Canary Islands Special Zone (ZEC)

Posted on Oct 27, 2024 in Economy

What is the Canary Islands Special Zone (ZEC)?

The Canary Islands Special Zone (ZEC) is a low-taxation regime created under the Canary Islands Economic and Fiscal Regime (REF). Its aim is to promote the economic and social development of the archipelago and diversify its production structure.

The European Commission approved the ZEC in January 2000. Initially, the benefits of the ZEC were valid until December 31, 2019. However, the European Commission extended the authorization in January 2007 (it was initially set to expire in 2008), and the current authorization is valid until December 31, 2026. The approval of the ZEC Registration Officer (ROEZEC) will start on December 31, 2026.

Where Can ZEC Entities Be Established?

The ZEC extends throughout the Canary Islands with certain specifications:

  • Companies providing services can be established anywhere in the Canary Islands.
  • Companies involved in the production, processing, handling, and marketing of goods must be located in designated areas near ports and airports. These areas are distributed as follows:
    • Gran Canaria and Tenerife: 150 hectares each, divided into 5 zones.
    • La Palma: 50 hectares divided into 2 zones.
    • El Hierro, La Gomera, Lanzarote, and Fuerteventura: 25 hectares each with a single authorized area per island.

Requirements for ZEC Entities

Any entity planning to develop industrial, commercial, or service activities listed in Royal Decree Law 2/2000 can be established in the ZEC, provided they meet the following requirements:

  • Be a newly created entity with domicile and effective management in the ZEC geographical area.
  • At least one director must reside in the Canary Islands.
  • Make a minimum investment in fixed assets related to the activity within the first two years of authorization: €100,000 for Tenerife and Gran Canaria, and €50,000 for the other islands.
  • Create at least 5 jobs (in capital islands) or 3 jobs (in non-capital islands) within 6 months of approval and maintain this average throughout the assigned ZEC period.
  • Carry out one of the following activities within the ZEC:

List of Permitted Activities:

Production, Processing, Handling, and Wholesale Distribution of Goods:
  • Fishing
  • Food, beverages, and tobacco
  • Clothing and fur
  • Leather & footwear
  • Paper, publishing, printing, and reproduction of recorded media
  • Chemicals
  • Prefabricated construction
  • Machinery and equipment
  • Electrical and optical equipment
  • Furniture and other manufacturing
  • Recycling
  • Wholesale trade and commission trade
  • Packaging
  • Renewable energy generation
Services:
  • Transportation and support activities
  • Computer
  • Telecommunications
  • Natural resources and waste elimination
  • R&D
  • Training
  • Consulting
  • Advice
  • Advertising
  • Other business activities
  • Audiovisual production

Tax Benefits of the ZEC

1. Corporate Income Tax

Tax advantages: ZEC entities are subject to a reduced corporate income tax rate of 4% (compared to the general rate of 30% for SMEs and 32.5% for others).

This reduced rate applies to a maximum amount of the tax base (profits), which depends on the number of jobs created and the type of activity carried out by the ZEC entity.

2. Capital Transfer Tax and Documented Legal Acts Tax

Tax advantages: ZEC entities are exempt from these taxes in the following cases:

  • Acquisition of property and rights for the development of activity within the ZEC geographical area.
  • Company operations (e.g., incorporation, merger, capital increase) conducted by the ZEC, except for dissolution.
  • Documented legal acts (e.g., notarial or registration) related to transactions carried out by these entities in the ZEC geographical area.

3. Canary Islands General Indirect Tax (IGIC)

Note: The IGIC is the Canary Islands’ indirect tax on final consumption, replacing the EU’s Value Added Tax (VAT). The standard IGIC rate is 5%.

Tax advantages: ZEC entities are exempt from IGIC on the supply of goods and services between themselves and on imports of goods.

4. Other Tax Benefits

  • ZEC entities can benefit from Double Taxation Agreements signed by Spain.
  • ZEC entities are eligible for the EU Parent-Subsidiary Directive (dividends paid by ZEC subsidiaries to parent companies resident in another EU country are exempt from withholding tax).
  • The ZEC Consortium can conclude tax agreements with local authorities to unify and facilitate the payment of municipal taxes.

What is the ZEC Consortium?

The ZEC Consortium is a public body with legal personality and its own assets. It is under the Ministry of Finance and is partnered with the Central Government and the Canary Islands Autonomous Community. Its functions include:

  • Supervising and advising ZEC entities.
  • Promoting and facilitating the services necessary for the proper functioning of the ZEC zone.
  • Managing the Official Register of ZEC (ROEZEC).
  • Its Governing Council authorizes the establishment of entities in the ZEC.