Canary Islands Special Zone, Company Formation, offshore company formation, offshore company, limited company

Company formation: Canary Islands Special Zone (ZEC)

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 benefits provided by the Canary Islands Special Zone will initially remain in force until 31 December 2019, and this time frame may be extended on the authorisation of the European Commission. The final date for authorisation to register in the Official ZEC Register (ROEZEC) will initially be 31 December 2013.

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 area.

Tax Advantages

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.

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 30%. 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.

Net job creationIndustrial activitiesService activitiesOther services
3 – 8 employees1.800.000 € 1.500.000 € 1.125.000 € 
9 – 12 employees2.400.000 € 2.000.000 € 1.500.000 € 
13 – 20 employees3.600.000 € 3.000.000 € 2.250.000 € 
21 – 50 employees9.200.000 € 8.000.000 € 6.000.000 € 
51 – 100 employees21.600.000 € 18.000.000 € 13.500.000 € 
more than 100 employees120.000.000 € 100.000.000 € 75.000.000 €

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 5%.  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.