q What is the Canary Islands Special Zone?

q Who may set up a ZEC Company?

q Where may a ZEC Company be set up?

q What requirements does a ZEC Company have to meet?

q What tax benefits does a ZEC Company enjoy?

q How is a ZEC Company registered?

q What is the ZEC Consortium?

WHAT IS THE CANARY ISLANDS SPECIAL ZONE?

The Canary Islands Special Zone has been created within the Fiscal and Economic Regime of the Canary Islands (REF), for the purpose of encouraging the economic and social development of the Islands and the diversification of their manufacturing and service sectors.

The ZEC has been created initially until 31^st December 2008 and may be extended beyond that date with the authorisation of the European Commission. Companies may register up to 31^st December 2006.

WHO MAY SET UP A ZEC COMPANY?

Any company intending to carry out manufacturing, commercial or service activities within the territory of the Canary Islands. ZEC companies may not offer services of a financial nature.

1. Manufacturing, processing, handling and goods distribution activities:

· Fishing

· Food, beverages and tobacco

· Clothing

· Leather goods and footwear

· Furniture and related products

· Paper, publishing, graphic arts and reproduction of recorded material

· Building materials

· Machinery and mechanical equipment

· Electrical, electronic and optical materials and equipment

· Chemicals

· Recycling

· Wholesale and distributive activities

· Packaging, bottling and canning

2. Service activities

· Transport and related activities

· IT

· Natural resources and waste disposal

· Telecommunications

· Advertising

· R + D

· Education and Training

· Consultancy

· Legal and fiscal services

· Other services

WHERE MAY A ZEC COMPANY BE SET UP?

Service companies may be set up in any part of the territory of the Canary Islands.

Production, processing, handling and distributive activities must be located in certain Designated Areas at:

Ø On the island of Grand Canary

- The Port of La Luz and Las Palmas

- Gando Airport

- The Arinaga Industrial Estate

Ø On the island of Tenerife:

- The Port of Santa Cruz de Tenerife

- Los Rodeos and Reina Sofía Airports

- The Granadilla Industrial Estate

There are Designated Areas on each of the other Canary Islands.

WHAT REQUIREMENTS DOES A ZEC COMPANY HAVE TO MEET?

Any Company wishing to set up in the ZEC must satisfy a number of requirements, of which the most important are:

- A ZEC Company must be newly incorporated.

- At least one of the persons authorised to manage and act on behalf of the Company must be resident in the Canary Islands.

- A ZEC Company must make an investment of at least 100,000 Euros (16,638,600 pesetas) in fixed assets related to the activity within the first two years subsequent to authorisation.

- A ZEC Company must employ at least five persons in the ZEC area within the first six months subsequent to authorisation and must retain this number of employees, on average, throughout its lifetime.

- A ZEC Company must present a description of its activities, with particular mention of its economic viability, international focus, contribution to the economic and social development of the Canary Islands and solvency.

WHAT TAX BENEFITS DOES A ZEC COMPANY ENJOY?

Ø Company Tax (corporate income Tax).

This is the tax payable in Spain on the profits of companies and other legal entities at a rate of 35%, or 30% in the case of small and medium sized companies.

ZEC Entities will pay Company Tax at special lower rates of between 1% and 5% on profits derived from ZEC activities. These rates vary according to:

- Net creation of employment

- The period of inclusion in the Register of ZEC Companies

- Whether the activity is new or pre-existing

- The type of activity

Ø Capital Transfer Tax and Stamp Duty

Indirect taxes on legal operations and capital acquisitions made by companies.

ZEC Companies are exempted from the payment of this tax for the following operations:

- Purchase of goods and rights for the conduct of the business activity of the ZEC Company within the geographical area of the ZEC.

- Company operations except liquidation.

- Stamp duty on documents connected with the Company’s operations in the geographical area of the ZEC.

Ø Canarian Indirect General Tax (Canarian Value Added Tax)

Canarian Indirect general Tax (IGIC) is a tax on added value applicable in the Canary Islands. It is similar to IVA (VAT) payable in Mainland Spain although with important differences such as lower rates.

As a general rule, delivery of goods and provision of services from one ZEC Company to another as well as imports made by ZEC Companies are exempt from Canarian Indirect General Tax.

Ø International Double Taxation Treaties and the EU Parent-Subsidiary Directive

The Canary Islands are an integral part of the territory of Spain and the European Union. ZEC Companies may take advantage of Double Taxation treaties signed by Spain and the EU’s Parent-Subsidiary Directive. ZEC Companies are not obliged to deduct tax from payments for tangible assets made by them.

HOW IS A ZEC COMPANY REGISTERED?

Application, authorisation and registration are the three steps required of companies wishing to set up within the ZEC.

- The application must be presented together with the description of the intended activities.

- The Consortium Board will then decide on the application and will inform the applicant of its decision within the space of two months from the date of presentation.

- The new company must be incorporated by a Notary Public and must be registered on the proper Registers (this may be done prior to authorisation being received).

- Once authorisation has been received, the company must be registered on the Official ZEC Register, which is managed by the Consortium Board.

Fees applicable to ZEC Companies

ZEC Companies are subject to the following fees:

a. Registration fee: 600 Euros

b. Annual fee to remain on the Official ZEC Register 900 Euros