The Canary Islands' special tax regime and what it means for you

Terms used

• IGIC — The IGIC is the Canary Islands' general consumption tax, charged instead of IVA.
• IVA — The IVA is Spain's value-added tax on goods and services, charged on the mainland and Balearic Islands.
• IRPF — The IRPF is Spain's personal income tax.
• ZEC — The ZEC is the Zona Especial Canaria, a low corporate tax regime for eligible companies set up in the Canaries.
• RIC — The RIC is the Reserva para Inversiones en Canarias, a business reserve that reduces taxable profit when invested in the islands.

Key rules

• Who it's for: Most Canary tax advantages, such as ZEC and RIC, are aimed at companies, not individuals.
• Consumption tax: You pay IGIC instead of IVA, and the standard rate is 7%.
• Income tax: Living in the Canaries does not give you a general income tax cut.
• ZEC: The ZEC does not reduce your personal income tax, even if you work for or direct a ZEC company.

The short answer

Most Canary tax advantages are aimed at companies, not at you as an individual. For most residents, the real effects are two: you pay IGIC instead of IVA on purchases, and you may get a few limited income tax deductions.

IGIC instead of IVA

The Canary Islands charge IGIC instead of the mainland's IVA. The standard rate is 7%, against 21% IVA on the mainland. You will see it on receipts, bills and invoices.

Not everything is taxed at 7%. Basic goods such as food, water, books and medicines are at 0%. There is also a 3% reduced rate, a 9.5% increased rate, and a 15% special rate for items like tobacco and certain fuels or vehicles. Some items sit in other bands, for example 5%. Which band an item falls in can change, so check the rate for anything expensive.

Buying a property or a car can also cost less in transfer tax. The rate on resale property transfers is 6.5%.

What you can get as an individual

Canary residents pay income tax (IRPF) under the national rules, with the regional scale. There is no general income tax cut for living in the islands. What exists is narrower:

• A 60% deduction on the tax due on income earned in the Canaries. It mostly helps people with business or freelance activity there. Check with the Canary tax agency whether your income qualifies and what the deduction amount is.
• Regional deductions that change from year to year. They have covered birth or adoption, dependants, housing rent, studies and disability.
• A 99.9% reduction in inheritance and gift tax for close relatives. This is the only one of these breaks that applies to that tax. The islands do not give residents a general exemption from wealth tax, so you should expect to pay it.

What is for companies, not you

• REF is the umbrella name for the Canary economic and tax regime. IGIC and the deductions above come from it.
• ZEC is a regime that taxes eligible company profits at 4%. It does not lower your personal income tax. You can take part as a shareholder, director or employee, but your pay is taxed at ordinary IRPF rates and dividends follow the normal rules. If you are a director, the rule that most directors be Canary residents applies to the board.
• RIC is a reserve that lets companies cut their taxable base by setting profit aside for investment in the islands. Some self-employed people with activity there can use it too, depending on the activity.

If you plan to set up a ZEC company, the timeline below lists the jobs and investment it requires. The questions below cover whether individuals can use the 4% rate and what the 60% deduction covers.

What to do

1. Expect IGIC, not IVA, on everyday spending.
2. If you are an employee or retiree, assume no special income tax regime applies to you beyond the regional deductions.
3. If you are self-employed or run a business, ask a Canary-based tax adviser or the Canary tax agency which deductions and the RIC apply to your activity.

Timeline and deadlines

Setting up a ZEC company

• Set up a company with its registered office and effective management in the Canaries, and file the ZEC authorisation with the ZEC Consortium: before you start trading under the regime

• Create the minimum jobs: 5 in Gran Canaria or Tenerife, 3 on the other islands, and keep that headcount: within six months of authorisation

• Invest the minimum in fixed assets: €100,000, or €50,000 on the smaller islands: within two years of authorisation

Frequently asked questions

Can I get the 4% ZEC tax rate as an individual?

No. The 4% rate is for companies set up in the Canaries, on profits from eligible activities. If you own shares, sit on the board or work for a ZEC company, your own income tax is not reduced.

If I join a ZEC company as a director, do I need to live in the Canaries?

Yes, if you count towards the board. A majority of the directors must be Canary residents. Shareholders and employees do not have this requirement.

What does the 60% deduction on income earned in the Canaries cover?

It reduces the tax on net income you earn in the islands while you are a resident. It is mainly useful if you work or run an activity there. Check the exact amount for your case with the Canary tax agency.

Are all goods taxed at the 7% IGIC rate?

No. Basic items such as food, water, books and medicines have a 0% rate, and some goods have a 3% or higher rate. Tobacco and certain fuels or vehicles are taxed above 7%. Check the rate for the specific item.