Wealth Tax in the Canary Islands: rates without a general rebate and the ZEC factor

Wealth Tax in the Canary Islands: particularities of the Régimen Económico y Fiscal

The Canary Islands occupy a distinctive position within the Spanish tax landscape. The archipelago benefits from a special Régimen Económico y Fiscal (REF), recognised in the Constitution and the Statute of Autonomy, which justifies differentiated tax treatment across multiple levies. However, the Wealth Tax in the Canary Islands does not carry the full rebate enjoyed in Madrid and Andalusia: the Comunidad Autónoma de Canarias applies its own scale without a general rebate, which means that island residents pay the Wealth Tax each year.

The Canary Islands Wealth Tax rates range from 0.24% at the lowest brackets to 2.50% for the highest estates. Although these rates are more moderate than those of the Balearic Islands (maximum 3.45%), they are significantly higher than those of Madrid and Andalusia (effective 0%). For a resident in Las Palmas de Gran Canaria or Santa Cruz de Tenerife with a net estate of €2 million, the annual Wealth Tax quota may be between €15,000 and €25,000.

This Wealth Tax burden must be assessed in the context of the overall Canary Islands tax system, which offers substantial advantages in other areas: the IGIC (Impuesto General Indirecto Canario) at a general rate of 7% versus the mainland 21% VAT; the Zona Especial Canaria (ZEC) at a 4% corporate tax rate for qualifying activities; the Reservas para Inversiones en Canarias (RIC), which allow income tax deferral for individual entrepreneurs; and an Inheritance Tax that offers a 99.9% rebate for Groups I and II.

The Canary Islands Wealth Tax scale: structure and quotas

The Canary Islands Government has approved its own Wealth Tax scale that applies to the taxable base (taxable estate minus the €700,000 exempt minimum). The brackets and rates currently applicable to Canary Islands residents are as follows:

The Canary Islands scale is moderate compared to the Balearic Islands (maximum 3.45%) and Catalonia (2.75%), but materially higher than Madrid and Andalusia (0%). For residents with estates between €700,000 and €3 million, the difference between residing in the Canary Islands and in Madrid represents several thousand euros per year in Wealth Tax.

Current Canary Islands Wealth Tax rules are published by the Canary Islands Treasury at gobiernodecanarias.org/tributos.

The Zona Especial Canaria (ZEC) and the Wealth Tax: the wealth connection

The ZEC is one of the most distinctive instruments in the Spanish tax system. Created in 1994 to promote the economic development of the archipelago, the ZEC allows entities registered in it to pay corporate income tax at a reduced rate of 4% (versus the general 25%) on profits derived from qualifying activities carried out in the Canary Islands or with economic effects in the archipelago.

The ZEC applies to legal entities (companies), not directly to individuals and their Wealth Tax. However, the connection between the two is significant for Canarian entrepreneurs:

Family business exemption on ZEC entity shareholdings. If a Canarian entrepreneur holds shareholdings in a ZEC-registered company that carries out genuine economic activity and meets the requirements of article 4 of the Ley del IP (minimum 5%/20% shareholding, remunerated management representing more than 50% of income), those shareholdings may be exempt from the personal Wealth Tax. The valuation of those shareholdings, which can be substantial where the ZEC entity is profitable, would be excluded from the Wealth Tax base.

ZEC family company as a wealth planning instrument. Structuring business activity through a ZEC entity, in addition to the corporate tax advantages, can contribute to Wealth Tax planning if the entity meets the family business exemption requirements. This dual advantage (4% corporate tax plus Wealth Tax exemption on the shareholdings) is one of the most compelling arguments for establishing ZEC entities by Canarian entrepreneurs with significant wealth.

The ZEC has restrictions on qualifying activities and minimum employment and capital requirements, which must be assessed on a case-by-case basis. BMC has experience in incorporating and managing ZEC entities and in planning both the Wealth Tax and corporate income tax within the REF framework.

The Reservas para Inversiones en Canarias (RIC) as a savings instrument

The RIC (Reservas para Inversiones en Canarias) is a REF instrument that allows individual entrepreneurs and entities resident in the Canary Islands to reduce their income tax base (for individuals with business income) or their corporate tax base (for companies) by setting aside a reserve designated for investment in the archipelago within the following five years.

For individuals with business activity in the Canary Islands, the RIC can reduce the income taxable base by up to 90% of the net positive income from the activity. Since the Wealth Tax exempt minimum is €700,000 and the Wealth Tax base includes the taxpayer’s total estate, using the RIC to reduce income tax results does not directly modify the Wealth Tax base. However, the RIC can finance investments in assets that, if structured through a company meeting the family business exemption requirements, may become exempt from the personal Wealth Tax. The coordination between the RIC, the corporate structure and the Wealth Tax family business exemption is an area of integrated fiscal planning that BMC develops for its entrepreneur clients in the Canary Islands.

The Canary Islands Inheritance Tax: one of the most generous rebates in Spain

While the Canary Islands Wealth Tax does not carry the full rebate available in Madrid and Andalusia, the Canary Islands Inheritance Tax offers one of the most generous rebates in Spain. The Canary Islands apply a 99.9% rebate on the full Inheritance Tax (Impuesto de Sucesiones y Donaciones) for heirs in Group I (descendants under 21) and Group II (descendants aged 21 or over, spouse, ascendants). This makes hereditary transfers between parents and children or between spouses virtually free of tax in the Canary Islands.

This combination, a Wealth Tax with a real quota but a near-zero Inheritance Tax, has important implications for wealth planning in the archipelago. For Canarian entrepreneurs with a family business and significant wealth, the annual Wealth Tax is the dominant wealth levy, but the intergenerational transfer of the business can be accomplished without relevant tax cost thanks to the 99.9% Inheritance Tax rebate.

The comparison with other regions is instructive: in Catalonia or the Balearic Islands, the Inheritance Tax can represent a meaningful burden even in the direct line (Catalonia offers a 25% rebate for children over 21, compared to the 99.9% in the Canary Islands). For family groups that weigh both the annual Wealth Tax and the succession cost, the Canary Islands present a more balanced profile than the Balearic Islands (high Wealth Tax, reasonable Inheritance Tax) or Catalonia (high Wealth Tax, significant Inheritance Tax).

Canary Islands property market peculiarities and the Wealth Tax

The Canary Islands property market has distinctive features that affect Wealth Tax planning. Prices in tourist municipalities on the islands (Maspalomas, Puerto del Carmen, Costa Adeje, Los Cristianos) have experienced significant appreciation in recent years, driven by international demand for second homes and primary residences from Germany, the United Kingdom, the Scandinavian countries and other European nationalities.

For property owners in the Canary Islands, the Wealth Tax valuation rules are the same as on the mainland: the highest of the cadastral value, the acquisition price and the administratively verified value. In the Canary Islands, cadastral values are generally up to date but may not reflect recent market appreciation, which means the Wealth Tax base may be lower than the current market value.

Non-resident property owners in the Canary Islands are subject to the Wealth Tax (and the ISGF, where applicable) under the Canary Islands rules for assets situated on the islands. Unlike regions with a 100% rebate (Madrid, Andalusia), in the Canary Islands non-residents with island assets above the exempt minimum will have a regional Wealth Tax quota to pay.

Tax residency in the Canary Islands: implications for the Wealth Tax and other taxes

For those considering establishing tax residence in the Canary Islands, the analysis must be multidimensional. The Canary Islands Wealth Tax does not offer the full rebate of Madrid and Andalusia, but the overall Canary Islands tax system can be highly competitive for certain profiles:

For entrepreneurs with international business activity: the ZEC (4% corporate tax), the RIC (income tax reduction) and the potential family business exemption on Wealth Tax can be combined for very efficient fiscal planning.

For families with significant wealth and a long-term succession focus: the combination of the Canary Islands Wealth Tax (with a real but manageable quota) and the Canary Islands Inheritance Tax (99.9% rebate in the direct line) may be globally superior to residing in the Balearic Islands or Catalonia (high Wealth Tax plus significant Inheritance Tax).

For international real-estate investors: the IGIC at 7% (versus variable mainland ITP), alongside still-competitive prices in some areas of the archipelago, makes the Canary Islands a destination with a favourable ratio between investment and acquisition tax burden.

To evaluate whether a tax residence change to the Canary Islands is advantageous for a particular profile, BMC carries out a comprehensive comparative analysis covering the Wealth Tax, income tax (including REF advantages), Inheritance Tax and corporate tax for group entities, with a simulation of the total burden in the Canary Islands versus the alternative of remaining in the current region or relocating elsewhere.