In recent years, cross-border investors active in non-performing loans (NPL) and distressed debt have shown growing interest in European jurisdictions that combine legal certainty, EU market access and a competitive tax framework. Within this landscape, the Canary Islands – and specifically the Canary Islands Special Zone (Zona Especial Canaria, ZEC) – often appear as a possible platform for credit risk structures, investment vehicles and centralised risk management.
This article is a joint technical note by FIMAX Asesores and Montclare Capital Partners. FIMAX contributes its on-the-ground expertise in ZEC implementation and Spanish tax and regulatory matters, while Montclare brings a cross-border perspective on structuring, credit strategies and multi-jurisdictional debt portfolios. Together, both firms examine whether the Canary Islands can be a viable and sensible jurisdiction for a specific type of structure: a company acting as credit protection seller in relation to distressed or non-performing debt.
The Core Business Model: Credit Protection Seller and CDS-Type Structures
The structure under consideration involves a Canary Islands company that would issue derivative or CDS-type instruments designed to hedge portfolios of non-performing or distressed loans. In economic terms, the company would act as a credit protection seller. In return for an upfront CDS-style fee, it would undertake to acquire the relevant receivables from lending institutions at their nominal value if a default event occurs.
In practical terms, the underlying loans could be consumer or corporate exposures originated in jurisdictions such as Poland, Romania, Lithuania, Spain or other EU countries. Once the Canary Islands company acquires the receivables, it would have two main options. It could work with local debt collection agencies in the relevant jurisdictions to pursue recoveries over time, or it could sell the acquired receivables to third-party debt purchasers or specialist distressed debt funds.
Economically, this type of structure sits at the intersection of a credit derivatives platform and a distressed debt investment vehicle. Legally and fiscally, however, the classification is less obvious. For investors and sponsors evaluating the Canary Islands as a base, the key questions are whether such CDS-type transactions can be accommodated within the ZEC framework and how they are treated from a corporate tax, VAT, withholding tax and regulatory perspective.
Corporate Income Tax: Treatment of CDS Fees and Distressed Debt Income in the ZEC
The first analytical layer is corporate income tax. In a structure of this nature, several different income and expense streams coexist. These typically include the upfront CDS-type premiums received, potential losses arising from the acquisition of defaulted loans at nominal value, subsequent recoveries on those loans and gains or losses on the eventual sale of receivables to third parties.
From a ZEC perspective, it is essential to determine how this activity is characterized for corporate income tax purposes. The question is whether the business should be viewed as a standard trading activity, a specific financial activity, or a mixed model combining elements of both. That characterisation will influence the treatment of premium income, impairment of receivables, recoveries and disposal gains in the tax base of the Canary Islands company.
Once the activity is properly defined, one can analyze to what extent the structure can benefit from the reduced ZEC corporate tax rate and under what conditions in terms of substance, investment and employment in the Canary Islands. Without this preliminary classification, headline rate comparisons between the ZEC and other jurisdictions do not provide a reliable basis for decision-making. For sophisticated investors, the relevant question is not only what the nominal tax rate is, but how this specific business line is taxed in practice when operated through a ZEC entity.
VAT and Withholding Tax on CDS-Type Transactions and NPL Flows
The second key dimension involves indirect taxation and cross-border cash flows. The issuance of credit protection instruments, the transfer of receivables and the provision of financial or portfolio management services may, in certain circumstances, fall within VAT exemptions commonly applied to financial services. However, the boundary between exempt financial services and taxable services can be narrow, particularly when a structure combines derivative contracts, loan transfers, recovery services and portfolio sales.
An accurate analysis therefore requires mapping each leg of the transaction chain. This includes the initial CDS-type fee paid by lenders or investors, the acquisition of receivables upon default, any servicing or recovery fees charged or paid, and the proceeds from the sale of portfolios to third-party debt purchasers. The VAT implications in Spain, and specifically in the Canary Islands, need to be considered alongside VAT or equivalent regimes in the jurisdictions where loans are originated and where buyers or service providers are based.
In parallel, potential withholding tax exposures on payments between the ZEC entity and counterparties in other EU member states or third countries must be identified. A structure that interacts with originator banks, funds, servicers and debt purchasers across multiple jurisdictions will often depend on the correct application of double tax treaties and domestic withholding rules. This can significantly influence the net return profile of the vehicle.
Regulatory Perimeter: Financial, Insurance or Unregulated Corporate Activity?
Beyond taxation, the decisive factor for many sponsors is the regulatory classification of the activity. A vehicle acting as credit protection seller and acquiring distressed loans may, depending on its precise design, approach several regulated categories. These include trading in financial derivatives, the provision of insurance-type credit guarantees, investment services and potentially securitization-related activities.
The central question is whether the Canary Islands company will be regarded as a proprietary risk-taking vehicle operating on its own account, or as an entity providing financial services to third parties in a way that requires prior authorization, ongoing supervision or regulatory capital. The answer will depend on elements such as who the contractual counterparties are, how the instruments are marketed, whether third-party investors participate in the structure and whether the company performs intermediation functions rather than simply managing its own risk and assets.
From the perspective of Spanish and EU financial regulation, drawing a clear line between unregulated corporate activity and regulated financial or insurance business is essential. If the structure falls within the regulated perimeter, it may require licences, compliance systems and interaction with supervisory authorities. In that scenario, any tax benefit derived from the ZEC would have to be evaluated against the cost and complexity of operating a regulated entity.
In this area, the collaboration between FIMAX Asesores and Montclare Capital Partners is particularly relevant. FIMAX brings experience in dealing with Spanish regulators and understanding how novel financial structures are classified in practice, while Montclare contributes insight into how credit protection and NPL strategies are typically implemented by international investors across different jurisdictions.
Is the Canary Islands (ZEC) a Viable Jurisdiction for Credit Protection and NPL Strategies?
For sponsors considering a ZEC vehicle for credit protection and distressed debt strategies, the key question is not simply whether the Canary Islands offer a lower corporate tax rate than other European jurisdictions. It is whether the proposed business model can be framed as a viable corporate activity with genuine substance in the Canary Islands, an acceptable tax profile and a manageable regulatory footprint.
If the structure can be designed so that the Canary Islands company operates as a proprietary investment and risk-taking vehicle, with its activity clearly outside the perimeter of fully regulated financial or insurance services, the ZEC framework may offer a compelling combination of legal certainty and tax efficiency. If, on the other hand, the activity is likely to be treated as regulated financial intermediation, the cost and complexity of licences, regulatory capital and ongoing supervision may outweigh the advantages of the ZEC regime.
In practice, this assessment must be carried out on a case-by-case basis, taking into account the specific contractual documentation, the profile of counterparties and the long-term strategy of the sponsor.
Why Early Structuring Work Matters More Than the Headline Tax Rate
In credit protection, NPL and distressed debt structures, the design of the vehicle is not a secondary technical detail. It is the core of the business model. Before focusing on the headline corporate tax rate or on the marketing appeal of a ZEC entity, sponsors should obtain an integrated view of how the activity will be classified for both tax and regulatory purposes.
From the joint perspective of FIMAX Asesores and Montclare Capital Partners, the sequence should be clear. First, clarify whether the proposed activity can be carried out as an unregulated corporate business under Spanish and EU law, or whether it will be treated as a regulated financial or insurance service. Second, map the corporate income tax, VAT and withholding tax consequences of the structure in the Canary Islands and in the jurisdictions where loans, counterparties and investors are located. Only once these two layers are understood does it make sense to move forward with implementation, cost estimates and operational planning.
For international investors and originators evaluating whether the Canary Islands could be a viable jurisdiction for this type of credit protection and distressed debt business, the first step is not to incorporate a company. It is to commission an early, focused assessment that combines local ZEC expertise with cross-border structuring experience.
That, ultimately, is what determines whether the jurisdiction is not only attractive on paper, but truly workable in practice.
Montclare Advisory board & FIMAX Asesores
Amsterdam, Gran Canaria, February 2026
