ZEC Canary Islands — 20 Questions Answered

The ZEC is a special low-tax regime authorised by the European Union exclusively for the Canary Islands, Spain. Companies registered under ZEC pay only 4% corporate income tax instead of Spain's standard 25% — one of the lowest rates in the EU. It was created to promote economic development in the Canary Islands and has been approved and renewed by the European Commission.

Any new company or permanent establishment created in the Canary Islands can apply, regardless of the nationality of its shareholders or directors. Non-EU founders (UK, US, Canada, Australia, etc.) are fully eligible. The key requirements are: (1) minimum investment of €100,000 (Gran Canaria or Tenerife) or €50,000 (other islands), and (2) creation of at least 5 new jobs (or 3 for other islands) within 6 months of registration, maintained as an annual average (art. 31.2 of Law 19/1994).

Yes. The ZEC was authorised by the European Commission as a state aid measure compatible with EU law, given the outermost region status of the Canary Islands. It has been renewed multiple times. Under the rules currently in force, registration of new ZEC entities can be authorised until 31 December 2026, unless that deadline is extended, and the ZEC tax incentives can be enjoyed for the six years after that date (art. 29 of Law 19/1994). It is fully legal and not considered a "tax haven" under OECD or EU standards.

The ZEC covers the activities listed in the annex to Law 19/1994, including: technology and software, wholesale trade, consulting, logistics, telecommunications, audiovisual production, industry and manufacturing. Eligibility depends on the NACE code of the activity, so not every digital or service business qualifies. Excluded activities include financial intermediation, insurance, and certain regulated services. We assess your specific activity during an initial consultation.

No. The 4% rate applies only to the part of the tax base that derives from operations carried out materially and effectively within the ZEC, and that part is capped: €1.8M for entities that meet the minimum job-creation requirement, plus €500,000 for each additional job above that minimum, up to 50 jobs. In all cases, the tax saving compared with the general corporate tax rate cannot exceed 30% of the entity's net turnover (art. 44.6 of Law 19/1994). Profits above the cap are taxed at the corporate tax rate that would otherwise apply (general rate: 25%).

The Canary Islands use IGIC (Impuesto General Indirecto Canario) instead of VAT. The standard IGIC rate is 7% (vs 21% VAT in mainland Spain). For B2B transactions within the EU, the same reverse-charge mechanisms apply. Many ZEC companies can also benefit from IGIC exemptions on certain goods and services, further reducing their tax burden.

Yes. Within the limits set by EU State-aid rules (art. 42.2 of Law 19/1994), ZEC companies can also benefit from: (1) RIC (Reserva para Inversiones en Canarias) — a reduction of the tax base for up to 90% of undistributed profits, provided the reserve is invested within three years of the tax accrual date for the year in which it is set aside (art. 27); (2) the Canary Islands investment deduction, with rates 80% higher than under the general regime and a minimum differential of 20 percentage points (art. 94 of Law 20/1991); (3) exemption from ITPAJD (Transfer Tax and Stamp Duty) on corporate operations such as company formation and on acquisitions of assets used for the ZEC activity (art. 46 of Law 19/1994); (4) IGIC exemption on supplies between ZEC entities and on imports of goods by ZEC entities (art. 47 of Law 19/1994). The RIC and the investment deduction cannot be applied to the same assets (art. 27.12 of Law 19/1994).

Yes. Dividends paid to a parent company resident in another EU Member State are exempt from Spanish withholding tax when the parent holds at least 5% of the subsidiary and has held it for one year, among other conditions (art. 14.1.h of the Non-Resident Income Tax Act). For parent companies resident outside the EU, art. 45 of Law 19/1994 extends that exemption, under equivalent conditions, to dividends paid by a ZEC entity out of operations carried out materially and effectively within the ZEC — except where the parent is resident in, or the income is obtained through, a territory with no effective exchange of tax information. In other cases the general 19% rate on dividends applies (art. 25.1.f of the Non-Resident Income Tax Act), unless a tax treaty between Spain and the shareholder's country provides for a lower one.

ZEC companies are subject to standard Spanish transfer pricing rules, which follow OECD guidelines. Transactions between the ZEC entity and related parties must be at arm's length. This is particularly relevant if you have a parent company or subsidiaries outside Spain. We provide transfer pricing documentation as part of our compliance service.

No. Shareholders do not need to be residents of the Canary Islands or even Spain. However, the company itself must have genuine economic substance in the Canary Islands: its registered office and place of effective management must be there, at least one director must reside in the Canary Islands (art. 31.2 of Law 19/1994), and it must create the required jobs. A purely shell company without real activity does not qualify.

Yes. A ZEC company can be 100% owned by a US LLC, UK Ltd, GmbH, BV, or any other foreign legal entity. The ZEC company is a Spanish S.L. (Sociedad Limitada) — the Spanish equivalent of an LLC — fully owned by whatever structure you choose. We regularly set up ZEC subsidiaries for US, UK, German and Dutch parent companies.

Substance means the ZEC company must genuinely operate from the Canary Islands. In practice, this requires: (1) registered office and place of effective management in the Canary Islands; (2) at least 5 jobs in Gran Canaria or Tenerife, or 3 on the other islands, created within six months of registration and maintained as an annual average; (3) at least one director resident in the Canary Islands; (4) bank accounts and operations managed locally. We help you set up all of this.

No. Employees can be of any nationality. They simply need to have a valid work permit for Spain (if non-EU) and a Spanish Social Security number. EU citizens can work in Spain without a work permit. We can assist with the HR and employment compliance aspects of setting up your team.

There are three stages: (1) prior authorisation from the Governing Board of the ZEC Consortium, granted after a favourable report from its Technical Committee (art. 40.3 of Law 19/1994); (2) incorporation of the company before a notary and filing at the Commercial Registry; (3) registration in the Official Register of ZEC Entities, which must be requested within 18 months of the authorisation and is entered within 10 days once the documents are filed, unless corrections are required (art. 47 of Royal Decree 1758/2007). Timing depends on the Consortium and the Commercial Registry. Bear in mind that, under the rules currently in force, registration of new entities can only be authorised until 31 December 2026, unless that deadline is extended (art. 29 of Law 19/1994). We handle the entire process. You do not need to be physically present — everything can be done with a power of attorney.

For companies on Gran Canaria or Tenerife: €100,000 in fixed assets (equipment, software, leasehold improvements, etc.) within 2 years of ZEC registration. For companies on other islands (Lanzarote, Fuerteventura, La Palma, etc.): €50,000. This investment threshold is verifiable and documented.

ZEC companies must: (1) File annual corporate tax returns; (2) Submit annual accounts to the Commercial Registry; (3) Maintain ZEC registration with the Consorcio ZEC; (4) Prove ongoing compliance with employee and investment requirements; (5) File IGIC quarterly returns. We provide a full annual compliance service so you never miss a deadline.

The ZEC regime applies to newly created entities or new permanent establishments. You cannot convert an existing mainland Spanish company into a ZEC entity. However, you can create a new ZEC subsidiary that takes over operations. We design the optimal migration structure depending on your current setup.

Several options apply depending on your situation, all under Law 14/2013 (Ley de Emprendedores): (1) Entrepreneur residence permit (art. 69): for non-EU nationals starting an innovative business or one of special economic interest for Spain, with a favourable report from ENISA — the permit must be decided within 20 days of the online application (art. 76.1); (2) Digital Nomad Visa (international teleworking, arts. 74 bis to 74 quinquies): for qualified professionals working remotely for companies located outside Spain — in force since 23 December 2022; (3) Intra-company transfer for executives, specialists and trainees (art. 73). The Golden Visa (residence by investment) is no longer an option: Organic Law 1/2025 left articles 63 to 67 of Law 14/2013 without content with effect from 3 April 2025. We advise on the best route for your profile.

Yes. The Canary Islands apply Spain's national Digital Nomad Visa (visado para teletrabajo de carácter internacional), introduced by Law 28/2022 and in force since 23 December 2022 (arts. 74 bis to 74 quinquies of Law 14/2013). It allows qualified non-EU professionals to live in Spain while working remotely for companies located outside Spain. Bear in mind its limits before combining it with a ZEC company: an employee holding this permit may only work for companies located outside Spain, and a self-employed professional may devote no more than 20% of their professional activity to a company located in Spain (art. 74 bis.1).

Yes, though opening a business bank account in Spain as a non-resident requires some preparation. We work with banks that are experienced with ZEC entities and foreign shareholders, including Santander, CaixaBank and BBVA, as well as fintech options like Wise Business and Revolut Business for operational accounts. We guide you through the account opening process.