While the Canary Islands are part of Spain, there are contrasts in the tax treatments and liabilities between regions, particularly where municipal taxes make a significant difference to the combined provincial and federal income tax bands.
Chase Buchanan Private Wealth Management, an expert financial advisory firm specialising in expatriate tax planning, explains how the regimes vary, covering all the essential information prospective residents need to know.
Income Tax Bands Across Spain and the Canary Islands
The first area to clarify is that unlike in the UK, the income tax you pay against your earnings and salary in Spain will depend on where you live. Each autonomous community has the right to levy income tax and deductions in addition to national rates.
Therefore, effective marginal rates can look rather dissimilar. As a comparison, for 2023, rates between Murcia, Andalusia, the Balearics, and the Canary Islands are as follows:
Murcia and Andalusia | Balearic Islands | Canary Islands | |
Lowest tax band | 19% on income up to €12,450 | 19% on income up to €10,000 | 18.5% on income up to €12,450 |
Highest tax band | 47% on income above €300,000 | 49.5% on income above €300,000 | 50.5% on income above €300,000 |
Non-residents living in Spain pay income tax on a separate basis, calculated at 24%, or 19% for expatriate non-tax residents who are citizens of other EU and EEA countries.
Note that other personal tax liabilities relating to dividends, interest earnings or business revenues may also be taxed on rates from 19% up to 23%.
Personal Income Tax in the Canary Islands
Alongside the differences in marginal income tax rates, Canary Islands taxpayers who habitually reside within the islands can apply for regional deductions, adjusted depending on their familial and personal position.
For example, families can apply for deductions which treat their tax obligations as if they had chosen to be taxed as individuals or opt for joint tax contributions.
Canary Islands residents can also apply for a broad range of allowances against their income tax burden, with reductions for:
- Childcare costs
- Single parent families
- Education expenses
- Donations and contributions
- Renting a permanent home
- Large families
- Births or adoptions
- Property investments
Another income tax deduction specific to the Canary Islands allows taxpayers to apply for reductions in income tax where they have gifted cash to children under 35 to buy or renovate their first home.
The Canary Islands Special Zone (ZEC)
In 2000, the Canary Islands introduced the Special Zone, or ZEC, which provides business advantages, incentivising self-employed professionals and business owners to operate their companies within the archipelago.
As remote working has become more commonplace, the islands have also seen an influx of ‘digital nomads’, primarily independent professionals who operate as sole trader businesses.
The ZEC offers a special low tax rate for SMEs, based on 4% corporation tax, compared to 25% across the rest of Spain and an average of 21.3% throughout the EU.
Businesses based in the Canary Islands can also apply for a further series of special tax treatments, including:
- 50% reductions in corporation tax for businesses that produce industrial or agricultural goods.
- Reduced corporation tax for companies investing in the Canary Islands, with revised tax calculated against 90% of the investment made, subject to conditions.
- Tax reductions for fixed asset investments, equivalent to 25% of the value invested, or reserved for investment into fixed assets.
- Corporation tax reductions of between 45% and 75% for businesses involved in research and development and other areas of tech innovation.
Sales taxes are also beneficial, with the Canary Islands General Indirect Tax, or IGIC, applied in place of VAT or sales tax, based on a standard 7% rate: a third of the prevailing 21% VAT rate.
Taxes levied on transport, fuel, alcohol and tobacco products are also applied at a lower rate. Specific services, such as telecoms, are exempt from IGIC.
Non-Spanish residents earning a business income and declaring taxes in the Canary Islands qualify for special tax treatments within the ZEC. However, foreign companies operating in jurisdictions without an information-sharing treaty with Spain are excluded.
Property Taxes in the Canary Islands vs Mainland Spain
Just as income taxes are adjusted based on the municipality, property taxes called Impuesto sobre Bienes Inmuebles deviate across Spain. Taxes are based on a property’s rateable value, depending on whether you own a property in an urban or rural setting.
Most municipal governments apply fixed rates with minimum and maximum thresholds. Across all of Spain, the minimum and maximum property taxes are as follows:
- Urban properties: from 0.4% to 1.1%
- Rural properties: from 0.3% to 0.9%
- Special properties: from 0.4% to 1.3%
Residents with properties in Spain pay an annual charge with an average liability between €200 and €800. The yearly obligation in the Canary Islands is summarised in the below table:
Area | Rural property tax | Urban property tax |
Lanzarote | From 0% to 0.5% | From 0.4% to 0.8% |
Fuerteventura | From 0.3% to 0.5% | From 0.4% to 0.59% |
Gran Canaria | From 0.3% to 0.9% | From 0.4% to 0.68% |
Tenerife | From 0% to 0.9% | From 0.4% to 0.58% |
Defining Your Tax Obligations in Spain
The Canary Islands is often considered a tax haven, primarily due to the lower tax burdens offered to businesses based in the ZEC. However, variances between tax liabilities are common among the Spanish regional governments.
Foreign nationals may find that moving between regions affects:
- Social security
- Property and wealth tax
- Capital gains tax
- Income tax
- Inheritance taxes
The system is segmented, with the state governing some aspects of the tax regime and independent localised governments others. For example, some areas, such as Andalusia and Madrid, offer 100% relief against wealth tax.
Understanding the tax efficiencies available and the best way to manage your income, pensions, savings, business interests, assets, and wealth, therefore, requires local knowledge to ensure you account for the complexities of the tax regime and have a full understanding of your obligations.
Chase Buchanan Wealth Management is an independent wealth management firm with local Spanish offices in Marbella, Javea and Tenerife, providing tailored advice and assistance for expatriates worldwide.
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About Chase Buchanan Private Wealth Management
Chase Buchanan is a highly regulated wealth management company who specialises in providing global finance solutions for those with a global lifestyle. We are global financial advisers, supporting expatriates around the world from our regulated European headquarters, and local offices across Belgium, Canada, Canary Islands, Cyprus, Malta, Portugal, Spain, UK and the USA.
Chase Buchanan Ltd is authorised and regulated by the Cyprus Securities and Exchange Commission with CIF Licence 287/15.
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