Starting a new business is an adventure where it's wise to control all strategic aspects from the outset. One of these is the location of your tax domicile and the tax regime you'll operate under. Registering in the Canary Islands Special Zone can lead to tax savings, potentially increasing the chances of success for your new venture.
The Canary Islands Special Zone (ZEC) offers a very attractive solution for entrepreneurs and businesses, as entities meeting ZEC requirements can access a reduced corporate tax rate of just 4%. If you are interested in setting up a company in the Canary Islands Special Zone and would like to learn about its main benefits, we invite you to continue reading this article.
What is the Canary Islands Special Zone (ZEC)?
This is a low-tax zone applicable to the Canary Islands, designed within the framework of the Canary Islands Economic and Fiscal Regime (REF) . Regulated by Law 19/94, this legislation was created to promote the region's economic and social development, representing an excellent opportunity for those who meet the requirements to access more favorable tax conditions to start their business.
What are the tax advantages of creating your business in the ZEC?
ZEC entities can access significant advantages by virtue of being domiciled in the Canary Islands.
Corporate tax at 4%
As we have mentioned, companies registered in the ZEC only have to pay a reduced corporate tax rate of 4% . This is a permanent advantage, which represents a clear benefit, since the general corporate tax rate in Spain is 25%.
Furthermore, it has recently been determined that the 4% tax will be applied to the profits of wholesale businesses even in triangular operations, that is, in those cases in which the goods do not physically pass through the Canary Islands. The only requirement is that the company's activity is centralized in the Canary Islands.
IGIC exemption for operations with other companies in the ZEC
The IGIC (Canarian Indirect General Tax) is equivalent to the Value Added Tax.
Your company could be exempt from this taxation for sales of goods and provision of services, as long as your clients are also ZEC entities.
Exemption from withholdings in Non-Resident Income Tax
Being part of the Canary Islands Special Zone could allow your SME to be exempt from withholding tax in Spain in some cases:
- The dividends that your company assigned to the ZEC to its parent company, when it is located in another country. For example, if the headquarters of your SME is located in Portugal and you have a branch in the Canary Islands, when you distribute dividends you will be exempt from withholding.
- Interest and income obtained from the transfer of own capital to third parties.
- Capital gains related to real estate that you have obtained without the mediation of a permanent establishment.
Exemption from the Tax on Property Transfers and Documented Legal Acts
Your company in the ZEC zone will be exempt from paying taxes on the ITPAJD in certain cases:
- When it comes to corporate operations carried out by ZEC entities.
- If goods and rights are acquired aimed at enhancing the activity of your entity in the Canary Islands.
- When the legal acts documents are linked to operations carried out within the ZEC area.
Keep in mind that when you sign notarial, commercial or administrative documents, which are essential to create, for example, a Limited Company, the ITPAJD is usually paid. Also if you make a capital increase, purchase and sale of shares or liquidate the company. But if you meet these requirements you will no longer have to pay this tax.
Is being a ZEC company compatible with other tax incentives?
Yes, up to a certain limit, the tax advantages of the ZEC can be combined with other deductions your company is entitled to under the Canary Islands Economic and Fiscal Regime (REF) . This includes the investment deduction, free trade zones, and the Investment Reserve.
What requirements are essential to be a ZEC entity?
Not all companies can access the benefits of being a ZEC entity . You must meet these requirements:
- It must be a newly created branch or entity.
- The domicile and address of the entity must be located in the Special Zone of the Canary Islands.
- There must be at least one administrator who resides in the Canary Islands.
- It is necessary to make a minimum investment of 100.000 euros if the company is located in Tenerife or Gran Canaria, and 50.000 euros in any of the other islands. This investment must be made in fixed assets that are related to the activity and will have to be made in the first two years from when the entity registers in the ZEC. However, an exemption from this requirement can be requested if it is an innovative company, HR-intensive companies, or if it is located in one of the so-called “priority” sectors, which includes technology companies, video games and the audiovisual segment.
- Your company must create at least 5 jobs if you are in Gran Canaria and Tenerife, or 3 jobs if you are on another island. The period you will have will be 6 months after registration in the ZEC. In addition, you must maintain this average number of employees for the entire time that your company is assigned to the Canary Islands Special Zone.
- In the event that they are companies focused on Human Resources-intensive activities or knowledge-intensive activities, if they create 6 for the capital islands or 4 jobs in the rest of the Canary Islands, they will not have to meet the investment requirement.
What happens if I do not meet the requirements to join the ZEC?
In case you do not meet the ZEC requirements, there are still tax benefits that could allow you to create a startup in the Canary Islands with excellent taxation.
In recent years, new opportunities have opened up for entrepreneurs, such as the new Startup Law , which allows startup companies to access adapted taxation of 15% for a maximum of 4 years, compared to the usual 25% taxed in Corporate Income Tax, as well as facilitating and accelerating the opening process.
This regulation offers many advantages for both companies and the self-employed. The Canary Islands have enormous attraction for digital nomads, both for their strategic position and ideal climate and for the possibility of creating a company with excellent tax conditions.
Tax advantages of the Startup Law
The Startup Law, applicable throughout the Spanish territory, including the Canary Islands, provides tax advantages that can be combined with those of the ZEC. This regulation offers very attractive benefits for a company or self-employed person who wishes to establish tax residence in our country, and it is an option that many digital nomads are considering.
These are some of the benefits of the Startup Law:
- Taxation of income in Spanish territory: Startups that prove their tax residence in Spain will only be taxed on income generated in Spanish territory and not on worldwide income. This ensures that you do not have to suffer double taxation on income generated abroad.
- Reduced income tax. Impatriates (people hired abroad who have been assigned to provide service in Spain) will only pay a rate of 24% on income up to 600.000 euros, a figure that clearly benefits foreigners working in Spain, since personal income tax “ “normal” has six sections and the maximum rate taxes incomes of more than 300.000 euros up to 47%.
- Exempt capital gains and real estate capital. If you obtain income from abroad in the form of dividends, sale of shares or capital gains, they will be exempt from tax in Spain.
- Wealth Tax, only on assets in Spain. Although this tax has been withdrawn in numerous countries, the Startup Law allows foreigners established in Spain not to have to pay taxes on their assets abroad. However, it must be taken into account that to date the Solidarity Tax of Great Fortunes is still in force, and that it does apply to individuals with assets of more than 3 million euros, and is calculated on the total of world heritage.
- NIE exemption. Non-resident investors who wish to create a business will not need to obtain the Foreigner Identification Number, they will only need the tax identity number, which they can obtain electronically.
- 100% bonus for multiple activities. For three years, those people who are working for others and at the same time carry out a self-employed activity will be exempt from double contributions to Social Security.
- Benefits for startups: Recently created companies that meet certain requirements will be able to benefit from a tax rate of 15% for 4 years, defer their tax debts during the first two years of activity and obtain a deduction of up to 50.000 euros per year for stock options, which are a of the variable remuneration methods used by many companies.
If you would like us to advise you on setting up a company in the Canary Islands or registering your new business in the Canary Islands Special Zone, we invite you to contact us.
