Taxation in the Canary Islands

The Canary Islands are an integral part of Spain; this has been so for more than 500 years, and a huge majority of Canarians have confirmed their status repeatedly over time. The language of the Canaries is Spanish (Castilian), but the accent is more like the Spanish spoken in the Caribbean. The Canaries form an "Autonomous Community" within the Kingdom of Spain. The islands have their own Government, Parliament and Administration, established by the Statute of Autonomy of the Canary Islands. The Canarian fiscal and economic system is different from the general Spanish one, which is in force in the major part of the Mainland. As a part of Spain, the Canaries are also part of the European Union. However, the islands enjoy some exceptions in the fiscal and economic area. The currency in the Canary Islands is the euro, as in Spain. The Parliament of the Canaries is in Santa Cruz de Tenerife; the delegation of the Spanish Government in the Canaries is in Las Palmas de Gran Canaria, with a sub-delegation in Santa Cruz de Tenerife; the Supreme Court of Justice of the Canarie is in Las Palmas de Gran Canaria. The Supreme Court of Justice exercises the judicial power. Appeals against its resolutions are to the Supreme Court and the Constitutional Court of Spain.

The Special Tax Regime (REF)

Although mainland tax regulations apply in the Canaries, companies operating there are also eligible for special tax incentives (the Special Tax Regime or REF). Key features of the REF are as follows:

• VAT is not applied in the Canary Islands; instead there is a specific Sales Tax (IGIC) which has a general rate of 4.5%, an increased tax rate of 12%, a reduced tax rate of 2% and a zero tax rate for certain basic need products and services (eg telecommunications).
• Exemptions from duty on capital increases.
• The use of undistributed profits to reduce the taxable base provided that the amounts concerned are invested within three years in certain qualifying fixed assets or public stock.
• Enhanced tax credits for various types of investment.

The Special Economic Zone (ZEC)

The Canary Islands Special Zone has been created within the fiscal and economic regime of the Canary Islands for the purpose of encouraging the economic and social development of the islands and the diversification of their manufacturing and service sectors. The ZEC was created initially until 31st December 2008 and may be extended beyond that date with the authorisation of the European Commission. Companies may register up to 31st December 2006. In early 2006, the Department of Economic Affairs and Finance of the Canary Islands Government suggested the introduction of improvements to the Canary Islands Economic and Fiscal Regime, including the extension of the time frame of the low tax zone beyond 2008 of 25 years for companies in the service sector and 50 years for companies operating in the industrial sector. In addition, a suggestion has been made for solving the problems related to double taxation on profits. This modification aims to make the ZEC a real stimulus for attracting companies with newly-created economic activity. At present, companies with their head office in mainland Spain are subject to double taxation on profits, which makes it difficult for them to set up in the low tax zone. It remains to be seen whether the Spanish government and the European Commission will agree to the new proposals. Any company intending to carry out manufacturing, commercial or service activities within the territory of the Canary Islands may register in the ZEC; financial services are excluded.