The Canary Island archipelago is made up of seven main islands, of volcanic origin. The islands are off the West African coast, about 1,000 kms. From the Iberian peninsular. Administratively, the Canary Islands are divided into two provinces; Las Palmas, covering Gran Canaria, Lanzarote and Fuerteventura, and Santa Cruz, covering Tenerife, La Palma, La Gomera and El Hierro. The cities of Las Palmas de Gran Canaria and Santa Cruz de Tenerife are both joint capitals of the region.

The strategic location of the Islands means that residents enjoy an enviable quality of life and an outstanding climate, with average annual temperatures that vary between a maximum of 24ºC and a minimum of 15ºC, and a unique natural setting. The rich and varied vegetation and beautiful landscapes are the main attractions that have not only made the Canary Islands the favourite holiday resort of the European Union, but also a luxurious environment for residents of the Islands, as business conditions are perfectly complemented by a broad range of options for leisure and relaxation. Moreover, investments benefit from the Canary Islands' situation as a bridge between Europe, Africa and America, as this facilitates trade and broadens the horizon of traditional destinations for European exports.

The possible opportunity costs that could arise from the island factor and the geographic location of the Canary Islands have traditionally been offset, as we shall now see, with a special Economic and Fiscal Regime (R.E.F. from its initials in Spanish), a special autonomous funding system and a network of regional aid and incentives from all the different authorities.

The Autonomous Community of the Canary Islands was officially created on the 16th of August 1982, when the Statute of Autonomy came into force. Jurisdiction in the areas of health and education services within the region, means that the Canary Islands have a higher level of competence than most regions, putting it on a par with Catalunya, the Basque Country, Galicia, the Community of Valencia, Andalucia and Navarra.

Another factor that must be added to the equation is the fact that, after a continued process of transferring and delegating the responsibilities of the Autonomous Community to the Island Cabildos (island level governments), these two levels of administration between them, now share exclusive responsibility for many areas, including infrastructure such as roads, water and the environment.

Implementing the high level of competence of the Canary Island Autonomous Region is guaranteed by the Autonomous Communities' funding system, of article 151 of the Constitution. In the case of the Canary Islands, financial autonomy is supported by a special tax system and by the fact that the area is considered an Objective 1 region, making it eligible for European Regional Development Funds and for Inter-territorial Compensation Funds at a domestic level.

The Canary Island Government's budget has a noted capacity for generating current savings, enabling it to undertake an active investment policy without causing financial strain. The healthy state of public finances is endorsed by international financial agents. In fact, leading international rating agencies have given the Canary Island Autonomous foreign currency debt the same credit worthiness rating as the Kingdom of Spain (the highest rating obtainable by an Autonomous Community).

The population census for the Canary Island Autonomous Community registers a population of 1,606,549 inhabitants, living in a total area of 7,651 km2. This is, therefore, one of the most densely populated regions of Spain. If we add to this the high, year-round, tourist occupancy rate, one can see that the potential market for companies with offices here is far greater than in other Autonomous Communities. Furthermore, The population is highly concentrated around the main cities of the Islands, especially around the two provincial capitals (Santa Cruz de Tenerife and Las Palmas de Gran Canaria).

Another factor that must be taken into account, along with the high population density of the Islands, is the fact that it is a relatively young population compared with other Autonomous Communities. This is explained by a high birth rate, leading to a high growth rate. Whereas on a national level, the under 30s account for 44.2% of total population, in the Canary Islands they represent 51.1%. The mortality rate is also lower than in the rest of Spain and this, together with the high birth rate generate quality of life indicators that exceed the national average.

Quality of life for residents in the Islands is enhanced by an extensive range of leisure and culture activities and the unbeatable naturconditions to be found in the Canary Islands.

Two main theatres, two auditoriums, two fair and exhibition centres, forty hyper-markets, five casinos, twenty theme parks and thirty two cinemas, eleven of which are multiple cinemas, consolidate an intense culture and entertainment supply. The high number of National Parks and the fact there are two Biosphere Reserves in the Canary Islands, also help to raise quality of living indicators in the Islands.

The Canary Islands can offer the working populace a considerable training potential through the two universities, applied research centres and public sector training programmes, specifically designed to match companies' specific needs. Human resources, therefore, are a factor of production that is expanding rapidly, with a highly qualified work force in the industrial and advanced services sectors, particularly in areas with great future potential such as bio-technology, robotics and telmatics, food and marine technology, environmental management, etc.

A modern infrastructure and communications net offsets the relative distance of the Canary Islands from mainland Europe: seven airports, ten commercial ports and twelve yacht marinas, and four more planned. The Islands also have an extensive road network covering 0.6% of the total surface area of the archipelago, 0.32% above the national average.

The extensive range of transport and communications services are very reasonably priced for users. The REF itself includes a series of complementary measures in the form of specific subsidies that guarantee lower prices for business and private users on:

The economic boom of recent years in the Canary Islands is far greater than the expansion that is occurring in other regions of the European Union, as can be seen from the main macro-economic variables for 1999.

A basic issue is to analyse which sector is driving the growth of the Canary Islands economy. Figures show the source of this wealth and the powerhouse of the Canary Island economy is the services sector and the construction sector.

Geographic and climate factors in the Canary Islands lead to a concentration of the Community's productive structure in the services sector, 75.5% in 1999, in general, and in the tourist sector in particular.

Unlike in other tourist regions of Spain, the sector in the Canary Islands has proved to be highly resistant to the economic crisis and to possible variations in flows of tourists over the year.

The high hotel occupancy rate in the Canary Islands, 20 points above the Spanish occupancy rate, and an average stay that is four days longer than the average tourist stay in the rest of Spain, are the best indicators to confirm the structural nature of tourism in the Canary Islands.

If we add the important role that new information technologies are going to play in the immediate future, to the major development of hotel and leisure services related infrastructure to be found in the Islands, we can see there is a whole range of opportunities for the Canary Islands to support continued economic growth: the Canary Islands give businessmen and professionals the chance to combine the benefits derived from its unrivalled geographic location and an enviable climate and setting, on the one hand, and beneficial cost savings made possible by making the most of new information systems, on the other.

Community funding that flows into the Canary Island Autonomous Community come from Structural Funds and the Cohesion Fund, the E.U.'s main instruments of regional and cohesion policy.

The Canary Islands, classed as an Objective 1 region as per capita income is less than 75% of the E.U. average, enjoys privileged access to Community Structural Funds. The special features of ultra-peripheral regions, which include the Canary Islands, have generated a specific Community initiative for them, REGIS, of which the Canary Islands are currently beneficiaries.

Community Initiatives are specific instruments of the European Union's structural policy that the Commission proposes to Member States, on its own initiative, to provide support for actions that help to solve special problems. Thus, the REGIS Community Initiative, passed in 1992, is intended to enhance the integration of the more remote regions of the European Union, like the Canary Islands. The new REGIS II initiative (1994-1999) moreover, integrates some of the measures of the POSEICAN programme that are eligible for Structural Funds, plus the measures of the remaining Community Initiatives that are implemented in the ultra-peripheral regions of the European Union. In the case of the Canary Islands, these are the measures included in the SME Community Initiative and the URBAN programme actions.

All these actions reflect the importance of European Union interventions in the framework of the Regional Development Programme, making the Canary Islands the Autonomous Community that has received the highest levels of EU funding to reduce internal divergences.

From the XV century to modern times, the Canary Islands have had a different tax and trading system because of the island factor and their remoteness.These historic rights have taken the form of a quasi-free trade regime, within a context of protectionism that has varied in degree from one period to another.

In the mid XIX century, this special status took the form of a free ports system that lasted up until the civil war. Since then, the systems has gradually evolved through interventions leading finally to the Canary Island Economic and Fiscal Regime Act (REF), Law 30/1972, which was passed to establish a range of measures, and with a view to laying the foundations for promoting economic and social development in the Islands.

The need for designing a special fiscal status for the Canary Islands compatible with European regulations in matters of competition and internal markets and the changes that have occurred in the world economic situation in the last twenty years, have meant that the Canary Islands economic and fiscal regime has had to adapt to the demands of the new environment, whilst maintaining its objective of development for the region.

For this reason, the Canary Islands Economic and Fiscal Regime Modification Act (Law 19/1994) was passed. This lays out the fiscal measures of the REF that have a direct effect and regulates the "Special Canary Island Zone", or ZEC as it is known. This is a future instrument for promoting the economic and social development of the Islands.

The question of compatibility between the Canary Islands tax system and European regulations arises because certain direct or indirect aid provided by Member States, or from state funds, may distort or jeopardise free competition, favouring certain companies or products.

All uncertainty in the matter has been dissipated by the European Commission's Opinion of the 16th of December, 1997, that confirms that the fiscal incentives established in the REF are "aid that can be considered compatible with the common market in accordance with the European Union Treaty and the EEC Accord".

The Opinion considers the fiscal incentives included in the REF to be indirect investment and operating aid for companies in the Canary Islands, and states they are justified provided they are subject to the limits established by community regulations and to the conditions laid down in the Opinion itself.

Royal Decree Law 13/1996 of the 26th of January, and Royal Decree Law 7/1998, of the 19th of June, have made all the necessary modifications to adapt REF fiscal incentives to conditions established in the Community Opinion, bringing the REF completely in line with Community regulations.

Recognition of the ultra-peripheral status of the Canary Islands and the need to offset the costs arising from the island factor and remoteness have been gradually taken on board in Spain's Treaty of Accession to the European Community (Protocol II), the REGIS II Community Initiative [in article 299 of the Treaty of Amsterdam], the POSEICAN programme and in all Community Opinions that have been passed since. All of this guarantees the stability of the special fiscal status of the Canary Islands, although it is subject to the conditions and controls of the European Commission, the institution in charge of ensuring compliance with community law.

The Canary Island Investment Reserve, hereinafter RIC, is an instrument aimed at stimulating self- financed investment; i.e. companies that operate in the Canary Islands can finance their own investments.

Contributing to the RIC represents fiscal advantages. For commercial operations carried out in premises located in the Canary Islands, and can be enjoyed by:

The essential prerequisite for benefiting from the RIC, is that the company, regardless of where it has its head offices, maintains a permanent establishment in the Canary Islands. A permanent establishment is understood to mean all the facilities or places of work in which the company continually or usually carries out all or part of its activity, with authority to enter into contract, in name, or on behalf of the non-resident person or entity.

The RIC enables a company to reduce its tax base, for Corporation Tax, by up to 90% of its Undistributed Profits (BND). This is applicable to whatever amount of profits the establishments located in the Canary Islands decides to allocate to the Canary Island Investment Reserve.

The requisites that must be met for an individual or company to fully and effectively enjoy the fiscal benefits of the RIC are as follows:

1. Materialise the reserve.

Sums allotted to the RIC must be invested in one of the following ways:

The following points concerning the enclosed table must, however, be clarified:

 

1. The regulations only expressly prohibit RIC funds from being used for acquiring used fixed assets that have previously received RIC benefits, it does not matter if they have previously benefited from investment deductions.

The fiscal advantages of ploughing profits into the RIC require that funds assigned to it must be used within three years of the date the tax for the year in question is due.

3. Minimum ownership of RIC assets.

The minimum period during which assets acquired with RIC funds must remain in operation depends on the investment option chosen:

The RIC must appear on balance sheets as completely separate account, under a suitable heading. The account may not be used during the compulsory period for keeping RIC assets.

5. Paying for RIC assets

The purchaser of RIC assets may use whatever form of payment he wishes: cash, external financing or leasing, provided that, in the latter case, there is no doubt about exercising the purchase option.

The RIC is compatible with fiscal benefits deriving from specific incentives of the Canary Islands Economic and Fiscal Regime and the General Corporation Tax Regime:

The tax payer will be penalised for infringing the requisites established in the regulations governieligibility for fiscal benefits. The penalty will take the form of adding the exact sum of the amount that does not comply with the regulations to the tax base for the year in which the infringement takes place. The corresponding interest will be charged on taxes payable on said amount.

It is a tax incentive that reduces the amount payable in Corporation Tax, or Income Tax. The aim of this fiscal instrument is to promote productive activity in the Canary Islands.

Everyone who pays Corporation Tax or Income Tax, and who calculates their income using the direct estimation system is eligible for the allowance, provided they comply with the following conditions:

This incentive is a 50% reduction on the total amount of taxes due on the portion of income arising from the sale of tangible goods produced in Canary Islands that meet the aforementioned requisites.

The 50% allowance covers the tax years that start on the 1 st of January 1998 and finalise on the 3 1 st of December 2001. The intensity of the fiscal benefit falls to 40% for the year 2002 and to 30% for the year 2003.

Allowance = 50% x 35% x Income from Sales of Tangible Goods produced in the Canary Islands.

The same allowance is applicable to Income Tax payers that carry out the same activities and under the same conditions required of Corporation Tax payers. The allowance is applied to the total sum of tax payable on the portion of income arising from the aforementioned productive activities.

Allowance = 50% x Average Tax Rate x Income from sales of Tangible goods produced in the Canary Islands.

This instrument is compatible with other fiscal incentives. In particular, any company that benefits from the Tangible Goods Production Allowance is also eligible for the fiscal advantages arising from The Canary Island Investment Reserve, the Estate Tax and Stamp Duty exemptions set out in the REF and the SME exemption for reinvestments.

The Deduction for Investments in Canaries is a fiscal incentive, equivalent in operation to the one that exists in the rest of the country, but with considerable advantages in the intensity of the fiscal benefit.

The special deduction regime for investments in the Canary Islands is applicable to the following people and entities:

The deduction for investments in Canaries is a measure providing fiscal stimulation that operates as an added reduction in the total sum of tax payable after applying the deductions for double taxation and possible allowances, just like the case of the general regime established in the 1995 Corporation Tax Act. In general terms, the amount of the deduction is calculated by applying the legally stipulated percentage deduction for each category of investment to the total sum of investments made.

The Canary Island regime offers considerable advantages over the general one:

There is also an added advantage: the investment deduction in the Canary Islands can be applied to used fixed assets that have previously benefited from the RIC.

Entities that are eligible for the special Canary Island investment deduction regime can also enjoy the following fiscal advantages at the same time:

The Canary Island General Indirect Tax, hereinafter IGIC, is an indirect tax whose purpose is to tax final consumption. It is a substitute for Community VAT in consumer taxation. The mechanics of the tax and its regulations are very similar to VAT, without prejudice to the specificities and peculiarities of the IGIC regime, that respects the consumer tax exemption that is explicitly regulated in the Canary Islands Statute of Autonomy.

The specific territorial scope of IGIC is the area of the Canary Islands, territorial waters out to a limit of 12 nautical miles and all the corresponding air space.

IGIC regulations offer the following additional advantages over the regulations established for Value Added Tax:

The investment incentives set out in article 25 of Law 19/1994, are fiscal advantages in indiretaxation. More specifically, it regulates exemptions from ET and SD in certain conditions, such as founding a company, making a new share issue and for the acquisition of assets or rights.

Companies domiciled in the Canary Islands, or that have a permanent establishment in the Islands, are eligible.

The exemption is applicable to the founding of companies, new share issues to enlarge companies and to the acquisition of assets or rights situated in the Canary Islands, or that can be exercised or have to be fulfilled in the Islands, which are intended to enlarge, modernise or transfer facilities.

Only "company operations" type ET and SD exemption is subject to a time limit and a progressive reduction of the fiscal benefit, as it is considered as company operating aid. Thus, in the case of founding a company, or issuing more share capital to enlarge it, the exemption can be applied to 100% of the portion of the amount of taxes payable that corresponds to capital that is not used for planned investment, up until the 31st of December of the year 2001. In the year 2002, it can be applied to 75% of this sum and it falls to 50% in 2003.

Nonetheless, to be eligible for the exemption, no more than three years can have passed since the above mentioned conditions were met. There is also a minimum period of five years, during which the company in question may not change its tax domicile or transfer its permanent establishment outside of the Canary Islands. Should a company fail to comply with this rule, it must pay the taxes it did not pay under the exemption, with all due interest.

The objective of this register is to enhance the competitivity of shipping companies and ports in the Canary Islands with a set of measures, including a range of tax exemptions and credits available to both companies and ships registered.

The following can register:

Benefits of the economic and fiscal advantages of the Special Shipping and Shipping Company Register will cover crews and the shipping company of all ships providing regular services between the islands, on the one hand, and between the Islands and the rest of Spain on the other, for such time as these are not allowed to enrol in the special Register.

The fiscal advantages of the REB are as follows:

Regulation (EEC) n.1911/91, concerning the application of Community Law in the Canary Islands, and Ruling 91/314/EEC, that establishes the Programme of Specific Options for the Remote and Island nature or the Canary Islands (POSEICAN), represent full application of all common policies in the Islands and their integration in the common customs area, with specific singularities arising from the remoteness and island factor concerned in the Canary Islands.

In customs matters, the position of the Canary Islands can be summed up in the following characteristics:

The Specific Supply Regime (REA) allows the continued import of certain goods that are essential for Canary Island production and consumption, at prices that are similar to those on the international market, by applying a series of economic measures and fiscal advantages:

Finally, a Free Zone in the Canary Islands has been recently approved, with the possibility of actively refining it. Together, these measures provide interesting economic advantages for business operations carried out by companies within the area of influence.

The Free Zone is a fenced area, within which, goods can be stored, processed, and distributed without paying duties or indirect taxes. The objective of establishing Free Zones in Canaries is to promote traditional overseas trading activities.

Companies installed in the Canary Island free zone will also be eligible for REF benefits. Moreover, in 1992, the European Commission granted a series of advantages to certain free zones, including the ones in the Canary Islands, that are not enjoyed by other free zones within the EU.

Apart from greater flexibility for goods entering from third countries, the main advantage is that active refining operations are not subject to economic conditions, that is, there is no economic obligation to explicitly demonstrate the financial possibilities of the operations that are going to be carried out.

Active refining generates value added through productive activities or processing. It means that companies are exonerated from paying entry duty on imported raw materials and components. Furthermore, operations of this kind carried out in free zones frees companies from paying indirect taxes on the value added generated. Only if the goods are later exported to EU common territory, including the Canary Islands, must the finished product pay these taxes, which is not the case if they are exported to a third country.