EU Agrees To Extend Canary Islands Fiscal Regime

by Ulrika Lomas, for LawAndTax-News.com, Brussels

28 December 2005

The European Commission last week approved the prolongation of the Economic and Fiscal Regime (REF) of the Canary Islands until the end of 2006.

The measure is intended to promote economic activity in the Canary Islands, enabling companies established in an area qualified as a peripheral region to overcome their natural structural handicaps. The aid, with a budget of €270.5 million, provides an incentive to business creation and expansion by supporting productive investments and by contributing to their capitalisation.

Competition Commissioner Neelie Kroes said “This aid measure will significantly contribute to offset the permanent handicaps of the Canary Islands arising from their peripheral geographical location by giving the necessary incentives to facilitate productive investment and economic diversification”.

The purpose of the “Economic and Fiscal Regime of Canarias – Law 19/94” is to facilitate productive investment in companies as well as the diversification of economic activity and the pooling of resources to undertake investment in fixed assets in the Canary Islands, one of the outermost regions of the EU.

The approved measure comprises the following aid mechanisms:

• a fiscal discount on the income derived from the sale of goods in the stockbreeding, fisheries, agricultural and industrial sectors, produced in the Canary Islands;
• a tax reduction for companies on profits generated in their establishments located in the Canary Islands which are assigned to constitute an investment reserve. The amounts assigned to this reserve should be employed for one of the following purposes: acquisition of fixed assets located in the Canary Islands; or subscription of shares or participations in the capital of enterprises that carry out their activities in the Canary Islands, as long as these enterprises make investments in fixed assets.

The Commission has assessed the aid in the light of the current Guidelines on national regional aid and has taken into account that the Canary Islands are fully eligible, under the derogation provided for in Article 87(3)(a) of the EC Treaty, for aid in favour of regions with high unemployment or a low standard of living until 31 December 2006.

Nevertheless, the proposed measures could not be considered as aid for initial investment within the definition of the regional aid guidelines and constitute therefore operating aid, which is in general prohibited under EC Treaty state aid rules. However, Article 299(2) of the EC Treaty recognises the specific permanent handicaps of outermost regions: remoteness, insularity, small size, difficult topography and climate, and economic dependence on a few products. The Commission therefore allows operating aid which is not progressively reduced and restricted in time, provided it is limited to offsetting the additional costs arising in the pursuit of economic activity in these regions.

The Commission’s examination of the Economic and Fiscal Regime (REF) of the Canary Islands showed that the aid is proportionate to the additional costs resulting from these handicaps, and is thus in line with the general objective of furthering the development of the outermost regions.

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