The audiovisual sector is one of the clearest candidates for the Canary Islands Special Zone, the regional regime commonly known by its Spanish initials, ZEC. Film and television production is physical, visible and locatable: a crew stands on a location, a sound stage is hired for weeks, a post-production suite runs on machines that sit in a building with people in front of them. When a regime is built around activity genuinely carried out from a territory, an industry that already places staff and equipment on the ground has less to prove than most. It is also a sector where the regime’s demands are easy to underestimate, precisely because the visibility of the work invites the assumption that qualification is automatic. It is not. This note sets out what qualifies, what the regime asks of a production company, how the ZEC sits alongside the separate Canarian audiovisual incentives, and where the structure fails.
Why the sector and the regime fit
The ZEC is a regional aid regime created by Title V of Law 19/1994 on the Economic and Fiscal Regime of the Canary Islands and operated within Spanish law and the EU state aid framework. Its horizon is tied to EU law: under article 29 of that law, registration of new entities can be authorised up to the end date of Commission Regulation (EU) No 651/2014, the General Block Exemption Regulation, or of the rule that replaces it, the incentives can be enjoyed for the six years immediately following the end of that regulation’s validity, extendable if the state aid rules applicable to the Canaries so provide after communication from the Commission, and the zone’s continuation remains subject to the Commission’s periodic reviews. It is not a haven and not a device. Article 43 sets a special corporate tax rate of 4%, and article 42 applies it, within the ceilings of article 44, to the part of the taxable base that corresponds to operations carried out materially and effectively in the zone, against the standard Spanish corporate rate that would otherwise apply, and only where the company meets the conditions attached to it. Those conditions are not administrative decoration; they are the regime itself. For most sectors, demonstrating that real activity happens on the islands is the difficult part of the exercise. For audiovisual production it is closer to the ordinary state of affairs, because the work is a physical process that leaves a trail of call sheets, hired stages, local suppliers and paid crew. An industry that already puts people and equipment in a place has an easier time showing that the place is where the value is made.
What activity qualifies
The regime covers activity actually performed from the islands, and the annex to Law 19/1994, which lists the permitted activities by NACE Rev. 2 code, includes division 59, motion picture, video and television programme activities, sound recording and music publishing, with the exception of 59.14, cinema exhibition. Audiovisual work offers several forms that sit naturally within it. Principal photography, with crew, cast and equipment on Canarian locations or sound stages, is the most visible. Post-production follows: editing, colour grading, sound design and mastering carried out in suites staffed on the islands. Animation and visual effects are, if anything, a still better fit, because the whole production process can be resident wherever the artists and the render infrastructure are. Technical and production services, from line-production to the servicing of inbound shoots, belong in the same picture to the extent they fall within that division and are genuinely delivered on the ground. For activities outside the annex, article 31.2.c allows them to be carried on through a separate branch with its own accounts, to which the ZEC benefits do not apply. The common thread is that the value is created by people and assets present in the territory, not by a contract that merely names it.
The conditions are the regime
A ZEC production company must satisfy the same requirements as any other entrant, set out in article 31 of Law 19/1994 and read against the realities of the sector. The entity must be a newly created legal person or branch, registered in the Official Register of ZEC Entities. It must have its registered office and its place of effective management in the islands, at least one director, or for a branch a legal representative, resident there, and a corporate object consisting of annex activities carried out in the zone. It must invest, within the first two years after registration, in tangible or intangible fixed assets located or received in the islands, used there and needed for its activity, for at least 100,000 euros in Gran Canaria and Tenerife and 50,000 euros in El Hierro, Fuerteventura, La Gomera, Lanzarote and La Palma. For audiovisual work this is rarely artificial, since stages, cameras, servers, render capacity and editing infrastructure are exactly the kind of assets the rule contemplates, and they must remain in the entity for the whole period of the regime, or their useful life if shorter, although a sale does not breach that rule where the proceeds are reinvested in new fixed assets on the same conditions within one year; the same letter also bars leasing them or ceding their use to third parties, unless that is the entity’s object or activity and there is no direct or indirect link with the lessee or assignee. The same letter leaves out assets acquired through the reorganisation regime of the Corporate Income Tax Law, and used assets count only if they have not already been applied to this requirement. Registration, or continued registration, can nonetheless be authorised by the Consorcio’s governing council, after a report from its Technical Commission, without that investment where the number of jobs to be created and the annual average workforce exceed the employment minimum. That minimum is the next requirement: the entity must create jobs in the islands within six months of registration and keep its annual average workforce at least at that number for the whole period of the regime, with a minimum of five jobs in Gran Canaria and Tenerife and three in the other islands named above, and where the same activity was carried on before, under the same or another owner, the law demands net creation of at least those numbers. Here the sector’s project-based rhythm needs care, because what is tested is an annual average maintained throughout the regime, not a spike for a single shoot. Finally, the applicant files a descriptive report of its main activities, supporting its solvency, viability, international competitiveness and contribution to the islands’ development, whose content binds the entity unless the governing council of the Consorcio de la Zona Especial Canaria expressly authorises a change. The investment and the workforce are continuing obligations, tested over time, not boxes ticked once at incorporation. Under article 38 the Consorcio’s governing council monitors compliance, without prejudice to the powers of other bodies, and the operation is judged as it runs, not as it was described on paper.
The regime rewards moving a production, not moving an invoice.
The Canarian incentives that sit alongside
Separate from the ZEC, productions in the islands can use the Spanish corporate tax deduction for film and audiovisual work in article 36 of the Corporate Income Tax Law. Its first two paragraphs cover investment in Spanish productions and, for a producer registered with the Instituto de la Cinematografía y de las Artes Audiovisuales that is in charge of executing a foreign production, spending incurred in Spain. The archipelago enhances that deduction in more than one way. Among other things, article 94 of Law 20/1991 makes the deduction rates, for investments made and kept in the archipelago by companies with their tax domicile there or by permanent establishments there, 80 per cent higher than under the general regime, with a minimum difference of 20 percentage points, and the Tax Agency applies that increase to the percentages of the deduction for Spanish productions and for foreign productions, with the higher percentage on the first million euros of the deduction base conditional on the aid intensity not exceeding 50 per cent of the eligible costs, on the terms of article 54 of Regulation (EU) No 651/2014; and the fourteenth additional provision of Law 19/1994 raises the maximum amount of each of those two deductions by 80 per cent where the production is made, or the spending incurred, in the Canaries. These are a different instrument, with their own eligibility rules, certification requirements and expenditure conditions, and their rates and absolute caps are revised over time, so we do not quote them here; the current parameters have to be confirmed for the year and for the specific project. What matters structurally is that the two systems are distinct. A production may look to the deduction for qualifying spend and to the ZEC for the rate on qualifying profit, but each stands on its own conditions, and article 42.2 of Law 19/1994 allows the ZEC benefits to be combined with other aid to investment and job creation within the limits and on the conditions set by EU rules. Combining them is a deliberate analysis rather than an assumption that one follows from the other.
Where the income has to be earned
A ZEC entity is a Spanish tax resident. It files Spanish corporate tax and is subject to Spanish anti-abuse rules like any other Spanish company. The reduced rate does not attach to the company as a whole; it attaches to the portion of income that arises from the activity carried out on the islands. Article 44 of Law 19/1994 measures that portion with a fraction whose numerator includes, among other items, services rendered with the entity’s means located in the zone, and whose denominator includes all income and other positive components of the taxable base. The rate then applies exclusively to the lower of two amounts: the share of the base given by that fraction, and a ceiling of 1,800,000 euros of taxable base for an entity that meets the minimum job creation of article 31, plus 500,000 euros for each job above that minimum up to 50 jobs, while job creation above 50, as well as that covered by the two previous rules, is subject in every case to a limit under which the reduction in tax against the general corporate rate in a period cannot exceed 30 per cent of the entity’s net turnover. For these purposes, job creation means the net number of jobs created in the geographic area of the zone since the entity’s registration, excluding, where applicable, the incorporation of a previous workforce. Operations carried out directly or indirectly with persons or entities resident in non-cooperative jurisdictions, or paid through them, are not treated as carried out in the zone. That attribution has to be defensible by functional analysis and transfer pricing, tracing profit to the functions performed, the assets used and the risks borne in the territory, with dealings between related parties valued at market value under article 18 of the Corporate Income Tax Law. For groups that place a Dutch holding or intellectual property company above the Canarian operation, this is the decisive discipline, and it is the subject of our note on transfer pricing between a Dutch BV and a Canary Islands ZEC entity. Get the functional profile right and the rate applies to what it should; get it wrong and the exposure is not a marginal adjustment but a challenge to the whole arrangement.
The failure mode: billing rights without producing there
The way this structure fails is predictable. A group registers a Canarian company, routes the exploitation or licensing income of finished content through it, and produces nothing on the islands. The reduced rate is then claimed on royalty flows that were earned by development, direction and creative work performed elsewhere. That does not qualify, and it should not. The statute is specific on the point. The paragraph of article 44 that deals with intangibles counts, among other rights, the licensing of intellectual property rights, and their transfer to unrelated parties, where the rights were created by the entity in the zone and in the proportion in which they are located there, and the same article locates them by a cost fraction: the expenses directly related to creating the asset that correspond to the entity’s own people and assets in the islands, together with work subcontracted to unrelated parties using people and assets based there, provided the entity itself takes the decisions on organising those resources and on the subcontracting, leaving aside general administration decisions of the entity or group, over all expenses directly related to creating the asset, with financial expenses, depreciation of buildings and other costs not directly related to creating the asset excluded. Royalties on content created elsewhere do not meet that description, while all income counts in the denominator. Where intangibles carry the return, the profit follows the people who develop, enhance, maintain, protect and exploit them, the DEMPE functions that determine where value in intellectual property actually sits; we set out the mechanics in our note on royalties, IP and DEMPE. A Canarian entity that holds a licence but performs none of those functions is holding a label, and a label is precisely what the anti-abuse rules are built to see through. Nothing about the audiovisual sector changes that; a production company earns the rate by producing, and a holding company that only invoices does not become a production company by choosing a Canarian address.
A worked example
Consider an international animation group that decides to build a studio on the islands through a newly created company with its registered office and effective management in the islands, a resident director, a corporate object within the annex activities, and registration in the ZEC register. It leases premises, installs a render farm and workstations as fixed assets, and hires a resident team of animators, technical directors and production staff, sustaining the headcount across projects rather than for a single title, with the investment and the average workforce at or above the minimums for its island. The creative and technical work of producing the animation happens there. Series are commissioned by broadcasters and platforms, and the studio earns production fees and, where it retains an economic interest, a share of exploitation income proportionate to the functions it performs; on rights it creates in the islands, article 44 counts that income in the proportion given by the cost fraction described above. On these facts, and with the descriptive report filed, the requirements of article 31 are met, and the profit attributable to the island operation can be supported by a functional analysis. The reduced rate applies to that qualifying base, subject to the ceilings in article 44, where the base ceiling rises with each job above the minimum up to 50, while income properly belonging to functions performed outside the islands is taxed where those functions sit. Whether the model holds turns on the facts rather than the label, which is the question addressed in our note on what the ZEC regime requires.
What this means in practice
For a media group weighing the islands, the test is easy to state and demanding to meet. Put real production on the ground: the people, the assets and the work itself. Size the investment and the workforce to the rule and keep them there over time. Document the functional profile so that the income taxed at the reduced rate is income the island operation genuinely earns. Treat the separate Canarian audiovisual incentives as a distinct question to be confirmed on current terms, not a benefit assumed in advance. Do all of that and the regime does what it was designed to do; skip it and no rate survives contact with the anti-abuse rules. The benefit is real and it is conditional, and the two facts are inseparable.
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This article is informational and does not constitute tax advice. Each engagement is subject to scope and applicable regulation.