One of the main tax advantages is the reduced corporate tax rate, which can be as low as 4% within the Special Tax Zone of the Canary Islands (ZEC) and thus well below the general rate of 25% applicable in the rest of Spain. Many companies, especially multinationals, have set up on the islands thanks to this incentive; they take advantage of the reduced taxation while contributing to the local economic development.
But the reduced corporate tax rate is not the only incentive the islands have to offer. There is also the so-called Reserve for Investments in the Canary Islands (RIC), which allows companies to deduct up to 90% of undistributed profits in their tax base if these are used for investments in the islands. This mechanism has been key to the growth of businesses in the Canary Islands, as it substantially reduces the tax burden.
However, the recent implementation of the international 15% minimum rate for large companies poses a challenge for the Canary Islands’ tax strategy. The tax treaty, promoted by the OECD and the G20 aims to prevent multinationals from using extremely favourable tax regimes to reduce their overall tax burden.
The minimum tax rate would affect businesses with a global turnover of more than EUR 750 million, obliging them to tax their earnings with at least 15% in all the territories where they operate. This global agreement stands in contrast to the 4% tax rate of the ZEC and the 90% tax base reduction of the RIC, raising concerns about the loss of tax attractiveness of the Canary Islands for large companies. But this system is still undergoing development, allowing for the possibility that certain incentives might fall outside the scope of the minimum tax rate.
Moreover, the Canary Islands can remain competitive due to other factors. The favourable business environment, the geographical proximity to Africa, the market for qualified labour, and the growing technological innovation sector, enjoying more favourable tax benefits on the islands than in the rest of Spain, are all additional factors, valued by companies when considering setting up in the islands.
Despite the fact that the 15% minimum tax rate changes the global tax landscape, it does not necessarily mean the end of tax incentives in the Canary Island. While large companies may have to adjust their tax planning, the special Tax and Economic Regime on the Canary Islands (REF) will continue to offer important benefits to encourage investment and local development.