The Rise of Europe’s Unlikeliest Tax Haven
WHY YOU SHOULD CARE
Because tax havens may not always be bad.
Two hundred miles off the coast of Morocco, the Canary Islands remain among Spain’s farthest-flung territories, appearing as a few specks of volcanic rock against the endless Atlantic blue. Tourists roast on its beaches, and everything moves at a snail’s pace.
That includes, unfortunately, the economy, which suffers from high unemployment and the highest child poverty rate in Spain. But while some regions might rely on building a tech industry or boosting tourism to recover, the Canaries have created a different lure: low taxes. Very low. Indeed, looking to places like the British Cayman Islands and Switzerland, the Canaries (despite its population of just 2.1 million people) are hoping to unseat Ireland, Europe’s best-known mecca for corporations with allergies to taxes. The islands’ corporate tax is now just 4 percent — a third of Ireland’s and the lowest on the continent, according to a report from advisory firm PricewaterhouseCoopers. Its standard VAT, or value-added tax, is 7 percent, whereas Ireland’s is 23 percent, which makes the day-to-day running of a business cheaper.
Being a European outpost gives the Canaries these unique financial advantages, which, until this past January, were almost inaccessible to foreign companies. After the latest reform, however, the so-called special economic zone (SEZ) is free game for everyone. According to Beatriz Barrera, president of the Canary Islands SEZ, the low-tax haven has already attracted more than 425 companies, about a third of which are foreign.
Even if the Canaries manage to attract foreign companies, there’s no guarantee this will help the local economy.
Enticing businesses with super low taxes is a counterintuitive move at a time when tax havens are getting a bad rep, and the European Union is cracking down on corporate tax evasion by planning to force all EU countries to share details of every tax ruling they grant to multinationals. And the Canaries are certainly not an obvious location. The islands’ remoteness can, in fact, be a deal breaker, since getting down there from London requires a four-and-a-half-hour flight. (Istanbul is closer.) Its infrastructure is also heavily oriented toward tourism — which employs about a quarter of its working locals — with far more hotels than universities, business centers or startup incubators. And the red tape — forms and papers that require stamps and signatures — doesn’t help either. “The bureaucracy is time-consuming and not English-friendly,” says Karen Floyd, the chief brand officer of intraHouse, a Norwegian mobile software company that opened a branch in Gran Canaria more than a year ago.
Still, being so far south does provide the ability for logistic companies to gain quick access to fast-growing markets like Nigeria, while remaining inside the EU. That’s been the case for the Norwegian company Otech, which operates from Gran Canaria and maintains Nigeria’s many offshore oil rigs. According to Jaime Cavero Gandarias, from the business consulting firm Dyrecto, companies value being able to provide their employees with “health, education and security at a European standard, but at a fraction of the cost.”
When it comes to the lifestyle, Ireland or Luxembourg can hardly compete with these laid-back nature-centric isles. “It’s a great place to live if you like the ocean,” says Peter Fabor, a user experience designer from Slovakia who moved here to surf two years ago. He’s since started his own company, Surf Office, offering accommodation and co-working spaces to professionals.
But even if the Canaries manage to attract foreign companies, there’s no guarantee this will help the local economy. After all, Ireland’s tax honeypot hasn’t really worked to uplift the crisis-stricken country, because it was an ad hoc model for multinationals that did not create jobs in the industries that needed it most, according to Nicholas Shaxson, a journalist and researcher for the Tax Justice Network, an expert-led group focused on tax and tax havens. This clientelist style has led the European Commission to accuse the Irish government of giving special treatment to Apple, which didn’t respond to a request for comment.
With the EU strapped for cash and cracking down on corporate tax evasion from Ireland to Luxembourg, one might think it isn’t too keen about this latest development. Yet it’s the EU that approved and guaranteed the Canary Islands’ friendly tax regime — until 2026, which means it can’t be revoked until after then. For her part, Barrera says the islands have no interest in luring greedy corporations with shady deals, or having tax breaks that benefit only a few foreigners. That’s why they have certain requirements for companies wanting to benefit from the special tax rate here, such as needing to have at least five employees and one manager living in the Canary Islands.
Talk to some Canary Islanders, though, and you’ll find more than a skeptical few. Some think the tax breaks aren’t enough to attract foreign companies, while local economist Jorge Dorta fears they’ll “only serve for companies from the mainland to colonize us.” Then there’s the whole image problem: “Nobody likes being identified as a ‘corporate tax haven,’” says 29-year-old teacher Pablo Gonzalez. Unless, that is, these forsaken islands succeed in creating a new breed of fiscal paradise — the sustainable kind.