Canary Island Tax Commentary 2-2014

On December 20, 2014, the Official State Gazette published Royal Decree-Law 15/2014, of December 20, 2014, amending the Canary Islands Economic and Tax Regime (the “REF”), which amends Law 19/94, amending the REF.

Law 19/1994 regulates myriad tax incentives, applicable to both direct and indirect taxes, which are deemed to be state aid in accordance with EU law. Consequently, their application must be brought into line with EU law. The former term of validity of these incentives was until December 31, 2013, in keeping with that of the map of regional state aid approved for Spain for the 2007-2013 period.

Given the delay in the approval of the Guidelines on regional state aid for 2014-2020 and of Commission Regulation (EU) No. 651/2014 of 17 June 2014, declaring certain categories of aid compatible with the internal market in application of articles 107 and 108 of the Treaty, commonly known as the General Block Exemption Regulation, Spain requested an extension of the validity of the incentives to 2014. This extension was granted by the Commission Decision of December 17, 2013.

When the extension expired, the REF legislation had to be amended again for the 2015-2020 period to bring it into line with the changes that arose from the negotiations conducted with the EU authorities. In a very big change of circumstances, as a result of the new approach by the authorities in relation to state aid, the system of notification and subsequent authorization was left behind and replaced with a mechanism for bringing all of the incentives included in the REF into line with the General Block Exemption Regulation.

This royal-decree-law takes the form of a single article that amends several provisions of Law 19/194 on the Canary Islands REF, making myriad changes with an impact on the rules on the Reserve for investments in the Canary Islands and on the Canary Islands Special Zone, in addition to introducing a tax credit for investments in West Africa and for advertising and publicity expenses.

No changes are made, however, to the rules on tax credits for increased investments in the Canary Islands, contained in Law 20/1991, amending the tax aspects of the Canary Islands Economic and Tax Regime, nor in particular to the rules on the tax credit for investments in property, plant and equipment.

Since prior EU authorization is no longer mandatory, the necessary mechanisms have been included to monitor its future compliance with the intensity ceilings and conditions applicable to the aid as contained in the General Block Exemption Regulation. Lastly, the government is given authority to issue, within the scope of its powers, the regulations required to implement the royal decree-law; this will be necessary for many of the aspects contained in the royal decree-law.

In this Commentary, we examine the changes which are introduced by the royal decree-law in the legislation in force until December 31, 2014 and which will apply to fiscal years commencing on or after January 1, 2015.