THE CANARY ISLANDS SPECIAL ZONE (ZEC)
by José Carlos G Narbona
In the Canarian Archipelago, a group of islands located in the Atlantic Ocean of the northwest coast of Africa, and at a distance of more than 1,000 kilometres from mainland Europe, Spain offers one of the best low tax jurisdictions of the world: The Canary Islands Special Zone (“Zona Especial Canaria – ZEC”). This is a low taxation regime plan created within the framework of the Canary Islands Economic and Fiscal Regime (REF) with the intention of encouraging the economic and social development of the Canary Islands and the diversification of their productive structure. 
The Canary Islands are integral part of the Spanish territory, and therefore of the European Union. Due to their ultra-peripherical location and in recognition of the special needs arising from this fact, a number of highly favourable exemptions and exceptions in the application of European Community Law have been set up. This has been enforced through the special Economic and Fiscal Regime which has the aim of encouraging the economic and social development of the Islands. 
Based on this framework, The Canary Islands Special Zone was created in 2000, and its  low taxation regime was authorised by the European Commission in January 2000. Following the terms and conditions of such authorization, the Spanish government adapted the aspects related to the ZEC contained in the regulations governing the Canary Islands Economic and Fiscal Regime. This regime was in force until 2008.
By late December 2006, the ZEC Authorities have obtained from the EU Authorities  a prorrogation of the ZEC regime until 2019 in order to optimize this regime, whose main target is to continue attracting capital for investments via the incorporation of new companies in the Canary Islands.
The following issues have been achieved from negotiations:
i.	A prorrogation as exposed at the beginning of this article.
ii.	The creation of coordination protocols between the ZEC and the Canary Free Trade Zone.
iii.	The elimination of the current limits to the activities that benefit from this regime.
iv.	That companies already incorporated out of the ZEC may have the option to incorporate a permanent establishment within the limits of the ZEC. 
v.	The simplification of the Corporate Tax rate.
vi.	The determination of a fixed tax base, 4%.
The ZEC will be in force until 31 December 2019. This period can be even extended subject to the authorization of the European Commission. The registration of companies in the Official ZEC Register (ROEZEC) will end in December 2013, unless otherwise decided by the European Commission.
This advantageous regime can be interesting for those entities wishing to carry out a wide list of activities, listed in the index included in the Royal Decree-Law 2/2000 which develops the regime. 
At present, many national and foreign companies – 401 currently authorised – are developing their business in ZEC territory. However, many entrepreneurs still do not know enough about the benefits foreseen by the ZEC regime: low taxation, excellent facilities, large infrastructures, etc…. Besides, we could not forget that the Canary Islands offer mild year round temperatures and an incomparable atmosphere to set-up a company. On a personal note, sandy beaches, delicious food and friendly people among other things, make the Canary Islands a particularly attractive option. 
Going into the more technical aspects, it must be pointed out that some requirements must be fulfilled in order to qualify for the application of the ZEC tax regime. The most important of these requirements are the following:
•	It must be a newly constituted entity (Limited Liability Company, S.R.L. minimum paid up capital 3,005€ or Corporation, S.A. minimum capital 60,101€ paid up 25%) with its domicile and effective office in the ZEC territory.
•	At least one of its directors must be resident in the territory of the Canary Islands.
•	The new company must make an investment in the territory of the Canary Islands of at least 100,000 € in fixed assets related to the activity within the first two years subsequent to the authorization by the ROEZEC. (Exception: only 50.000€ in the islands, La Palma, La Gomera, El Hierro, Fuerteventura and Lanzarote)
•	The new entity must create at least 5 jobs within six months from the date it receives the authorization to establish itself as a ZEC Entity, and maintain an average of at least 5 jobs during the time it is registered as a ZEC Entity. (Exception: only 3 jobs in La Palma, La Gomera, El Hierro, Fuerteventura and Lanzarote)
•	Its corporate purpose must consist in any of the following activities:
Manufacturing, processing, handling and distribution of goods like fishing; food products, beverages, tobacco; wearing apparel, dressing, leather products; paper products; publishing and printing; chemical products; building industry; manufacture of machinery and equipment; IT; electrical and optical equipment; recycling; wholesale trade and commission trade, aeronautical maintenance, etc.
Services such as transport, computing, telecommunications, natural resources, R&D; education; consultancy and advisory services, advertising, and other business activities.
As previously said, there are certain activities excluded, like finance activities and others.
•	The geographic extension of the ZEC comprehends the whole Canarian territory with the following specifications:
o	Service sector companies may be established anywhere within the Canarian territory.
o	Those companies whose main activity is the production, transformation, handling or commercialization of goods may be established only within certain areas specified for that purpose, close to the air and sea ports of the islands.
These specific areas are located in the proximity of the Canarian ports and airports and they are distributed as follows:
-	Gran Canaria: 150 ha distributed over 5 areas
-	Tenerife: 150 ha distributed over 5 areas
-	La Palma: 50 ha distributed over 2 areas
-	El Hierro, La Gomera, Lanzarote and Fuerteventura have 25 ha each and one authorized area per island. 
As previously mentioned, as the Canary Islands are an integral part of Spain, the companies established within their territory can apply, with no other than the normal limits, the Double Taxation Treaties executed by the Kingdom of Spain with other countries (at present, there are 52 Treaties inforce).
As part of the EU, all European Union regulations are fully applicable to the Canary entities. ZEC companies can also take advantage of the EU Parent Subsidiary Directive, so —provided they fulfil the Directive parameters— the distribution of dividends to parent companies resident in a Member State will be exempt of any withholding tax. Furthermore, and according to the ZEC regime, this exemption will also apply to the profits distributed to non-EU Member States from its ZEC subsidiary, when the profits arise from operations effectively developed within the ZEC territory. 
As for the Spanish general regulations, these exemptions will not apply if the profits have been obtained via a territory considered as tax haven, or if the parent company is located in one of these territories.
CORPORATE INCOME TAX
Concerning the tax benefits of the ZEC company, we must start with the Corporate Income Tax (CIT). Regarding this tax, the ZEC is subject to the general CIT in force in Spain at a reduced rate 4 %  (since January 2007).
It has to be pointed out that the general tax rate of the Corporate Income Tax in Spain is currently 32.5%, or 25% in the case of Small and Medium-sized Enterprises (SME).
The applicable tax rate shall be levied on the taxable amount arising from  operations materially and effectively carried out within the ZEC territory.
Other aspect that must be considered is the tax base for the application of the tax rate established in this peculiar regime. In this case, again, the tax base will vary depending on the number of jobs created by the company, and, this is a new variable, depending on the type of activity. Regarding these two factors, tax bases for the application of special tax rates will be as follows:
MAXIMUM AMOUNTS OF THE TAX BASE AT WHICH ZEC ENTITIES WILL BENEFIT FROM THE SPECIAL TAX RATES
Net creation of employment	Industrial activities	Service activities	Other services	
Between 5 and 8 employees	1,800,000 €	1,500,000 €	1,125,000 €	
Over 8 and up to 12 employees	2,400,000 €	2,000,000 €	1,500,000 €	
Over 12 and up to 20 employees	3,600,000 €	3,000,000 €	2,250,000 €	
Over 20 and up to 50 employees	9,200,000 €	8,000,000 €	6,000,000 €	
Over 50 and up to 100 employees	21,600,000 €	18,000,000 €	13,500,000 €	
Over 100 employees	120,000,000 €	100,000,000 €	75,000,000 €	

These are the main peculiarities regarding the Corporate Income Tax in the ZEC regime, but there are other minor taxes conditioned by this regime:
TRANSFER TAX
The ZEC companies are exempt from this tax – known as ITP (Impuesto sobre Transmisiones Patrimoniales) – in certain operations such as the purchase of goods and rights needed for the development of its activity; corporate transactions and operations, such as incorporation, increase of social capital, and others, except dissolved.
STAMP DUTY
All operations related to the operations carried out by the ZEC company within the ZEC territory are exempt of Stamp Duty.
GENERAL INDIRECT TAX IN THE CANARY ISLANDS (IGIC)
The IGIC is the Canarian Indirect Tax which is levied on the end product,  substituting Value Added Tax applied in the EU. Its nature is similar to that of VAT, although with important differences such as lower tax rates. The general IGIC rate is 5%.
As a general rule, it can be asserted that the ZEC Entities are exempt from IGIC when selling goods and delivering services to other ZEC Entities, as well as when importing goods.

THE ZEC CONSORTIUM AND THE REGISTRATION IN THE OFFICIAL ZEC REGISTER (ROEZEC)
Those investors wishing to set up a ZEC Entity must receive prior authorization from the Consortium Board. The procedure for obtaining such authorization begins when the interested party presents the following documents before the ZEC Consortium:
-	Application for prior authorization to set up a ZEC Entity.
-	Report describing the activity to be carried out.
-	Bank guarantee or documentary proof of payment of the Official ZEC Register (ROEZEC) registration fees. 
The Consortium Board is responsible for deciding on applications and will notify its decision within two months maximum from the date of application.
Once the entity has received prior authorization from the Consortium Board, it may be registered in the Official ZEC Register by presenting the following documents:
-	Application for registration in the ROEZEC.
-	Fiscal Identification Number (CIF).
-	Document certifying the legal constitution of the entity plus a Copia Simple (legal parallel document).
-	Document certifying the registration of the entity in the Registro Mercantil (Mercantile Register). 
ZEC Entities must pay the following fees:
● 	Fee for Registration in the official ZEC Register: 732,51€
● 	Annual fee to remain on the Official ZEC Register: 1.098,76€
The above mentioned Consortium is a joint organism created between the Spanish Government and the Canary Islands Regional Government, and belongs to the Ministry for Economic affairs and Finance.
The main functions of this Consortium are the supervision and control of the ZEC companies, and the ZEC Register, as well as promoting the ZEC.
The ZEC Consortium will manage the procedures necessary for the granting of prior authorization and the subsequent registration in the Official ZEC Register. In addition to its administrative tasks, the ZEC Consortium will make all the necessary resources, both human and material, available to ZEC Entities in order to facilitate the feasibility of their business projects.

OTHER INCENTIVES OF THE CANARY ISLANDS ECONOMIC AND FISCAL REGIME (REF)
There are other tax incentives in the Canary Islands such as their special economic and tax regime and the reserve for investments in the Canary Islands (RIC). This reserve is tax incentive that in certain circumstances implies a reduction on the Corporate Income Tax base up to 90% of the undistributed profits, in case these profits are allocated to a Special —and clearly differentiated— Reserve for Investments (RIC). Because of its complexity, all this should be studied in a different report.
CUSTOMS-FREE ZONES
Customs-Free Zones are enclosed areas for storage, processing and distribution of goods without the application of charges, duties or indirect taxes. 
The Customs-Free Zones in the Canary Islands are the perfect choice for companies wishing to import or export part of their goods, as well as for those directly engaged in international trade. They provide excellent advantages for the import and export of goods and make commercial traffic with the Canary Islands easier. At present, the Gran Canaria Customs-Free Zone is already operating and another is being created on the island of Tenerife. The Customs-Free Zones in the Canary Islands enjoy an advantage that makes them different from other customs-free zones in Europe: inward processing operations are exempt from certain economic conditions.
SPECIAL REGISTER OF SHIPS AND SHIPPING COMPANIES (REB)
This is an incentive whose aim is to improve the competitiveness of Canarian shipping companies and ports by means of tax exemptions and allowances for ships and shipping companies registered in the REB.
Merchant ships carrying out coastal, national and international trade activities, and shipping companies with their effective center of control in the Canary Islands Autonomous Community (or having at least a permanent establishment or legal representative in the Canary Islands) may be registered in the REB.

INVESTMENT STRUCTURING IN PRACTICE
As a practical example, it can be considered the case of an international company, who wants to invest directly in the Canary Islands and/or develop business not only in Spain but also worldwide. In this case, we can consider the use of a parent company located in an advantageous jurisdiction, avoiding always the use of the ones considered as tax havens in Spain. This company will incorporate a Spanish subsidiary and invest in the ZEC with the advantages described above—low tax rates and exemptions in certain taxes, and total exemption of withholding on dividends— and the Canary company could perform several activities —as the development of software, call centres, etc.— and also trading activities —like sale and purchase of goods in different locations—. At this regard, it must be considered the Free Trade Zone of the Canary Islands, and their importance in the international trading.

ZEC Company

Low Tax Jurisdiction
(NO Tax Haven)

Others

EU company

No withholding on dividends

Trading activities, sale and purchase of goods.
Rendering of consultancy services.

This company can perform a wide range of activities, like development of software products, call centers, etc.

4% Corporate Tax

Summarising, we can affirm that, because of its low taxation rates, its wide net of Double Tax Treaties and its location in a EU Member State, the Special Canary Zone is very interesting tool for entrepreneurs looking for a location to establish their business and trading centers, warehouses or factories, or rendering services worldwide.