Tax benefits in the Canary Islands

Entities subject to IS with tax domicile in the Canary Islands and those that operate in the Canary Islands through a permanent establishment are exempt when the income is considered to be produced in the Canary Islands:

1. In the form of onerous property transfers (TPO), for the acquisition of investment assets. In the case of intangible assets, the exemption reaches 50% of their value, unless the purchaser is considered a small entity according to the IS.

2. In the form of corporate operations (OS), for the incorporation of companies and for the increase in capital for the portion that is allocated to the acquisition or import of investment goods or to the acquisition or transfer of certain elements of intangible fixed assets. If the capital increase is disbursed with non-monetary contributions, these must also be considered investment assets or be intangible fixed assets.

The capital increase through credit offsetting is not exempt.

For the purposes of general incentives, the following are considered investment assets:

1. The tangible fixed assets acquired or imported as part of an initial investment. Initial investment is understood to be that which has as its object:

   • The creation of an establishment.

   • The expansion of an establishment.

   • The diversification of an establishment's activity for the production of new products.

   • The substantial transformation in the general production process of an establishment.

   Tangible fixed assets must also be considered investment assets.

2. In the case of intangible fixed assets, the exemption applies in relation to the acquisition of the right to use industrial or intellectual property, non-patented knowledge, and administrative concessions which, additionally, must meet the following requirements:

   • To be used exclusively in the establishment that meets the conditions indicated in section a) above, which is only understood to occur when the aforementioned elements are directly and exclusively intended for carrying out operations that are understood to be carried out in the Canary Islands in accordance with the localization rules of IGIC .

   • Be amortizable.

   • Be acquired from third parties under market conditions.

   • Appear in the company's assets.

   In addition to the above requirements, exemptions are subject to compliance with these other requirements:

   • Investment goods must be new, unless the purchaser or importer meets the conditions to be considered a small company.

   • In the incorporation of companies and capital increases, the acquisition or import must take place within a period of 3 months from the date of the granting of the corresponding public deed and be used for the acquisition or import of investment goods or for the acquisition or transfer of intangible fixed assets.

   • Capital goods and intangible fixed assets must be put into operation within 3 months from the date of their acquisition or import.

   • Investment assets and intangible fixed assets must be located or received in the Canary Islands, used therein, assigned to and necessary for the development of the entity's economic activities.

   • Investment goods and intangible fixed assets must remain in operation in the same acquiring, importing or transferring entity for at least 5 years, without being transferred, leased or assigned to third parties for their use. If its useful life is less than that period, this requirement is not considered to be breached when another investment asset is acquired to replace it, which meets the requirements for the application of the exemptions and remains in operation for the time necessary to complete the period.

   • Entities that are engaged in leasing or transferring fixed assets to third parties for their use and obtain income from the economic activity may enjoy the exemption, provided that there is no direct or indirect link with the lessees or transferees of the assets, nor are they financial leasing operations.

   • Only transport elements that are objectively considered to be exclusively used for industrial, commercial, agricultural, clinical or scientific purposes may benefit from exemptions, if their production models or individual vehicles have been approved by the Canary Islands Tax Authority and are not intended to provide transport services to third parties.

   • Entities acquiring or importing investment goods or acquiring or transferring intangible fixed assets must maintain their tax domicile or permanent establishment in the Canary Islands for a period of at least 5 years from the date of the effective start of use or entry into operation of the investment goods or from the acquisition or transfer of the intangible fixed assets. In the case of entities leasing protected housing, the term is 10 years.

The deduction regime for investments in the Canary Islands is the common one of the LIS whose general rules and complementary provisions apply as long as they are not contrary to what is established in this regard in the LIGIC .

The rates applicable to investments made must be 80% higher than those of the common regime, with a minimum differential of 35 percentage points.

The deduction to be applied for investments has a maximum limit of a coefficient, which operates on the net quota of IS , which must always be 80% higher than that established for each modality in the common regime with a minimum differential of 35 percentage points. However, from 7-11-2018, for investments made in La Palma, La Gomera and El Hierro, the limits on the full quota will be 100% higher than those established in general with the minimum differential of 45 percentage points.

The net tax rate is understood to be the result of reducing the total tax rate by the amount of the deductions to avoid internal and international double taxation and bonuses.

When applying the deduction for investments in new fixed assets in the Canary Islands, we must consider the following:

• The moment of calculation of the deduction is that of the tax period in which the investments are made available to the taxpayer.

• The applicable deduction rate is 25% (5 + 20).

• The limit coefficient on the full quota will be 50% (15 + 35). Investments in La Palma, La Gomera and El Hierro for 2019 are 60% (15+45), if they are investments contemplated in Law 2/2016.

• Deductions from previous years pending application are applied with the individual limit established in each case, with a joint limit, for all types of investments, of 70% (35 + 35), which is independent of that corresponding to the deductions of the general regime of the LIS .

Fixed assets used in any of the following categories are eligible for investment deductions:

• Machinery, facilities and tools.

• Information processing equipment.

• Internal and external transport elements, excluding vehicles that may be used by persons directly or indirectly linked to the company.

For the deduction for investments made by permanent establishments in the Canary Islands of entities without tax domicile in the Islands, the limit coefficient is applied independently of the one corresponding to investments under the general regime.

This same criterion is followed with respect to investments made in the Peninsula or the Balearic Islands, through permanent establishments, by entities domiciled in the Canary Islands.

Entities domiciled in the Canary Islands must choose to apply the deduction for investments in new fixed tangible assets or, alternatively, apply the corresponding deduction to the full rate of those established in general in the LIS.

According to article 94 of Law 20/1991, companies and other legal entities subject to Corporate Tax, with tax domicile in the Canary Islands, may benefit from the first financial year closed after 31-12-1991, and in relation to investments made and remaining in the Archipelago, from the deduction regime provided for in article 26 of Law 61/1978, in accordance with the peculiarities established in said article 94.

Furthermore, the Fourth Transitional Provision of Law 19/1994 establishes that:

In the event of the abolition of the General Regime of Deduction for Investments regulated by Law 61/1978, its future application in the Canary Islands, as long as an equivalent replacement system is not established, will continue to be carried out in accordance with the regulations in force at the time of the abolition.

Law 61/1978 was repealed by Law 43/1995, which in turn has been repealed and replaced by TRLIS . Furthermore, this last rule has been repealed by Law 27/2014, of November 27, on Corporate Tax. The latter contains, in Chapter IV of Title VI, a series of deductions for investments also applicable in the Canary Islands with the specialities established in Article 94 of Law 20/1991, to which must also be added the assumption of the deduction for the acquisition of new fixed assets. Although this last deduction was removed from the general regime of Corporate Tax as of the 1997 financial year, in accordance with the aforementioned fourth transitional provision of Law 19/1994, said deduction for fixed assets continues to be applied in the Canary Islands in accordance with the regulations in force for it in 1996, that is, the twelfth Additional Provision of Law 43/1995.

The percentage of the deduction for technological innovation activities carried out in the Canary Islands and which meet the criteria established in section 2 of article 35 of Law 27/2014, of November 27, on Corporate Tax, will be 45%, without the provisions of article 94.1.a) of Law 20/1991, of June 7, amending the tax aspects of the Economic and Fiscal Regime of the Canary Islands, being applicable to it.

With effect for tax periods beginning on or after 7 November 2018, those entities that hire a worker to carry out their activity in the Canary Islands will be entitled to enjoy the tax benefits for job creation established by tax regulations in accordance with the requirements established therein, increasing them by 30 percent. This amendment involves including the application of the deductions for job creation in Article 37 of Law 27/2014, on Corporate Tax, and the non-existent increase of 30 percent on the deductible amounts of both the deductions in Article 37 of Law 27/2014 and those in Article 38 relating to the deduction for job creation for disabled workers in the aforementioned Law 27/2014.

In tax periods starting during 2020, investments in Spanish productions of feature films and short films and audiovisual series of fiction, animation or documentary, made in the Canary Islands, which allow the creation of a physical support prior to their serial industrial production will entitle the producer to a deduction:

1. 54 percent of the first million of the deduction base.

2. 45 percent of the excess amount.

The basis for the deduction will be the total cost of production, as well as the costs of obtaining copies and the advertising and promotion costs borne by the producer up to a limit of 40 percent of the cost of production for both.

At least 50 percent of the deduction base must correspond to expenses incurred in Spanish territory.

For tax periods starting on or after 1 January 2023, the maximum amount of the deduction will be 36 million euros. In the case of audiovisual series , the deduction will be determined per episode and the maximum deduction amount will be 18 million euros.

In the case of a co-production, the amounts indicated in this section will be determined, for each co-producer, based on their respective percentage of participation in the production.

The production costs incurred in each tax period will qualify for this deduction, although it will be applied with effect from the tax period in which production of the work is concluded. Nonetheless, in the case of animations, the deduction will be applied with effect from the tax period in which the certificate of Spanish nationality is obtained.

The basis for assessment will be reduced by the amount of any grants received to finance investments entitling the producer to this deduction.

The amount of this deduction, together with the rest of the aid received, may not exceed 50 percent of the cost of production. However, this limit may be raised in certain cases.

With effect for tax periods beginning on or after 1 January 2020, the amount of the deduction for investments in Spanish productions of feature films and audiovisual series of fiction, animation or documentaries referred to in section 1 of article 36 of Law 27/2014, of 27 November, on Corporate Income Tax, is increased from 5.4 to 12.4 million euros in the case of productions made in the Canary Islands.

Regulations:

Additional Provision 14 Law 19/1994, of July 6, amending the Economic and Fiscal Regime of the Canary Islands as amended by Final Provision 3 of Royal Decree-Law 12/2021, of June 24.

With effect for tax periods beginning on or after 1 January 2020, the amount of the deduction was increased from 5.4 to 12.4 million euros for expenses incurred in the Canary Islands for foreign productions of feature films or audiovisual works referred to in section 2 of article 36 of Law 27/2014. Regarding the minimum amount of expenditure established in section 2 of article 36 of Law 27/2014, in the case of the execution of visual effects or animation services for a foreign production, this is set for expenses incurred in the Canary Islands.

Regulations:

Additional Provision 14 Law 19/1994, of July 6, amending the Economic and Fiscal Regime of the Canary Islands as amended by Final Provision 3 of Royal Decree-Law 12/2021, of June 24.

In tax periods starting during 2020, producers registered in the Administrative Registry of Cinematographic Companies of the Institute of Cinematography and Audiovisual Arts who are in charge of the execution of a foreign production of feature films or audiovisual works, made in the Canary Islands, which allow the creation of a physical medium prior to their serial industrial production will be entitled to a deduction for expenses incurred in Spanish territory:

1. 54 percent of the first million of the deduction base.

2. 45 percent of the excess amount.

The deduction will be applied provided that such expenses are at least 1 million euros. However, for pre-production and post-production expenses for animation and visual effects carried out in Spain, the limit is set at 200,000 euros.

The basis of assessment will include the following expenses made in Spanish territory directly relating to the production:

1. Expenses for creative staff, provided that they have tax residence in Spain or in a member state of the European Economic Area.

2. Expenses deriving from the use of technical industries and other suppliers.

For tax periods starting on or after 1 January 2023, the maximum amount of the deduction will be 36 million euros. In the case of audiovisual series, the deduction will be determined per episode and the maximum deduction amount will be 18 million euros.

The deduction provided for in this section is excluded from the limit referred to in the last paragraph of section 1 of article 39 of this Law. This deduction will not be taken into account for the purpose of the calculation of the aforementioned limit.

The amount of this deduction, together with the rest of the aid received by the contributing company, may not exceed 50 percent of the cost of production.

With effect for tax periods beginning on or after 7 November 2018, the minimum expenditure amount established in section 2 of article 36 of Law 27/2014, in the case of the execution of post-production or animation services for a foreign production, is set at 200,000 euros for expenses incurred in the Canary Islands.

With effect for tax periods beginning on or after 7 November 2018, the minimum amount of the deduction for expenses incurred in the production and exhibition of live performing arts and music shows referred to in section 3 of article 36 of Law 27/2014 is set at 900,000 euros for expenses incurred in the Canary Islands.