Taxation is one of the many aspects companies have to consider when setting up their headquarters. Connectivity, proximity to clients, local talent, and infrastructures are other determining factors when choosing a location. The Canary Islands have the lowest corporate tax in Europe approved by the European Union due to their status as one of the EU’s outermost regions. This is an enormous competitive advantage for companies located in the archipelago. In this article we explain all the details and information you need to know for your business.
What is the Canary Islands Special Zone (ZEC)?
One of the countries with the lowest taxes for companies is Spain, specifically in the Canary archipelago. The Canary Islands Special Zone, which has existed for more than 20 years, is a place with low taxes, included within the framework of the Economic and Fiscal Regime of the Canary Islands (REF) and authorized by the European Commission in the year 2000. The main goal of this project is to boost social and economic development across all of the archipelago, diversifying its entire production structure and creating new jobs.
What are the tax benefits of the ZEC?
All of the entities in the ZEC can enjoy a low corporate tax rate. This reduced rate is 4% instead of the 25% general tax rate that applies in the rest of Spain. The tax base is 1.8 million euros, although this depends on the number of employees the company has. If it has more than 50 employees, there is an unlimited tax base.
Being part of the ZEC also gives you additional tax privileges you should consider in your analysis when deciding whether to relocate your activities to the Canary archipelago. You will be exempt from documentary and property transfer taxes.
You will not have to pay the Canary Islands General Indirect Tax on imports or exports. These privileges are compatible with other tax benefits for Personal Income Tax as long as your company is set up in the Canaries. This will not apply if your corporate tax residence is in another country or territory.
What are the requirements for becoming a ZEC entity?
If you want to expand your business to one of the lowest business tax countries or regions, the ZEC is one of the best options available to you.
Some of the main requirements are that your company must be a legal entity and it must be a newly created company with its registered address and effective place of management within the Canary Islands. It is also important to note that one member of the company’s administration must reside permanently in the Canaries.
In 2022, a new system was established to reduce the investment requirements for companies focused on knowledge and innovation that create more than the minimum number of jobs. Job creation is another one of the requirements you have to meet in order to be in the ZEC. In Gran Canaria or Tenerife, you must create a minimum of 5 jobs. In the rest of the islands, the minimum is 3 jobs. Furthermore, your company’s activities must be included in the list of activities permitted in the ZEC (according to Rev.2 2019).
Companies that require a larger workforce in the capital islands can reduce their investment requirement. If the company employs at least 20 people, the minimum investment is 20,000 euros. If it employs at least 15 people, the minimum is 40,000 euros. If it employs at least 10 people, the minimum is 60,000 euros. Companies that create more than 25 jobs will not have an investment requirement.
Which economic sectors can benefit from the ZEC?
Another positive aspect of the ZEC is its versatility in benefiting all types of economic sectors. One of the main sectors is wholesale trade and services, although there are many more that can also enter the ZEC.
Audiovisual services and outsourcing, for example, are other options to keep in mind. The ZEC also includes the Canaries’ main business activities, which are part of the tourism sector and take advantage of the archipelago’s excellent year-round weather. These include the activities of travel agencies, tour operators, and other reservation services and related activities.
Also important to keep in mind are logistics, transportation and distribution, and ICT. Information Technology is another sector that is gaining ground in the Canary Islands.
What are the obligations of companies set up in the ZEC?
The main obligations of all the companies set up in the ZEC are to comply with the requirements regarding investment, residence in the Canary Islands, and job creation in the archipelago. In exchange, these companies can enjoy the low corporate tax rate of 4%.
However, these obligations not only contribute to the islands’ business development, they can also result in penalizations if they are not met. Article 52 of the law states that it is possible for companies to lose the right to fiscal benefits and be removed from the Official Register of Canary Islands Special Zone Entities if they do not meet the contractual obligations.
What is the ZEC’s role in international business?
ZEC has a very important role in the internationalization of the Canarian economy. Its purpose is to promote the economic and social development of the archipelago and diversify its production structure in order to position the Canaries as an international nerve center. In fact, together with other public organizations like PROEXCA and the island Councils, the ZEC carries out trade missions to attract investment and thereby helps to position the archipelago as a desirable destination for foreign investment from Europe and the rest of the world.
This organization is also a meeting place that brings together a variety of businesses from very different sectors and promotes networking events to foster closer ties between business leaders. This helps to alleviate any geographical difficulties the islands may present in terms of logistics.
In conclusion, the ZEC offers companies substantial benefits, such as the lowest corporate tax in Europe. Thanks to this low corporate tax rate, companies can be more competitive and can attract, maintain, and hire qualified talent. This translates to reduced margins and lower prices, which in turn increases the competitive edge of the companies and of the Canary archipelago. Nevertheless, each case must be studied individually to evaluate the real impact of taxation on business competitiveness.