Eternity Law International — News — The Canary Islands reduced tax regime

The Canary Islands reduced tax regime

Published:
September 5, 2023

The introduction by the Canary-authorities of a new tax-regime with a corporate rate of 4% has not been noticed by all specialists. However, this decision directly affects the lost revenue of corporations that open their accounts outside this region. This regime in the country was called the Canary Special Zone and this name makes many specialists mistaken because this status is not related to the geographical principle.

Therefore, it is important to understand where such rates apply and who can take advantage of them to get a clear benefit for their business. Let’s try to understand this issue.

Where the reduced tax regime in the Special Canary Zone applies

Today the Canary Islands are considered part of Spain and because of this many companies are confused about how to correctly calculate tax deductions. According to European Union directives and the Tax Treaties signed by the Spanish-authorities, all lawmaking applies to tax assessments in the Canaries, except for the VAT directive.

Accordingly, this corporate rate of 4% applies not only to a certain zone but to all corporations that have been registered in the Canary Islands. This tax regime was approved by the representatives of the EU and is valid until at least 2026. Also in the agreement, there are variations for prolongation of the agreement of the so-called tax heaven on Canary Islands. But it is too early to talk about it.

Prerequisites for obtaining special tax status

To obtain the status of a company that can operate under the reduced tax regime on Canary Islands, the following requirements must be met:

  • have a registered office and salaried employees in the territory of these islands;
  • at least one representative in a management position must reside in the islands;
  • the corps undertakes to carry out economic actions that will be subject to these prerequisites (in case the corporation or its branch violates this rule, the corporate tax rates may not apply);
  • any activity carried out by the company must be carried out through offices located in the territory of the islands;
  • the company may invest within 2 years from the date of establishment in the purchase of real estate, businesses, and other intangible acquisitions for stakes ranging from 50 to 100 thousand euros, and exceeding these amounts deprives the firm of corporate-tax-rates;
  • mandatory employment of 4 employees (if the enrollment is on a small island, then 3 workers) among the local population within six months from the date of enrollment of the legal entity.

If these essentials are met, the company will be able to get good opportunities for company development and not overpay taxes while carrying out its activities.

Why one should strive to obtain this status

First of all, the main incentive for obtaining this status is to pay a lessened tax-rate of 4%. At the same time, it will be applied to the company’s income of up to 1.8 million euros. But at the same time for each supplementary worker who is hired among residents above the minimum requirements for the island, this amount may increase by 0.5 million euros. Accordingly, the more such employees, the greater the savings on tax liabilities.

Another important point is the provision of dividend exemptions for foreign shareholders. According to local law, they are determined from qualifying gains from the parent company. Accordingly, they are not taxed on Spanish territory. But there are exceptions to this rule. Tax will be levied when the parent company is located in an offshore zone or in the territory of countries with which Spain does not cooperate under double taxation treaties. Parent corporations include companies that own at least 5% of the company’s shares during the year.

Also, free capital gains, if it was obtained from the sale of shares in a corp that has a status in the special tax zone of Spain. Likewise, taxes are not applied to interest paid to units or individuals who hold shares.

As you can see, setting up a corporation in the Canary Islands is a very profitable solution and can generate a good income compared to working in other regions.

Who can help in formalizing the company

To create a legal entity in a special Canary zone, you need to go through several important stages. Of course, you can do everything on your own, but the most correct way is to apply to professionals.

Representatives of our company are ready to help you with consultation at all stages of corps enrollment with the collection of the necessary documentation. Thanks to our cooperation, corporations collect the necessary package of documents for registration faster and understand why it is important to work with the Directorate of the Canary Islands.

We will not only help you to collect the necessary documents but also check them to eliminate errors. With our help, companies come to the regulatory authorities with a more qualified set of documents and the likelihood of a quick registration increases many times over. For a consultation, please contact our staff in any convenient way for you.

What is the special-tax-regime in the Canary Islands?

In reducing the payment of the tax rate to 4% and not paying taxes for paying dividends or for receiving income from the sale of shares in a corp enlisted in the CSZ.

Why are the Canary Islands a tax haven?

These rules only apply in the Canary Islands and not throughout the Spanish jurisdiction.

What is the tax-regime in Tenerife?

This island has a corporate-tax-rate of 4%. At the same time, a company can buy real estate or other assets on this island for an amount of up to 100 thousand euros.

What is the income-tax in the Canary Islands?

A rate of 4% applies on income up to 1.8 million euros and an additional 0.5 million euros on the engagement of locals above the min prerequisite for status in the CSZ.

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