as a tax paid by a non resident while selling.
The taxable base of the State Tax is calculated as a difference between profit and expenses while renting out. (Expenses: light, water, community fees,refurbishing, etc..).
Taxable base: difference between profit and expenses
Tax rate: 20%
Under the Spanish Law while renting the Tenant is responsable to pay this tax.
- Double taxation
Being a resident of another country (if an investor lives more than 180 days in that country , has a permament registration , can present the school receipts , etc..) all property taxes on the property he has he pays according to the fiscal system of his country.