Tax benefits in the Canary Islands

The Reserve for Investments in the Canary Islands (RIC) is a tax incentive for investment in the Canary Islands that, for companies, operates on the tax base of the tax.

The following taxpayers may benefit from the RIC:

1. Corporate Taxpayers with their tax domicile in the Canary Islands.

2. Corporate Taxpayers who, without having their tax domicile in the Canary Islands, operate in the Canary Islands through a permanent establishment.

3. Entities not resident in Spanish territory, when operating in the Canary Islands through a permanent establishment, for the income obtained through it.

4. Entities whose main activity is the provision of financial services or the provision of services to entities that belong to the same group of companies within the meaning of article 18.2 of the LIS, when they materialize the allocation in any of the initial investments detailed in the Law.

There is no apparent breach of the regime for entities dedicated to the leasing of housing for which an entity has materialized the RIC, nor does the RIC regime, when determining its compatibility, exclude the possibility that its exploitation through leasing may be tax-deductible.

In the Corporate Tax, they are entitled to a reduction in the taxable base for the amount of the contributions they make to the RIC in each tax period. This reduction is limited to 90% of the undistributed profits for the period and corresponding to its establishments located in the Islands.

The profit eligible for the RIC is the one on which the corresponding reduction is applied.

For these purposes, profits from permanent establishments located in the Canary Islands will be considered to be those derived from operations carried out with the material and human resources assigned to them that close a business cycle that determines economic results, as well as those derived from the transfer of assets not assigned to economic activities, provided that, in the latter case, they are tangible fixed assets, real estate investments or intangible assets that have generated income for at least one year within the three years prior to the date of transfer.

The RIC may be allocated by applying the percentage determined by the taxpayer, with a limit of 90% of the profit of the year that is not subject to distribution; The profit referred to in the rule is the commercial or accounting result, a magnitude that is subject to distribution or apportionment by companies, not the taxable base of the tax, which is a different magnitude.

Consequently, once the reserve has been created, a negative extra-accounting adjustment must be made to the accounting result for the purposes of determining the tax base, without the application of this reduction being able to determine that the tax base is negative.

The RIC may be allocated by applying the percentage determined by the taxpayer, with a limit of 90% of the profit of the year that is not subject to distribution; The profit referred to in the rule is the commercial or accounting result, a magnitude that is subject to distribution or apportionment by companies, not the taxable base of the tax, which is a different magnitude.

The allocation to the RIC for a tax period must be made from the portion of profit obtained in said period that is not subject to distribution, as long as it comes from establishments located in the Canary Islands.

Undistributed profits are considered to be those used to feed reserves, except for those of a legal nature.

The following will not be considered undistributed profit:

• That which derives from the transfer of assets whose acquisition would have determined the materialization of the reserve for investments in the Canary Islands.

• That which derives from the securities representing participation in the capital or equity of other entities, as well as the transfer of equity to third parties, except in the case of entities that provide financial services.

For the purposes of calculating split payments, when these are made based on the taxable base of the period, the taxable base may be reduced by the amount expected to be allocated to the reserve, prorated in each of the periods of the first 3, 9 or 11 months of the tax period, with a maximum limit of 90% of the taxable base of each of them. However, if the reserve actually allocated is more than 20% lower than the amount of the reduction made when calculating the annual fractional payments, the entity is obliged to adjust these payments for the difference between the initial provision and the actual allocation.

The amounts allocated to the RIC must be materialized in:

• Initial investments that may consist of:

  • the acquisition of new tangible or intangible fixed assets.

  • the creation of jobs.

  • the subscription of shares or interests.

• Investments for the continuation of the following activities:

  • fixed asset assets.

  • environmental Protection.

  • research and development.

  • Canary Islands Special Zone.

  • job creation.

  • public debt.

  • titles of public bodies.

  • construction or operation of infrastructure.

The investment of the amounts allocated to the RIC must be made within a period of 3 years, counted from the date of accrual of the tax corresponding to the year in which the reserve was provided. This could involve a period of almost 4 years: the one in which the RIC is endowed and the taxable base is reduced and the three subsequent ones. The investment is deemed to have been made when the assets come into operation, even when they are financed through financial leasing contracts.

Assets considered initial investments must remain in operation in the company for a minimum period of 5 years, without being transferred, leased or assigned to third parties for their use. With effect from 11-7-2018, when its permanence (previously, useful life) is less, another asset must be acquired to replace it at its net book value previously or, within 6 months of its removal from the balance sheet, which meets the requirements RIC and which remains in operation for the time necessary to complete the 5 years.

If land is acquired, the term is 10 years.

The RIC must appear on the company's balance sheets in a completely separate and appropriate manner, and cannot be used as long as the assets in which it was materialized must remain in the company.

The formal requirements or obligations that are specifically established for the RIC are:

1. The RIC must appear on the balance sheets in a completely separate manner and under an appropriate title.

2. Until the investment maintenance period is met, include in the annual accounts report the information relating to the investment listed in article 27, section 13.

The RIC benefit is incompatible, for the same assets and expenses, with the deductions to encourage the performance of certain activities and with the deduction for investments.

With effect from 7-11-2018, in the case of used assets and land, these cannot have previously benefited from the RIC, for provisions that would have been made with profits from tax periods beginning on or after 1-1-2007, nor from the deductions to encourage the performance of certain activities or the deduction for investments.

With effect from 7-11-2018, investments in used assets that have only partially benefited from the RIC in the corresponding proportional part are considered eligible.

Failure to comply with any of the requirements for benefiting from the regime entails the inclusion in the tax base of the year in which the breach occurs of the amounts that reduced the base at the time, with the liquidation of late payment interest and the imposition of any applicable penalties.