What is a service producer?
A service producer is a company that provides operational, technical, and administrative support to a production that normally belongs to a third party.
In international productions, ownership of the work usually remains with the foreign production company. The Canary Islands company does not necessarily participate in the exploitation rights of the work, but it can play an essential role in ensuring the project is successfully implemented in the Canary Islands.
Their duties may include:
- Filming coordination.
- Hiring of technical staff.
- Location management.
- Administrative permits.
- Relationship with suppliers.
- Equipment rental.
- Executive production services.
- Budget Control.
- Local expense management.
- Fiscal and documentary support.
This activity can generate its own income for the Canary Islands company and, if structured correctly, can form part of a stable business activity.
The service producer as a ZEC company
A service producer can consider joining the ZEC when it carries out real activity from the Canary Islands and meets the requirements of the regime.
The ZEC allows a reduced rate of 4% to be applied to the Corporate Income Tax on the part of the taxable base derived from operations carried out materially and effectively in the Canary Islands.
In the case of a service producer, this requires analyzing what services are provided from the Canary Islands, what team participates, what expenses are incurred, what contracts are signed, and what income is derived from that activity.
The goal is not to create a formal structure without content, but to consolidate a real audiovisual company, with human and material resources in the archipelago.
If the production company has a local team, effective management in the Canary Islands, recurring activity and the ability to provide audiovisual services to third parties, the ZEC can become a tool for competitiveness.
Tax deduction for foreign productions in the Canary Islands
Foreign productions filmed in the Canary Islands can benefit from enhanced tax incentives if they meet the established requirements. The Spanish Tax Agency indicates that, for foreign productions filmed in the Canary Islands, entities must comply with the general requirements of Article 36.2 of the Corporate Income Tax Law. It also stipulates a 54% deduction on the first million euros of taxable income and a maximum deduction of 36 million euros for tax periods beginning on or after January 1, 2023.
This incentive is one of the main arguments for attracting international productions to the archipelago.
However, for the structure to function correctly, it is essential to define the role of the Canary Islands company, document the expenses incurred, and organize the contractual relationship with the foreign production company.
Difference between production incentives and corporate taxation
At this point it is important to distinguish two levels.
On the one hand, there is the tax incentive linked to foreign production. This incentive is related to eligible expenses and the specific production carried out in the Canary Islands.
On the other hand, there is the taxation of the Canary Islands company that provides services. If that company is registered under the ZEC (Canary Islands Special Zone), it can analyze the application of the reduced rate of 4% on the taxable base derived from operations carried out materially and effectively in the Canary Islands.
Both planes can coexist, but they should not be confused.
The audiovisual tax deduction applies to the project and its specific requirements. The ZEC (Special Economic Zone) applies to the business activity of the authorized entity.
This distinction is essential to avoid incorrect interpretations and to design a solid structure.
Contract with the foreign production company
The contract between the foreign production company and the Canary Islands service production company is one of the most important documents of the operation.
You must clearly define:
- The scope of services.
- Budget.
- Reimbursable expenses.
- The service producer's fees.
- Documentation obligations.
- The responsibility of each party.
- The execution deadlines.
- Ownership of rights.
- The treatment of suppliers.
- The billing method.
An imprecise contract can lead to tax, accounting, and operational problems.
When a ZEC company is also involved, it is advisable that the contractual structure allows identifying which services are provided from the Canary Islands and what income corresponds to that activity.
Expenditures incurred in the Canary Islands
In an international production, the expenses incurred in the Canary Islands are a key element.
These may include hiring technicians, equipment rental, locations, transportation, accommodation, professional services, set construction, post-production, visual effects, or any other expenses related to the project.
The Canary Islands company must have a document control system that allows it to justify expenses, link them to the project, and prove their execution.
Traceability is essential. There must be consistency between contracts, invoices, payments, suppliers, budgets, and certifications.
Own resources of the service producer
In order for a service producer to operate as a ZEC company, it must have its own resources.
This doesn't mean you have to have all the resources in-house. In the audiovisual sector, it's common to work with external suppliers, freelancers, rentals, and specialized equipment.
However, the company must have a real minimum structure that allows it to manage and organize the activity from the Canary Islands.
This may include production staff, administration, coordination, technical management, supplier management, finance team or specialized professionals.
Outsourcing is compatible with real business activity, provided the company has effective organizational and management capacity.
An opportunity to professionalize the Canary Islands audiovisual sector
The ZEC service production company can have a very positive impact on the development of the Canary Islands audiovisual sector.
It allows attracting foreign production, generating local employment, creating relationships with suppliers, improving technical training and consolidating companies with recurring activity.
The Canary Islands not only compete as a filming location. They can also compete as a territory where audiovisual companies with attractive structures, expertise, and tax benefits can establish themselves.
This approach has great commercial potential, because it allows the ZEC to be presented as a tool for building audiovisual industry, not just for applying a reduced rate.
Conclusion
International productions in the Canary Islands offer a significant opportunity for audiovisual companies that act as service producers.
If these companies have real activity, human and material resources, effective management and services provided from the Canary Islands, they can analyze their possible incorporation into the Canary Islands Special Zone.
The combination of audiovisual incentives for foreign productions and ZEC taxation can make the archipelago a highly competitive platform for attracting international projects and consolidating local audiovisual companies.
At Fimax Asesores we advise production service companies, audiovisual companies and international companies that wish to structure productions in the Canary Islands, analyzing the application of audiovisual incentives, production contracts and possible fit within the Canary Islands Special Zone.
