LIFE IN TENERIFE – TAXES AND REAL ESTATE IN THE CANARY ISLANDS
Tenerife is a paradise that seduces with its climate. The temperature never drops below 20 degrees Celsius. It is a blissful and deliciously beautiful place. The pandemic and growth in remote working have demonstrated that working away from a sunny location in a café by the ocean is no longer just a dream, it has become a reality. After tasting this way of life, many have been thinking about staying in Tenerife forever… or at least for a long time. But before committing to this, we will look at whether this paradise is a good place for everyday life and indeed how cost effective it is.
MOVING TO PARADISE, AT WHAT COST?
Where to live? Buy or rent? The biggest challenge on the island is to find a house or apartment to live in. Most coastal strips are occupied by hotels, and to rent or buy a property one has to often book well ahead of time. Things are easier inland, that said generally when we think about life in Tenerife the main considerations are a beautiful view and quick access to the ocean. As in Poland, when renting, it is necessary to put down a deposit, but once a property has been found it is necessary to pay a fee called Agency Commission even if the property was sourced directly through the owner. It is a payment to an agent who is responsible for the process of leasing an apartment regardless of whether they handled the initial interaction with you or not. In summary, the process starts with spending 3 times the monthly rental value. And that’s not all. Unless the applicant has a permanent contract in Tenerife, they may be required to pay at least 6 months’ rent upfront.
IT’S TIME TO THINK ABOUT WHAT WE WILL BE DOING AND HOW MUCH IT WILL COST? – TAXES IN THE CANARY ISLANDS
Tenerife, like the entire territory of the Canary Islands, is subject to Spanish jurisdiction. It benefits however from a certain level of autonomy from to the Kingdom, one example is indirect taxation, nevertheless its direct taxes are consistent with those levied in mainland Spain.
The general CIT rate in Spain, and thus in Tenerife, is 25%. Newly formed companies are taxed at a 15% tax rate in the first two tax periods of making a profit. This means that Tenerife places towards the bottom of the ranking of jurisdictions with advantageous tax systems. The effects of the high rate of tax are somewhat mitigated by tax reliefs (IP-Box, R&D relief or tax deductions for the film industry) and financial incentives for investments in the region (subsidies for job creation, technology fund), but these solutions cannot compete with what Cyprus or Malta have to offer to their residents.
On a side note. If you are going to run a business here, either learn Spanish or find someone who will be your permanent representative with the various departments and offices you will need to deal with – it is rare to hear English being spoken here.
DO YOU WISH TO INVEST IN THE DEVELOPMENT OF FIXED ASSETS IN THE CANARY ISLANDS? THIS IS THE PLACE FOR YOU
Those who decide to start their businesses from scratch in the Canary Islands and become associated with The Canary Islands Special Zone (ZEC) can benefit hugely. The CIT on activities within the zone is levied at a rate of 4%, there is a dividend exemption for mother companies from outside the Islands; there is also an exemption from the General Indirect Tax of the Canary Islands (equivalent to VAT) for transactions of supply of goods and services and imports within the ZEC.
The preferential treatment within the ZEC is intended for newly created entities that invest sufficiently high amounts in fixed assets in the Canary Islands within the first two years of registration (in Tenerife it is EUR 100,000), which create jobs for at least 5 people in the first six months from registration, and at least one member of the management board lives in the Canary Islands.
Developing the operational side of a business in Tenerife from the outset may turn out to be an interesting option for investment, but the location is not equally beneficial for a holding company. Particularly because the basic tax rates at source are 19% and 24%, this is of course after taking into account lower rates under the double taxation treaties concluded by Spain.
HOLIDAY RESIDENCE IN TENERIFE – BE MINDFUL OF TAXES
Individuals who dream of moving their tax residence to Tenerife should understand the profitability of this endeavour. Taxation of natural persons, depending on their personal and financial circumstances, ranges from 19 to 26%.
In the context of living in Tenerife and owning real estate there, it is important to remember about the so-called tax on hypothetical rental. It applies to both residents and non-residents. Those who own real estate in the Canary Islands, which is not their permanent residence, are obliged to pay tax on the hypothetical rental price. It does not matter whether such rental income is actually made or the holiday residence is vacant for part of the year.
In addition, when selling real estate, a local tax is charged on the theoretical increase in the value of real estate (tax on the increase in the value of urban land). The tax base takes into account the value of the property and the period of ownership. Thus, by purchasing investment real estate in the Canary Islands one agrees to share one’s profit with the Spanish tax authorities.
WHAT IF THE CHOICE IS INDEED TENERIFE
Undoubtedly, the climate in Tenerife is unique and can make you want to stay there for longer. In the context of tax planning, this location is not beneficial for people who wish to combine the efficient management of holding companies and spending the rest of their time lounging on the beach. Such plans are much easily implemented in Cyprus, where not only the weather is pleasant, but so is the legal and economic climate. However, if Tenerife has turned out to be captivating enough to become someone’s favourite place on earth, then it is worth planning the moving process, whilst taking into account housing, as well as administrative and tax issues. It is also good to be aware of all the consequences of changing tax residence, so that there are no surprises and that life doesn’t get rudely interrupted by the Polish or Spanish tax authorities. Chaos also has a negative impact on business, so any cross-border movements should be planned out in advance and consulted with experts.
Are you interested in this article? Read also: “CYPRUS VS UNITED ARAB EMIRATES – WHERE TO MOVE“
Blog edited by dr Anna Maria Panasiuk
Founder and Managing Partner of Panasiuk & Partners, with many years of expertise in wealth management.
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