The Treasury has fined 116 million companies for taking ill in the Canary Islands tax Eden in 20 years

The Tax Agency, dependent on the Ministry of Finance, has sanctioned more than 116 million euros to Spanish companies that did not accept the Reserve for Investments in the Canary Islands (RIC) between 2000 and 2018. The RIC is one of the main tax incentives in the Canary Islands that allow businessmen to reduce up to 90% of corporate tax. The fines correspond to the data of more than a thousand tax infringement records to which has had exclusive access, following a request for information under the Transparency Law.

The Reserve for Investments in the Canary Islands It is one of the most aggressive tax incentives of the Canarian tax regime. It allows any company or establishment based in the archipelago to allocate up to 90% of its profits to this reserve and only pay taxes on the remaining 10%. In return, the companies undertake to reinvest these profits in the Canary Islands over the next three years.

How does it work? A company earns a million euros in profits in the last year. If you do not take advantage of any tax bonus or deduction, you will have to pay 25% of those profits in corporate tax. That is, 250,000 euros. If you allocate part of those profits to the RIC, the base on which you pay taxes could be reduced by up to 90%. Instead of paying 25% of the million benefits, he pays them over 100,000 euros. The final fee comes to 25,000 euros, reducing the effective rate to 2.5%.

In compensation, the company will have to invest those tax-exempt profits in the Canary Islands. The requirements to reinvest, Although they have been modified over the years, they are relatively lax and allow these benefits to be used to create or expand company establishments, rehabilitate hotel or commercial areas, create jobs, acquire shares in other companies, carry out housing developments protected, buy public debt securities of the Canary Islands public administrations or, even, the creation of financial instruments for other companies to materialize the investment.

Since 2000, the Treasury has opened 1,132 tax infringement files for Canarian companies that failed to meet the requirements to avail themselves of this tax benefit.

Some data that the business sector blames on the restrictive interpretations of the Tax Agency. "What happens is that the different interpretations that have been made by the AEAT Inspection sometimes do not coincide with what is made from the economic sectors", defends the president of the Association of Tax Advisors of the Canary Islands, Juan Luis Alayon.

This criticism of the lack of "legal certainty" is repeated in the discourse of all business associations of the archipelago in the main Canarian media. "It is necessary that there is greater legal certainty that allows businessmen and investors to undertake investments without the risk and uncertainty that is being created with the actions and interpretations of the General Directorate of Taxes," defends Alayón.

Differences in the interpretation of the law that have led to a legal battle that has been going on for years between businessmen and Canarian tax advisors against the inspection of the Tax Agency.

As documented by in more than 300 court rulings published in the Judicial Documentation Center (CENDOJ)dozens of Canarian companies have resorted to these tax sanctions, even reaching the Supreme Court.

Among the main reasons for these fiscal regularizations have been, for example, allocating to the RIC profits not related to economic activity, such as the sale of shares or real estate. Also pretending to carry out an activity in the Canary Islands when it is carried out in another place, materializing the reservation in assets not linked to the business activity such as vehicles for private use or second homes or for not making the investments within a period of three years.

"There are flagrant cases in which the RIC is poorly invested, but the vast majority of cases are due to tax innovations or interpretations of tax regulations by Agency inspectors," acknowledges Salvador Miranda, director of the Regime Chair Economic and Fiscal in the Canary Islands (REF) and one of the greatest experts on the fiscal particularities of the archipelago. The chair was created in 2014 thanks to an agreement between the University of Las Palmas and the Círculo de Empresarios de Gran Canaria.

“The problem is that at first the law did not say anything. For many years, the companies allocated any benefit to the RIC, but later they said that it was not worth any benefit and many had to go to court,” explains Miranda.

This is the case of Lopesan, one of the largest hotel companies in the Canary Islands that is owned by one of the richest people in Spain, Eustasio López. In 1998, the group allocated about 24 million euros to the RIC (in pesetas at the time) from the sale of land in the south of Gran Canaria and the sale of 120 shares of one of the conglomerate's subsidiaries to the Caja Insular de Ahorros. The objective is to allocate these tax-exempt profits to build the Gran Hotel Costa Meloneras.

However, the Tax Agency considered these allocations to the RIC as unsuitable since in the operations carried out there was not "a business activity but a merely patrimonial one". That is, these benefits had not been generated by the economic activity of the company but through financial operations and the sale of the assets of the companies. The tourist group took the matter to court, which ruled in favor of the administration in two sentences of the National audience and the supreme court.

Similar to the resolution received by the Catalan promoter Santiago Puig, one of the most influential businessmen in the south of Tenerife. In 1999, one of his companies allocated more than 3 million euros to the RIC to save taxes on the purchase of the Las Américas Golf Course land, which it had been operating for several years. The inspection, as stated in the judgmentconsidered that this investment could not be considered as a technological improvement since "the construction of the golf course and its facilities were carried out before the application of the RIC and it is obvious that the transmission has not changed anything".

From the association of tax advisors they denounce that the interpretations of the inspectors have been "traditionally restrictive" on the application of these tax credits. An affirmation that is categorically denied in the Ministry of Finance: "The Inspection does not carry out any innovation, but limits itself to monitoring compliance with the law, regularizing those assumptions that suppose a clear violation of the provisions of the norm and acting in accordance with the criterion dictated by the administrative doctrine and the courts”.

The main Canarian employers (CEOE-Tenerife and the Canarian Confederation of Entrepreneurs) refused to make statements for this report.

More than 8,000 million allocated to the RIC since 2008

The Canary Islands Investment Reserve (RIC) continues to be one of the archipelago's main tax incentives. This is shown by the data. Between 2008 and 2018 alone, Canarian companies and establishments based on the Islands allocated 8,827 million euros to the reserve, according to the figures published in the annual corporate income tax accounts. A figure that meant an approximate fiscal saving of 2,470 million in the last decade.

The greatest excesses occurred during the real estate bubble during which up to 2,500 million euros were allocated to this reserve in 2006. An excessive growth of the tax reduction that the Zapatero government tried to stop due to the difficulties in materializing the high amounts of tax credits.

Precisely, during the bubble, criticism of the RIC intensified since at that time the purchase of real estate for lease was promoted in full escalation of prices, an investment not allowed with the current regulations. In other words, an entrepreneur could allocate part of his profits without taxes to buy a house and use it for rent. "In the street it is not understood, either, how businessmen and professionals can acquire real estate with the RIC to rent constantly raising the price of the square meter of housing", set out in a report of the first nine years of implementation of the incentive published in 2003.

Although pre-financial crisis endowment amounts have never been reached, earnings for the RIC rose again with the economic recovery. In the last decade, contributions to reduce the tax base rose from 632 million in 2009 to 1,058 million according to the latest data available.

These figures do not include tax adjustments and sanctions imposed on companies for irregularities in the application of the tax benefit.

Corruption, speculation and tax avoidance

The fiscal irregularities in the Reserve for Investments in the Canary Islands have often had as protagonists some of the most famous corruption cases in the archipelago. This is the case, for example, of the two businessmen convicted in the Las Teresitas case, Antonio Plasencia and Ignacio González.

Inversiones Las Teresitas (ILT), the company created in 1998 by businessmen to acquire the land of the main beach of Santa Cruz de Tenerife, allocated part of the profits made in the urban development ballot to the RIC, as revealed by Canary Islands Now. Specifically, he allocated part of his profits to the reserve with the embezzled money to reduce the tax bill, which was finally used to purchase public debt bonds from Canary Islands administrations.

The modus operandi is repeated in the Tindaya Case. The company Canteras Cabo Verde sold the exploitation rights of Montaña Tindaya to the Government of the Canary Islands well above their real value and allocated the profits from the operation to the Canarian Investment Reserve to save more than one million euros in taxes.

Rafael Bittini, the owner of the company and already convicted of tax fraud, allocated to the RIC the nearly 6 million euros that it earned by transferring the exploitation rights of the quarry. A decision that opened a file before the Tax Inspection since the benefit obtained did not come from a business activity. The company went to court but lost both in the National High Court and in the Supreme Court, that gave the reason to the Tax Agency.

One of the Fórum Filatélico figureheads was also sanctioned by the Tax Agency for irregularities to benefit from the RIC in the Canary Islands. José Ana Labajos, figurehead of the plot, sold two plots of land in the Tenerife municipality of Santa Cruz de Tenerife to Fórum for 1.2 million euros in 2002. Some plots that will multiply their value with reclassification up to 15 million euros.

The figurehead society endowed the Investment Reserve with 1.2 million euros profit from the sale of the land to save about 400,000 euros in taxes. An action that both the tax inspection and the courts rejected outright: "There is no evidence that the land was anything other than rustic and that the sale constituted an ordinary operation, within the promotional activity not yet started that generated eligible profits. therefore to sustain the economic endowment to the RIC”, is indicated in the sentence.

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