The Spanish government announced last week that it is confident that the Special Economic Zone ('Zona Especial Canaria' or 'ZEC') on the Canary Islands will begin operations by June 2000 following recent discussions with the EU.
The Spanish government has been negotiating the conditions for the ZEC with European Commission. One of the main issues discussed was the length of time that the ZEC exemption would apply for. Spain originally wanted the ZEC to last until 2024, but the EU bargained this down to nine years, with the possibility for extension being left open. Spain also lost out on another crucial issue when the EU refused to agree to allow the ZEC to host the financial services industry.
The Canary Islands just qualified for the ZEC under EU state aid rules which allow tax breaks to be given by areas that have a living standard more than 25% below the EU average or exceptionally high unemployment. The Irish economy has already benefited substantially from these EU state aid rules, but will lose its special status from next year, with its special zones being phased out by 2005.
In addition to existing tax-breaks for companies based in the Canary Islands, the ZEC will offer tax breaks to companies that invest a minimum of 100,000 euros in the special zones of the two main Canary Islands. ZEC companies will be subject to Spanish taxes, but will only have to pay 1% in Spanish corporate income tax (compared with the normal rate of 35%). However, Spanish shareholders in ZEC companies will still have pay the standard rate. ZEC companies will receive limited special tax treatment on transfer tax, stamp duty and value-added tax on certain activities within the Canary Islands and ZEC.
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