Economic Zones

Tax-optimization with SEZs in the European Union: The Portugal and Spain cases

Businesses who set up shop in Spain's or Portugal's SEZs can obtain unique tax advantages in the EU.
,  
April 12, 2022
April 12, 2022

Business owners who want to set up a company in the Canary Islands (ZEC zone), Ceuta, or Melilla in Spain, or in the Madeira IBC in Portugal will be welcomed by a number of tax advantages.

In today’s article, Christoph Heuermann, our internationalization partner at Staatenlos and Settee will go over these zones and explore what benefits they provide for companies and investors.

The 4% corporate tax rate in the Canary Islands Special Zone (ZEC)

The Canary Islands are one of the most sought-after destinations for expats in Europe. The climate, nature, local people, and endless possibilities attract a lot of tourists, many of whom dream of living there for at least a season.

What many do not know, however, is that besides being an attractive tourist destination, the archipelago also offers many tax advantages for business owners.

Due to their marginal geographic location, the Canary Islands are an official, EU-recognised tax haven, with corporate tax of barely 4%. Nevertheless, this special tax rate only applies to companies established within the Canary Islands Special Zone (ZEC).

The use of the term “special zone” in this context can be confusing. In reality, this attractive tax status is not limited to a-certain geographic section of the islands, but rather applies to potentially all companies resident in the Canary Islands.

To obtain this status, companies have to fulfil certain requirements, which differ depending on the geographic location of the company.

In short, the ZEC exists to boost the economy of the Canary Islands, an economically and structurally weak region. Because of this, the European Union officially authorises financial stimuli to lend a hand to this marginal territory.

The tax advantages in the Canary Islands have recently been extended to 2026, and it possible that they will still be in force beyond that point.

ZEC companies are completely normal Spanish capital companies (SLs) with a minimum share capital of €3,000. The only difference is in the tax system and the start-up process.

Regular Spanish capital companies pay from 19% to 23% corporate tax (and 15% to 20% during the first two years), depending on their income. Moreover, regular Spanish companies withhold 21% VAT.

Meanwhile, companies in the Canary Islands Special Zone only pay 4% corporate tax up to a certain limit.

Although they are totally subject to EU law, they don’t form part of the VAT intra-community space. Instead of Spanish VAT at 21%, ZEC companies only pay a local variant of value added tax, known as IGICat a rate of 7%.

However, the tax burden on ZEC companies is calculated according to the sum of profits before tax and the number of workers. In other words, the corporate tax rate of 4% only applies up to maximum profits of €1.8 million.

For each new employee recruited who fulfils the requirements (see below), this limit increases by €500,000. Spanish corporate tax at 23% is applied to income that exceeds this limit (not the rest).

Currently, the regulations that used to be in force no longer apply, since these differentiated between the threshold amounts depending on the type of commercial activity and number of workers.

As an example, let us consider a ZEC with 5 employees in Tenerife, which is the minimum number of workers required to benefit from this rule.

The company will only pay 4% tax on profits up to €1.8 million. If profits increase up to €2 million, the remaining €200,000 will be taxed at 23%. Of course, if the company hires a sixth worker, the threshold (which exceeds the minimum requirement by one worker) increases up to €500,000, meaning that the company can enjoy profits up to €2.3 million while the 4% rate still applies.

If the work is divided between 10 employees, 4% tax will be paid on profits up to €4.3 million (1.8+5×0.5=4.3). If profits are €5 million with 10 workers, the company will pay 4% on the €4.3 million and 23% on the remaining €700,000, resulting in a total tax burden of €172,000 + €161,000 = €333,000.

ZEC companies are fully valid Spanish companies, and aren’t classed as shell companies. This means that they can take advantage of various Spanish double taxation agreements and EU directives, such as the community directives that apply to parent companies and subsidiaries, for example. This can be a very attractive option for certain holding structures.

In accordance with Spanish law, subsidiaries generally don’t pay their parent companies tax at source on distributed dividends (with a minimum share of 5% and a year-long retention period), as long as the parent company isn’t based in a tax haven that features on the Spanish blacklist. Even the sale of ZEC companies is not subject to tax in Spain.

In addition, ZEC companies can do business with each other tax-free. They also do not pay import tariffs, transfer tax, or stamp duty.

Requirements for ZEC companies

What may seem like a beneficial structure in theory has several barriers in practice. To obtain ZEC status, companies have to fulfil various requirements.

This is why online entrepreneurs in particular usually prefer to set up companies in European tax havens like Cyprus, Malta, or Bulgaria. In spite of this, and especially for big companies, it can be worth considering the options offered by the Canary Islands.

To be considered ZEC, companies have to fulfil the following requirements:

  • the administration of the company must be carried out in the Canary Islands,
  • at least one of the administrators has to be a resident in the Canary Islands,
  • commercial operations must be carried out from the Canary Islands,
  • an investment of €50,000 (on the smaller islands) or €100,000 (on Gran Canaria and Tenerife) must be made in the first two years,
  • and three (on the smaller islands) to five (on Gran Canaria and Tenerife) job positions must be created within six months.

ZEC companies have several advantages. One is that they almost automatically lend the necessary substance (credibility) to escape CFC rules and be recognised internationally, no matter the shareholder’s country of residence. So even if the shareholders reside in a country with a high tax burden, such as Germany, France, or Italy, they can benefit from tax advantages.

Furthermore, as fully valid Spanish companies, they can capitalise on the positive effects of freedom of establishment within the EU. If the founders are unable or unwilling to take on the management of the company from the island, it is not difficult to find and recruit an administrator in the Canary Islands.

For companies in the services sector, ZEC companies can be established wherever one chooses on the respective islands. In the industrial sector, however, they should preferably be established in pre-defined industrial zones.

This is an attractive option for services companies, because partners or administrators at the company can look for a personal accommodation and use it as a registered office, therefore removing it from the tax burden.

However, the purchase of real estate does not count as investment. The company must invest in real economic activities that can be carried out on the ground. This can mean creating production plants in the industrial sector, dispatching goods for commercial operations, and finding relevant alternatives in the service industry. The essential aspect is that both the managers and the workers really provide their services in the Canary Islands, even if these are then sold online to the rest of the world.

As for the employees, there is no need to depend on the local population in the Canary Islands. In the context of freedom of establishment, it is perfectly acceptable for employees who already work for the company to settle down in the Canary Islands as EU citizens.

Workers from outside can also fulfil the requirements of the minimum number of employees, but they logically also have to settle down in the Canary Islands and pay the corresponding income tax there, as well as contributions to Spanish social security.

VAT in the Canary Islands and the Madeira solution

Although ZEC companies are fully valid Spanish companies, they do not form part of the intra-community VAT space. This has a few advantages, since they only have to pay the local IGIC tax at 7%, meaning that valid invoices can be supplied to private clients in any European country, for example in Germany, without having to withhold German VAT at 19%. Of course, the reverse charge system does not apply (which is why the duty to declare VAT would fall on the buyer, as with sales between EU countries), because the Canary Islands are considered as a third country.

But this also has its disadvantages, since there are certain activities that require intra-community VAT. ZEC companies cannot obtain a normal Spanish VAT number. They therefore either have to specifically respect the provisions that correspond to companies in a third country, or acquire a VAT number in another country through a detour.

If for some reason one urgently needs an intra-community VAT number, it is worth looking beyond the Canary Islands. A few dozen sea miles to the north, another marginal region of the European Union is to be found: the island of Madeira, a Portuguese territory.

Companies in Madeira also have a special tax system authorised by the EU, but unlike the Canary Islands, they officially form part of the intra-community VAT space. This means Madeiran companies pay 5% corporate tax and the official Portuguese VAT rate, which is currently 22% in Madeira.

Madeira companies are a much more beneficial option for online business owners, as they do not necessarily require an in situ administrator. For profits up to 2.6 million euros, the company only has to have one employee contracted in Madeira and make an investment of €75,000. Unlike with ZEC companies in the Canary Islands, the investment does not have to be made in Madeira.

This starting point is made even more attractive by the fact that Madeira is also a free port. This strategically-located island in the Atlantic offers very favourable conditions, especially for import and export businesses.

Madeira could also be an excellent opportunity for large online businesses that are looking for a good reputation outside the classic tax havens. They would only pay 5% corporate tax, the same rate as in Malta.

Instead of being a typical tax haven, viewed with a sceptical eye by the EU, Madeira is a haven that is often overlooked, but still officially authorised by the EU Commission.

Due to the low number of requirements, economic costs, and total protection under the EU, Madeira is also a good option for credible solutions and companies with substance.

Halving the tax burden in the Spanish enclaves of Ceuta and Melilla

But returning to Spain, although this time on the mainland. There are no tax advantages to be found in the Balearic Islands but several hundred kilometres to the south are two cities in Spain that should not be dismissed, at least with respect to taxes.

These are Ceuta and Melilla in North Africa.

Ceuta and Melilla are not recognised as tax havens by almost any government, and in reality, they should not be. Due to their special marginal location, the Spanish government has granted them 50% tax exemption for commercial companies. In other words, if one manages a company in the Spanish enclaves, the person will only pay half of the usual corporate tax.

Whether or not it is worth living in one of these two cities is another question, but it could be an option for those who, for whatever reason, have to be registered in Spain and want to optimise their taxes through special jurisdictions.

These companies only pay half of the corporate tax, at 11.5%. Managers will only pay very little for the housing necessary for registration in Ceuta and Melilla, since both cities are known for being relatively affordable.

These cities could be an especially good option for digital nomads who want to spend long seasons in Spain, while still being able to move around freely. And yes, it is important to visit the African cities once in a while, and not keep property in other places in Spain.

Setting up a company in Ceuta or Melilla could also be an interesting option for business owners who do not live in Spain. Spanish companies in these cities do not count as companies residing in areas with a low tax burden (unlike ZEC companies in the Canary Islands), which makes it considerably easier to access the tax advantages there(and avoid CFC rules).

For this to work for residents in EU countries with a high tax burden (like Germany, for example), the company must be more than a shell company.This means that it has to have an official administrator in Ceuta or Melilla. This will allow a company of this type to be unequivocally recognised in Germany, even if it pays low taxes.

More specifically, the tax burden would be 10% in the first two years and 11.5% in the third year after the company is established. As with the Canary Islands, such companies do not form part of the intra-community VAT space, but pay a local value added tax at a reduced rate, down by 0.5% to 10%.

Moreover, both Ceuta and Melilla are free ports, where the movement of goods can be carried out free of tariffs and taxes. These circumstances also make these enclaves very attractive for importers and exporters. Taxes are reduced by half as long as there is a minimum real asset in Ceuta, i.e., something more than a shell company.

 

We thank Christoph for this overview. If you are interested in learning more about internationalization, you can visit Staatenlos‘ website in English and German here. This article can be found in Portuguese as "As Vantagens das Zonas Especiais de Portugal e Espanha" at our internationalization partner Settee.

Tags
Economic Zones

Tax-optimization with SEZs in the European Union: The Portugal and Spain cases

Businesses who set up shop in Spain's or Portugal's SEZs can obtain unique tax advantages in the EU.
,  
April 12, 2022
April 12, 2022

Business owners who want to set up a company in the Canary Islands (ZEC zone), Ceuta, or Melilla in Spain, or in the Madeira IBC in Portugal will be welcomed by a number of tax advantages.

In today’s article, Christoph Heuermann, our internationalization partner at Staatenlos and Settee will go over these zones and explore what benefits they provide for companies and investors.

The 4% corporate tax rate in the Canary Islands Special Zone (ZEC)

The Canary Islands are one of the most sought-after destinations for expats in Europe. The climate, nature, local people, and endless possibilities attract a lot of tourists, many of whom dream of living there for at least a season.

What many do not know, however, is that besides being an attractive tourist destination, the archipelago also offers many tax advantages for business owners.

Due to their marginal geographic location, the Canary Islands are an official, EU-recognised tax haven, with corporate tax of barely 4%. Nevertheless, this special tax rate only applies to companies established within the Canary Islands Special Zone (ZEC).

The use of the term “special zone” in this context can be confusing. In reality, this attractive tax status is not limited to a-certain geographic section of the islands, but rather applies to potentially all companies resident in the Canary Islands.

To obtain this status, companies have to fulfil certain requirements, which differ depending on the geographic location of the company.

In short, the ZEC exists to boost the economy of the Canary Islands, an economically and structurally weak region. Because of this, the European Union officially authorises financial stimuli to lend a hand to this marginal territory.

The tax advantages in the Canary Islands have recently been extended to 2026, and it possible that they will still be in force beyond that point.

ZEC companies are completely normal Spanish capital companies (SLs) with a minimum share capital of €3,000. The only difference is in the tax system and the start-up process.

Regular Spanish capital companies pay from 19% to 23% corporate tax (and 15% to 20% during the first two years), depending on their income. Moreover, regular Spanish companies withhold 21% VAT.

Meanwhile, companies in the Canary Islands Special Zone only pay 4% corporate tax up to a certain limit.

Although they are totally subject to EU law, they don’t form part of the VAT intra-community space. Instead of Spanish VAT at 21%, ZEC companies only pay a local variant of value added tax, known as IGICat a rate of 7%.

However, the tax burden on ZEC companies is calculated according to the sum of profits before tax and the number of workers. In other words, the corporate tax rate of 4% only applies up to maximum profits of €1.8 million.

For each new employee recruited who fulfils the requirements (see below), this limit increases by €500,000. Spanish corporate tax at 23% is applied to income that exceeds this limit (not the rest).

Currently, the regulations that used to be in force no longer apply, since these differentiated between the threshold amounts depending on the type of commercial activity and number of workers.

As an example, let us consider a ZEC with 5 employees in Tenerife, which is the minimum number of workers required to benefit from this rule.

The company will only pay 4% tax on profits up to €1.8 million. If profits increase up to €2 million, the remaining €200,000 will be taxed at 23%. Of course, if the company hires a sixth worker, the threshold (which exceeds the minimum requirement by one worker) increases up to €500,000, meaning that the company can enjoy profits up to €2.3 million while the 4% rate still applies.

If the work is divided between 10 employees, 4% tax will be paid on profits up to €4.3 million (1.8+5×0.5=4.3). If profits are €5 million with 10 workers, the company will pay 4% on the €4.3 million and 23% on the remaining €700,000, resulting in a total tax burden of €172,000 + €161,000 = €333,000.

ZEC companies are fully valid Spanish companies, and aren’t classed as shell companies. This means that they can take advantage of various Spanish double taxation agreements and EU directives, such as the community directives that apply to parent companies and subsidiaries, for example. This can be a very attractive option for certain holding structures.

In accordance with Spanish law, subsidiaries generally don’t pay their parent companies tax at source on distributed dividends (with a minimum share of 5% and a year-long retention period), as long as the parent company isn’t based in a tax haven that features on the Spanish blacklist. Even the sale of ZEC companies is not subject to tax in Spain.

In addition, ZEC companies can do business with each other tax-free. They also do not pay import tariffs, transfer tax, or stamp duty.

Requirements for ZEC companies

What may seem like a beneficial structure in theory has several barriers in practice. To obtain ZEC status, companies have to fulfil various requirements.

This is why online entrepreneurs in particular usually prefer to set up companies in European tax havens like Cyprus, Malta, or Bulgaria. In spite of this, and especially for big companies, it can be worth considering the options offered by the Canary Islands.

To be considered ZEC, companies have to fulfil the following requirements:

  • the administration of the company must be carried out in the Canary Islands,
  • at least one of the administrators has to be a resident in the Canary Islands,
  • commercial operations must be carried out from the Canary Islands,
  • an investment of €50,000 (on the smaller islands) or €100,000 (on Gran Canaria and Tenerife) must be made in the first two years,
  • and three (on the smaller islands) to five (on Gran Canaria and Tenerife) job positions must be created within six months.

ZEC companies have several advantages. One is that they almost automatically lend the necessary substance (credibility) to escape CFC rules and be recognised internationally, no matter the shareholder’s country of residence. So even if the shareholders reside in a country with a high tax burden, such as Germany, France, or Italy, they can benefit from tax advantages.

Furthermore, as fully valid Spanish companies, they can capitalise on the positive effects of freedom of establishment within the EU. If the founders are unable or unwilling to take on the management of the company from the island, it is not difficult to find and recruit an administrator in the Canary Islands.

For companies in the services sector, ZEC companies can be established wherever one chooses on the respective islands. In the industrial sector, however, they should preferably be established in pre-defined industrial zones.

This is an attractive option for services companies, because partners or administrators at the company can look for a personal accommodation and use it as a registered office, therefore removing it from the tax burden.

However, the purchase of real estate does not count as investment. The company must invest in real economic activities that can be carried out on the ground. This can mean creating production plants in the industrial sector, dispatching goods for commercial operations, and finding relevant alternatives in the service industry. The essential aspect is that both the managers and the workers really provide their services in the Canary Islands, even if these are then sold online to the rest of the world.

As for the employees, there is no need to depend on the local population in the Canary Islands. In the context of freedom of establishment, it is perfectly acceptable for employees who already work for the company to settle down in the Canary Islands as EU citizens.

Workers from outside can also fulfil the requirements of the minimum number of employees, but they logically also have to settle down in the Canary Islands and pay the corresponding income tax there, as well as contributions to Spanish social security.

VAT in the Canary Islands and the Madeira solution

Although ZEC companies are fully valid Spanish companies, they do not form part of the intra-community VAT space. This has a few advantages, since they only have to pay the local IGIC tax at 7%, meaning that valid invoices can be supplied to private clients in any European country, for example in Germany, without having to withhold German VAT at 19%. Of course, the reverse charge system does not apply (which is why the duty to declare VAT would fall on the buyer, as with sales between EU countries), because the Canary Islands are considered as a third country.

But this also has its disadvantages, since there are certain activities that require intra-community VAT. ZEC companies cannot obtain a normal Spanish VAT number. They therefore either have to specifically respect the provisions that correspond to companies in a third country, or acquire a VAT number in another country through a detour.

If for some reason one urgently needs an intra-community VAT number, it is worth looking beyond the Canary Islands. A few dozen sea miles to the north, another marginal region of the European Union is to be found: the island of Madeira, a Portuguese territory.

Companies in Madeira also have a special tax system authorised by the EU, but unlike the Canary Islands, they officially form part of the intra-community VAT space. This means Madeiran companies pay 5% corporate tax and the official Portuguese VAT rate, which is currently 22% in Madeira.

Madeira companies are a much more beneficial option for online business owners, as they do not necessarily require an in situ administrator. For profits up to 2.6 million euros, the company only has to have one employee contracted in Madeira and make an investment of €75,000. Unlike with ZEC companies in the Canary Islands, the investment does not have to be made in Madeira.

This starting point is made even more attractive by the fact that Madeira is also a free port. This strategically-located island in the Atlantic offers very favourable conditions, especially for import and export businesses.

Madeira could also be an excellent opportunity for large online businesses that are looking for a good reputation outside the classic tax havens. They would only pay 5% corporate tax, the same rate as in Malta.

Instead of being a typical tax haven, viewed with a sceptical eye by the EU, Madeira is a haven that is often overlooked, but still officially authorised by the EU Commission.

Due to the low number of requirements, economic costs, and total protection under the EU, Madeira is also a good option for credible solutions and companies with substance.

Halving the tax burden in the Spanish enclaves of Ceuta and Melilla

But returning to Spain, although this time on the mainland. There are no tax advantages to be found in the Balearic Islands but several hundred kilometres to the south are two cities in Spain that should not be dismissed, at least with respect to taxes.

These are Ceuta and Melilla in North Africa.

Ceuta and Melilla are not recognised as tax havens by almost any government, and in reality, they should not be. Due to their special marginal location, the Spanish government has granted them 50% tax exemption for commercial companies. In other words, if one manages a company in the Spanish enclaves, the person will only pay half of the usual corporate tax.

Whether or not it is worth living in one of these two cities is another question, but it could be an option for those who, for whatever reason, have to be registered in Spain and want to optimise their taxes through special jurisdictions.

These companies only pay half of the corporate tax, at 11.5%. Managers will only pay very little for the housing necessary for registration in Ceuta and Melilla, since both cities are known for being relatively affordable.

These cities could be an especially good option for digital nomads who want to spend long seasons in Spain, while still being able to move around freely. And yes, it is important to visit the African cities once in a while, and not keep property in other places in Spain.

Setting up a company in Ceuta or Melilla could also be an interesting option for business owners who do not live in Spain. Spanish companies in these cities do not count as companies residing in areas with a low tax burden (unlike ZEC companies in the Canary Islands), which makes it considerably easier to access the tax advantages there(and avoid CFC rules).

For this to work for residents in EU countries with a high tax burden (like Germany, for example), the company must be more than a shell company.This means that it has to have an official administrator in Ceuta or Melilla. This will allow a company of this type to be unequivocally recognised in Germany, even if it pays low taxes.

More specifically, the tax burden would be 10% in the first two years and 11.5% in the third year after the company is established. As with the Canary Islands, such companies do not form part of the intra-community VAT space, but pay a local value added tax at a reduced rate, down by 0.5% to 10%.

Moreover, both Ceuta and Melilla are free ports, where the movement of goods can be carried out free of tariffs and taxes. These circumstances also make these enclaves very attractive for importers and exporters. Taxes are reduced by half as long as there is a minimum real asset in Ceuta, i.e., something more than a shell company.

 

We thank Christoph for this overview. If you are interested in learning more about internationalization, you can visit Staatenlos‘ website in English and German here. This article can be found in Portuguese as "As Vantagens das Zonas Especiais de Portugal e Espanha" at our internationalization partner Settee.

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