Tenerife Tax free zone (Canary Islands) – ZEC SPAIN

06.09.2023
Economy

The Canary Islands are globally renowned for their stunning landscapes and temperate climate throughout the year. However, these islands offer much more than that, including attractive tax benefits with the canary islands special zone.

One of the reasons why many people choose to live in the Canary Islands is the exceptional quality of life they offer. With pleasant weather year-round, a wide range of outdoor activities, and a relaxed culture, this is a place where life is enjoyed to the fullest.

Another advantage of living in the Canary Islands is the ease of exploring other islands in the archipelago and nearby destinations. From here, you can embark on adventures to amazing places without long flights or complex procedures.

The Canary Islands also offer unique business opportunities, especially in sectors such as tourism, renewable energy, and technology. The infrastructure, connectivity, and favorable business environment make it an ideal place to start or expand your company.

Indice del artículo

Why do companies choose the Tenerife Tax Free zone?

The Canary Islands are globally renowned for their stunning landscapes and temperate climate throughout the year. However, these islands offer much more than that, including attractive tax benefits.

The Canary Islands also offer unique business opportunities, especially in sectors such as tourism, renewable energy, and technology. The infrastructure, connectivity, and favorable business environment make it an ideal place to start or expand your company.

Why should you consider the Canary Islands?

The Canary Islands offer an unparalleled lifestyle where work and leisure harmoniously blend. You can enjoy a mild climate, outdoor activities, and a vibrant cultural scene while maintaining a reduced tax burden.

Why do companies choose the Canary Islands?

A Paradise for Businesses and a Thriving Territory

Canarias is an exceptional destination to live due to its appeal to digital nomads or ‘remote workers.’ The investment and strategy implemented by the Ministry of Tourism, Industry, and Commerce, supported by Tourism of the Canary Islands, have positioned the archipelago as an ideal place for this niche segment.

The successful attraction of remote workers to the Canary Islands is due to several key factors:

Ideal Climate: The Canary Islands have been promoted as the ‘office with the best climate in the world,’ attracting digital nomads from around the globe. The pleasant and consistent climate is a major draw for those seeking to work in a pleasant environment.
Exponential Growth: The promotional strategy has exceeded expectations, with the arrival of remote workers surpassing the annual forecast in just one year. This demonstrates the high level of interest the destination generates.
Tourism Diversification: The Canary Islands have diversified their tourism model to reduce dependence on more volatile segments. Investment in three long-stay tourism segments, including remote workers, has contributed to this diversification.
Private Sector Involvement: The private sector has responded positively by adapting accommodations and developing coworking and coliving spaces to meet the needs of remote workers.
Specialized Events: The organization of events like Pueblos Remotos and Thriving Nomads demonstrates the commitment of the Canary Islands to promote practices and strategies that benefit businesses and freelancers embracing remote work.
Access to Key Markets: The strategic location of the Canary Islands and the availability of direct flights, especially to the United States, position it favorably to attract remote workers from high-income markets.

In summary, the Canary Islands have become an attractive destination to live thanks to its exceptional climate, commitment to remote work, investment in infrastructure and services for remote workers, and tourism diversification. These qualities make the archipelago a popular choice for those seeking to combine a high quality of life with professional opportunities. Now, let’s move on to tax matters.

Taxes for companies in the Canary Islands, the ZEC zone

If Spain is one of the countries with a high level of aggressiveness in tax matters, you may be wondering: How is it possible to pay a 4% tax rate instead of the standard 25% in Spain?

To fully understand the Canary Islands Special Zone (ZEC), we must first decipher its meaning and purpose. While it may sound somewhat mysterious, it is actually a quite important concept in the field of international taxation. But why should it matter to you?

What is the Canary Islands Special Zone (ZEC)?

The Canary Islands Special Zone (ZEC) is a unique tax tool in the context of Spain and the European Union. It is a specific geographical area in the Canary Islands that enjoys special tax benefits with the aim of promoting investment and economic development in the region.

Tax Benefits of the ZEC

One of the main attractions of the ZEC is the tax benefits it offers to companies that establish themselves in this area. These benefits include:

Reduced Taxes: Companies operating in the ZEC enjoy a significantly reduced corporate tax rate, which can result in considerable tax savings.

VAT Exemption: In the ZEC, companies can benefit from the exemption of Value Added Tax (VAT) in their commercial operations.

Simplified Requirements: The requirements for establishing and operating a company in the ZEC are less burdensome compared to other areas, making it easier for businesses to enter and expand.

REQUIREMENTS TO ACCESS THE 4% CORPORATE TAX

Now that we understand the benefits, it is important to delve into taxes in the ZEC. How are they applied, and what should you know about them?

So, when a company registers in the Canary Islands, it does not automatically mean that it will be taxed at 4%. This tax rate is a privilege and is granted only to companies that meet the requirements to obtain the special status called ZEC.

A company wishing to pay this rate must meet the following criteria:

It must be a separate entity, so tax authorities know exactly who is responsible for taxes.

It must operate in a non-excluded business area. There are some types of business areas that would not qualify for ZEC status. However, if the business is not related to tourism, retail, or entertainment, then there won’t be a problem. As this program is designed to attract investments and business development in areas that need support, the authorities have already defined the sectors that are developed in the Canary Islands and do not require additional tax incentives.

At least one of the company directors must be a resident in the Canary Islands. The good news is that you don’t need a shareholder to move to the Canary Islands. The company can simply hire someone as a director who is physically in the Canary Islands and pay them a regular salary.

There is also a minimum investment requirement. The amount varies from island to island, ranging from EUR 50,000 to EUR 100,000. The more developed the island, the higher the amount of investment. The investment can include anything related to the business. For example, you can buy real estate, use it as the company’s office, and that would be considered an investment. Just keep in mind that if you buy an apartment, use it for personal needs, and present it as an investment, tax authorities will not accept it.

And the last requirement is that, within 6 months after registering the ZEC company, you must employ at least 3 to 5 local employees at a minimum. The amount varies again depending on the island. 3 to 5 is the minimum amount, but it can be more. What does ‘local employees’ mean? Local does not necessarily mean they have to be born there, just that they will physically reside in the Canary Islands.

If at any time at least one of the requirements is no longer met, the ZEC status will be revoked, and standard Spanish tax rates will apply.

Advantage of VAT in the Canary Islands

And the final benefit of having a registered company in the Canary Islands is the VAT (Value Added Tax). The EU has a common VAT system for all EU countries, and the agreed minimum VAT rate for the EU is 15%. However, even though Spain is part of this common EU system, the Canary Islands are not. Therefore, the rate there is only 7%, the lowest in the entire EU.

Which business sectors can take advantage of this investment shift?

The exemption applies to new business projects in three situations:

Companies with “knowledge-intensive activity”: These are entities that meet the condition of being an innovative small and medium-sized enterprise (SME) or whose activity focuses on innovation.
Companies engaged in “activities related to priority sectors”: These sectors are considered priorities for the development of the Canary Islands due to their significant growth potential. They include the audiovisual field, video games, technology, and science.
Companies with “human resource-intensive activities” that increase their hiring above the minimum requirements (5 and 3 employees, depending on the island). In this case, the minimum investment will be reduced proportionally based on the number of employees hired.

How many employees must be hired?

Both knowledge-intensive companies and those operating in priority sectors must create at least six jobs in the capital islands and four in the non-capital islands. This represents one more job than the minimum requirement.

Taxation in the Canary Islands: Other benefits of the ZEC

In addition to the aforementioned tax advantages, the Canary Islands Special Zone (ZEC) offers benefits for other direct and indirect taxes, such as Non-Resident Income Tax (IRNR), the Canary Islands General Indirect Tax (IGIC), and Property Transfer and Documented Legal Acts Tax.

Non-Resident Income Tax (IRNR): Under the ZEC, certain items, such as dividends distributed by ZEC entity subsidiaries to their parent companies in other countries, interest and other yields from the transfer of own capital, and capital gains from movable property obtained without a permanent establishment, are exempt from withholding tax in Spain. This exemption applies to income earned by residents in any state when paid by a ZEC entity and arising from operations carried out within the ZEC.

Property Transfer and Documented Legal Acts Tax: ZEC entities are exempt from taxation in this tax for cases such as the acquisition of assets and rights intended for the development of ZEC entity activities in the ZEC, corporate operations carried out by ZEC entities (except dissolution), and documented legal acts related to operations carried out in the ZEC.

Canary Islands General Indirect Tax (IGIC): Under the ZEC regime, deliveries of goods and services made between ZEC entities are exempt from IGIC taxation, as well as imports of goods made by them.

It is important to note that the ZEC is compatible with other tax incentives under the Canary Islands Economic and Tax Regime (REF), such as the Reserve for Investments in the Canary Islands (RIC) and the deduction for new fixed assets (DIC).

What activities are allowed within the framework of the Canary Islands Special Zone?

architecture, design, public relations, marketing, communication, etc.
Audiovisual: Film production, series, animation, IT consulting, web hosting, web portals, etc.
Maritime sector: Repair, assembly, maintenance, transportation, logistics, supplies, recreational boat construction, inspection and control, among others.
Transport, logistics, and distribution: Warehousing, storage, cargo handling, postal activities, etc.
Tourism: Tour operators, travel agencies, reservation and excursion organization services, theme parks, manufacturing of tourist products for hotels and restaurants, maintenance and cleaning of hotel and leisure complexes, private security activities, etc.
ICT (Information and Communication Technologies): Software development, digital services, telecommunications, network providers, GPS location, technological platforms, etc.

Conclusion

The Canary Islands Special Zone (ZEC) offers companies a unique opportunity to legally reduce their tax burden in an environment with high taxes in Spain. This special tax regime allows companies to enjoy a corporate tax rate of 4%, compared to the standard 25% in Spain. However, to benefit from these tax advantages, companies must meet certain requirements, such as operating in specific sectors, having at least one director residing in the Canary Islands, and complying with investment and local employment requirements.

In addition to the tax benefits, the Canary Islands offer an exceptional quality of life with pleasant year-round weather, a wide range of outdoor activities, and a relaxed culture. This has attracted remote workers and digital nomads from around the world to settle in the region.

The diversity of sectors that can take advantage of the benefits of the ZEC, including business services, the audiovisual industry, the maritime sector, transportation, logistics, tourism, and technology, makes the Canary Islands an attractive destination for investors and entrepreneurs.

If you want more information, do not hesitate to contact us here

FAQ

What is the Special Canary Zone (ZEC)? The Special Canary Zone (ZEC) is a specific geographical area in the Canary Islands that enjoys special tax benefits with the aim of promoting investment and economic development in the region.

What are the tax benefits of the ZEC for companies? The ZEC allows companies operating in this area to enjoy a corporate tax rate of 4%, compared to the standard 25% in Spain. Additionally, it offers exemptions in other direct and indirect taxes, such as the Value Added Tax (VAT) and the Tax on Property Transfers and Documented Legal Acts.

What requirements must companies meet to benefit from the 4% corporate tax rate? To obtain ZEC status and pay a 4% corporate tax, a company must meet requirements such as operating in specific sectors, having at least one director residing in the Canary Islands, meeting minimum investment requirements, and employing a minimum number of local employees.

How is the Value Added Tax (VAT) applied in the Canary Islands? Unlike most regions in the European Union that apply a minimum VAT rate of 15%, in the Canary Islands, the VAT rate is 7%, the lowest in the EU. This benefits companies operating in the ZEC and consumers in the region.

Which business sectors can take advantage of the ZEC benefits? The ZEC offers opportunities in various sectors, including business services, audiovisual industry, maritime sector, transportation, logistics, tourism, and technology. Sectors considered “knowledge-intensive activities” or “activities related to priority sectors” can benefit.

What is the minimum investment required to obtain ZEC status? The minimum investment varies depending on the island where the company is established, ranging from 50,000 EUR to 100,000 EUR. The more developed the island, the higher the required investment.

How many local employees must be hired to meet ZEC requirements? Companies operating in the ZEC must employ at least 3 to 5 local employees minimum, depending on the island. Local employees do not necessarily need to be born in the Canary Islands; they just need to physically reside there.

How is the investment calculated in the ZEC? Investment can include various business-related elements, such as the acquisition of properties for business use. The tax authorities in the Canary Islands have specific criteria to determine which investments are eligible.

What additional advantages does the ZEC offer in terms of other direct and indirect taxes? In addition to the reduction in corporate tax and VAT, the ZEC offers exemptions in other taxes such as the Tax on Property Transfers and Documented Legal Acts, as well as benefits in the Non-Resident Income Tax (IRNR).

What makes the Canary Islands attractive to digital nomads and remote workers? The Canary Islands are attractive to digital nomads due to their pleasant climate, exponential growth of remote workers, diversification of tourism, adaptation of the private sector with workspaces, and specialized events. Additionally, the strategic location and access to key markets contribute to their appeal to high-income remote workers.

Don’t forget to visit our Youtube channel for more information.