Why Set Up a Business in the Canary Islands?

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Step 1: Understand Your Business Structure Options

Sociedad Limitada (SL) — Limited Liability Company

The SL is the Spanish equivalent of a UK Ltd or German GmbH. It is the standard choice for most foreign entrepreneurs:

• Minimum share capital: €3,006 (must be paid in full at incorporation)
• Directors can be non-residents
• Annual accounts required; bookkeeping mandatory
• Limited liability: shareholders' personal assets protected
• Can have a sole director and sole shareholder (you)
• Corporate tax: 25% standard (4% with ZEC; 15% for first 2 years as a new company without ZEC)

Sociedad Anónima (SA) — Public Limited Company

The SA requires €60,000 minimum capital (25% paid at incorporation). It is appropriate for larger enterprises planning to raise investor capital or list on stock exchanges. Not typical for early-stage startups.

Autónomo (Sole Trader / Self-Employed)

If you relocate to the Canary Islands, you can register as a Spanish self-employed person (autónomo). This avoids the complexity of company incorporation but:

• Personal unlimited liability
• Social security contributions of ~€200-500/month (income-linked system since 2023)
• Cannot access ZEC status
• Suitable for freelancers and sole practitioners operating in Spain

Sucursal (Branch of Foreign Company)

A foreign company (e.g., UK Ltd, US LLC, German GmbH) can open a branch in Spain. The branch is not a separate legal entity — liabilities flow through to the parent. Used when you want to maintain the foreign entity but need a Spanish operational presence.

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Step 2: The ZEC — 4% Corporate Tax in the EU

The Zona Especial Canaria is the primary reason internationally-mobile entrepreneurs choose the Canary Islands over other EU jurisdictions.

What is the ZEC?

Established in 1994 and renewed by the EU, the ZEC is a legally-compliant EU state aid scheme offering:

• 4% corporate tax on qualifying income (vs 25% standard)
• Exemption from IGIC on services (not goods) provided to non-Canary Islands clients
• Reduced withholding taxes on dividends and royalties in certain cases

ZEC Eligibility Requirements

Qualifying Activities

The ZEC covers a broad range of activities particularly suited to digital businesses:

• Software development and IT services
• E-commerce and online retail
• Management consulting
• Financial services and fintech
• Logistics and international trade
• Audiovisual production
• Research and development
• Architecture and engineering services
• Tourism-related businesses

Excluded: certain financial services (banking, insurance underwriting), activities primarily serving the local Canarian market.

ZEC in Practice: A Worked Example

A software consulting company generates €500,000 in profit per year:

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Step 3: The Beckham Law for Expat Directors and Employees

The Beckham Law (Ley Beckham, formally the Régimen especial para trabajadores desplazados) allows qualifying individuals who relocate to Spain for work to pay a flat 24% income tax rate on their Spanish-sourced income (up to €600,000), instead of the standard progressive rates that reach 45-47%.

For a ZEC company founder who moves to the Canary Islands:

• Company pays 4% corporate tax on profits
• If the founder pays themselves a salary as director, Beckham Law applies: flat 24% income tax
• Combined effective tax rate on income extracted from the business can be very low compared to Northern European alternatives

Requirements: must not have been resident in Spain during the 5 years prior to relocation; must have been hired by a Spanish employer or company director.

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Step 4: Incorporating Your Company — The Process

Phase 1: Before Incorporation (2-3 weeks)

1. Obtain your NIE — essential for any contract signing or company registration in Spain. Can be obtained in-person at the Foreigners Office or via a lawyer with power of attorney.

2. Company name clearance — apply to the Spanish Mercantile Registry Central (Registro Mercantil Central) for a certificate confirming your chosen name is available. This takes 3-5 days.

3. Open a bank account — many banks require a physical visit to deposit the share capital. Some online banks (e.g., Banco Sabadell's digital branch) are more flexible for non-residents.

4. Prepare the articles of association — your lawyer drafts the company statutes (object, management structure, share classes, etc.)

Phase 2: Notarial Incorporation (1-2 weeks)

5. Notarial deed — the founding act is signed before a Spanish notary. If you cannot attend in person, a lawyer can sign on your behalf with a power of attorney.

6. Liquidación del ITPAJD — a public company deed must be presented to the tax authority (though companies are generally exempt from this tax, the procedure is mandatory).

7. Inscription in the Mercantile Registry — the notary sends the deed to the Provincial Mercantile Registry. This takes 10-20 days and is when the company becomes legally registered.

Phase 3: Tax Registration (1-2 weeks)

8. Obtain CIF — provisional company tax number (Código de Identificación Fiscal) issued immediately upon notarisation; permanent number after Mercantile Registry inscription.

9. Register for corporate tax (IS) and VAT/IGIC with the Tax Agency (AGENCIA TRIBUTARIA).

10. Register for social security if you are hiring employees.

Phase 4: ZEC Application (2-3 months, after company formation)

11. Apply to the COPECAN (Consorcio de la Zona Especial Canaria) — the body that grants ZEC status. Submit business plan, investment commitments, employment commitment, and documentary evidence.

12. Approval — upon approval, ZEC status is retroactive to the date of application.

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Costs of Setting Up a Company in the Canary Islands

Total setup cost (SL without ZEC): approximately €1,500-3,500 in fees, plus the minimum €3,006 share capital.

Total setup cost (SL with ZEC): approximately €4,000-6,000, with the ZEC benefits typically recovering this within weeks to months for profitable businesses.

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Banking for Foreign Entrepreneurs

Opening a Spanish business bank account is often the most time-consuming step for non-residents:

Large banks (Santander, BBVA, CaixaBank): generally require in-person visit in Spain, identification documents, proof of address (Spanish or foreign), and sometimes a business plan.

Online/challenger options: Some neo-banks and digital business accounts (Wise Business, Revolut Business) can be opened remotely, but may not satisfy Spanish tax agency requirements for a "fiscal account" where payments are received.

Practical advice: open the account at the same time as collecting your NIE. Many bank branches in Las Palmas de Gran Canaria and Santa Cruz de Tenerife have English-speaking staff experienced with international business clients.

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Operational Considerations

Registered Address

Your company must have a registered address in the Canary Islands. Options:

• Your own office or commercial premises
• A co-working space with registered address services (increasingly popular, and acceptable for ZEC)
• A domiciliación service provided by lawyers or gestorías

For ZEC purposes, genuine business activity must be demonstrable — a mere postal address is not sufficient.

Accounting and Bookkeeping

Spanish companies must maintain proper accounts (contabilidad) according to the Spanish General Accounting Plan (PGC). Annual financial statements must be deposited with the Mercantile Registry within 7 months of the financial year end.

For a ZEC company, a local accountant (contable) or gestoría is essential to handle the quarterly tax filings and annual accounts.

Labour Law

If you hire employees in the Canary Islands, Spanish labour law applies — including employment contracts, social security contributions, paid holidays (22 working days per year), and strict redundancy rules. Spain's labour framework is significantly more employee-protective than the UK or the US.

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The Canary Islands vs Other EU Jurisdictions for Company Formation

The ZEC's 4% rate is among the lowest in the EU for a fully-compliant, EU-regulated jurisdiction. Unlike some other low-tax EU structures, ZEC status is backed by clear EU state aid approval and is not subject to the reputational risk of offshore structures.

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Common Mistakes Foreign Entrepreneurs Make

⚠️ Applying for ZEC before the company is incorporated: the ZEC application must be submitted after (or at the time of) company formation.

⚠️ Not maintaining genuine presence: ZEC requires actual business activity in the Canary Islands. A letterbox company with no real operations risks losing ZEC status.

⚠️ Confusing ZEC corporate tax with IGIC: the ZEC rate (4%) applies to corporate income tax. IGIC is the consumption tax (similar to VAT) and operates separately. Inter-island and export of services may be IGIC-exempt.

⚠️ Neglecting the NIE timeline: many entrepreneurs underestimate how long the NIE takes and delay the entire process as a result. Apply for the NIE as the very first step.

⚠️ Mixing personal and company finances: Spanish tax inspections closely examine transactions between shareholders and companies. Clear separation of personal and business accounts is mandatory.

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How ALY Abogados Can Help

Our business and tax law team in Las Palmas de Gran Canaria regularly assists foreign entrepreneurs with the full process:

• NIE application: fast-tracked via power of attorney — you don't need to travel to Spain
• SL incorporation: from name reservation to Mercantile Registry inscription
• ZEC application: business plan preparation, COPECAN submission, ongoing compliance
• Beckham Law application: qualification analysis and submission
• Employment contracts and labour law: setting up your team legally
• Ongoing tax and accounting: coordination with trusted local accountants

We work in English, Spanish and have French-speaking team members. Most of our international business clients never need to travel to Spain to complete the company setup.

Free initial consultation.

📞 +34 633 572 607 | ✉ alyabogados@lazaroamable.com

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Lázaro Héctor Amable Méndez — Lawyer, Bar Association No. 5,231 ICALPA