The Zona Especial Canaria (ZEC) system in the Canary Islands presents a remarkable opportunity for businesses with its highly favorable tax structure.
Located in the Atlantic Ocean and strategically positioned between Europe, Africa, and the Americas, the Canary Islands have established themselves as an international business hub.
With the ZEC status, companies can take advantage of a corporate tax rate of only 4%, making it one of the most attractive tax regimes in Europe.
This tax incentive applies to all types of businesses established throughout the Canary Islands, including both domestic and foreign companies.
To benefit from the ZEC status, companies must meet specific requirements and conditions set by the Spanish government.
Firstly, the company must have its registered office in the Canary Islands. This means establishing a physical presence in the archipelago, whether through a branch, subsidiary, or permanent establishment.
Secondly, the nature of the corporate activities conducted by the company must fall within the approved sectors defined by the ZEC regulations.
These sectors cover a wide range of industries, including manufacturing, services, R&D, logistics, and renewable energy, among others.
In addition to these requirements, companies must fulfill certain investment and employment conditions. The minimum investment for small and medium-sized enterprises (SMEs) is set at €100,000, while for large companies, it is €1 million.
This investment must be made within two years from obtaining the ZEC status. Furthermore, companies must create and maintain a certain level of employment, which varies depending on the sector and size of the company.
The ZEC provides flexibility in determining the number of employees required, considering factors such as the company’s economic activity, technological level, and value-added.
Businesses enjoying the ZEC status can benefit from two primary tax incentives. The first incentive is the application of a reduced corporate tax rate of 4%, which is significantly lower than the standard tax rates in Spain and many other countries.
This advantageous tax rate allows companies to allocate more resources towards growth, innovation, and expanding their operations.
The second tax incentive is linked to the number of additional employees hired beyond the statutory requirements. ZEC companies that exceed the minimum employment thresholds can enjoy further tax benefits. The exact amount of the incentive is calculated based on a formula that considers the size of the company, the sector of activity, and the number of additional employees hired.
This provides an additional incentive for companies to generate employment opportunities and contribute to the local economy.
To gain a comprehensive understanding of how the ZEC status benefits companies in the Canary Islands, let’s explore three examples that illustrate how the tax liabilities are calculated based on the size of the taxable profit and the number of employees.
Example 1: A small-sized technology company with a taxable profit of €200,000 and five additional employees beyond the statutory requirement.
The company would benefit from the 4% corporate tax rate, resulting in a tax liability of €8,000 (4% of €200,000). Additionally, the company would be eligible for the employment-related tax incentives, further reducing its overall tax burden.
Example 2: A medium-sized manufacturing company with a taxable profit of €1 million and 20 additional employees. With the 4% corporate tax rate, the company would have a tax liability of €40,000 (4% of €1 million).
The employment-related tax incentives would provide additional savings, making the ZEC status highly beneficial for the company’s financial performance.
Example 3: A large-scale logistics company with a taxable profit of €10 million and 100 additional employees. With the ZEC status, the company would enjoy the 4% corporate tax rate, resulting in a tax liability of €400,000 (4% of €10 million).
Moreover, the employment-related tax incentives would provide substantial savings, making the ZEC status a lucrative choice for companies operating in the Canary Islands.
In addition to the attractive corporate tax rate, ZEC companies in the Canary Islands can benefit from another significant advantage: outbound dividends paid to foreign shareholders.
When ZEC entities distribute dividends to shareholders located outside of Spain, these dividends are generally not subject to taxation in Spain. This means that foreign shareholders can receive dividends from their investments in ZEC companies without incurring additional tax liabilities.
It is important to note that the tax treatment of outbound dividends may vary depending on the tax regulations of the shareholder’s home country.
Therefore, it is advisable for companies and shareholders to seek professional advice and consider the specific tax implications in their respective jurisdictions.
The Canary Islands offer much more than just beautiful landscapes and a favorable climate. With its Zona Especial Canaria (ZEC) system, the archipelago has established itself as an attractive destination for international businesses seeking a competitive fiscal proposition.
The combination of the 4% corporate tax rate, tax incentives tied to employment, and the tax advantages of outbound dividends make the Canary Islands a strategic choice for companies looking to optimize their tax planning and expand their operations in Spain and beyond.
At Employing In Spain, we are aware of the importance of fiscal optimization for international businesses with employees in Spain. The Zona Especial Canaria (ZEC) system in the Canary Islands offers a highly advantageous tax structure with a corporate tax rate of just 4%.
By qualifying for the ZEC status, companies can unlock numerous tax incentives and benefits, including reduced tax liabilities and favorable treatment of outbound dividends.
If you need assistance with ZEC applications, tax planning, or any other employment-related matters, our team of experts is ready to provide you with comprehensive support.
Contact us today and let us help you navigate the complexities of the ZEC system and ensure your business thrives in the Canary Islands.
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