Spain’s Canary Islands Special Zone vs. Madeira’s Free Trade Zone: Atlantic Islands as Tax Optimization Hubs

Why the Atlantic Islands are more than just holiday destinations

Just imagine: you run your business from a sunny island in the Atlantic. Corporate tax? Significantly lower than in Germany. Bureaucracy? Manageable. The climate? Pleasant year-round.

Is this too good to be true?

But it’s not. Both the Canary Islands and Madeira have been offering attractive tax regimes for EU entrepreneurs for years. And it’s all completely legal.

In my daily consulting practice, I often meet entrepreneurs who rave about Dubai or Cyprus. Meanwhile, they tend to overlook two real gems right on our doorstep. Spain’s Zona Especial Canaria (ZEC) and Portugal’s Zona Franca da Madeira (ZFM) offer similar benefits—with one crucial difference: both are in the EU.

What does this mean in practical terms? No complicated substance discussions like in Dubai. No Brexit-related uncertainty as with British territories. Instead, EU law, EU double taxation agreements, and EU legal certainty.

Today, I’ll take you on a journey to these two tax optimization hotspots. I’ll show you not only the bare tax rates but also which structure suits which type of entrepreneur.

Ready for the Atlantic comparison?

Zona Especial Canaria: Spain’s tax gift in the Atlantic

What is the Zona Especial Canaria?

The Zona Especial Canaria is Spain’s answer to global tax competition. Since 2000, this special zone has been attracting companies to the Canary Islands with drastically reduced tax rates.

The special feature: The ZEC is not a separate jurisdiction. It’s an integral part of the Spanish tax system—with the blessing of the EU and the approval of the WTO.

Here are the key facts:

• Corporate tax: 4% (instead of 25% in Spain)
• Validity period: Until 2027 (very likely to be extended)
• Minimum investment: From €100,000 depending on activity
• Jobs: At least 3 local full-time positions

Which companies benefit from the ZEC?

The ZEC isn’t suitable for everyone. Spanish authorities have defined clear criteria for which companies can enjoy the 4% corporate tax rate.

Permitted activities include:

1. Industrial production: Manufacturing goods and products
2. International services: Services for clients outside the Canaries
3. Logistics and transportation: Storage and distribution
4. IT and software: Development and digital services
5. Research and development: Innovative projects
6. Holding activities: Management of participations (with restrictions)

What is explicitly not accepted: Pure trading companies, real estate business, or passive investments. The ZEC wants real economic activity on the islands.

The practical requirements in detail

Let me be honest: ZEC is not a matter of just filling out a form and calling it a day. Spanish authorities scrutinize everything closely.

In other words: You can’t just set up a mailbox company. ZEC requires real economic substance on the Canary Islands.

Tax benefits of the ZEC at a glance

The 4% corporate tax is only the tip of the iceberg. The ZEC offers further tax perks:

• Dividend taxation: 0% on distributions to shareholders
• Transfer pricing: Simplified documentation
• Loss carryforwards: Unlimited carry-forward
• EU Parent-Subsidiary Directive: Tax-free dividends to EU holdings

You also benefit from Spain’s extensive double tax treaty network—which covers more than 100 countries, far more than most other tax optimization destinations can offer.

Madeira Zona Franca: Portugal’s answer to the Canaries

Understanding Madeira’s tax regime

While the Canaries go for volume, Madeira pursues a premium strategy. The Zona Franca da Madeira (ZFM) is more exclusive, but often more lucrative.

Since 1987—and therefore much longer than the ZEC—Madeira has been attracting international companies with attractive tax perks. The concept: fewer companies, but higher quality and greater economic value added.

The key data:

• Corporate tax: 5% (instead of 21% in Portugal)
• Validity period: Until 2027 (extension expected)
• Minimum investment: From €75,000
• Jobs: At least 2 local full-time positions

Why Madeira is different

The crucial difference to the ZEC lies in flexibility. Madeira allows a broader range of business activities—including some that wouldn’t work on the Canaries.

Permitted activities:

1. International trading: Trade with third countries
2. Financial services: Banking and financial consulting
3. Ship management: Shipping services
4. Intellectual property: Licensing and IP management
5. Consulting: International consultancy
6. Holding structures: Management of participations

Especially interesting: Madeira is one of the few EU jurisdictions where IP holding structures still offer attractive benefits. While other countries have tightened their IP regimes, Madeira remains a viable option.

Requirements in practice

Madeira is less bureaucratic than the Canaries but still demands real substance. Here are some of my practical experiences:

A typical client of mine set up a consulting company in Madeira. Minimum investment: €150,000 in office and equipment. Two local employees for administration and customer support. Result: 5% corporate tax on €400,000 annual profit.

The requirements in detail:

Madeira’s special tax features

The 5% corporate tax is just the starting point. Madeira offers further tax refinements:

• Withholding tax: Reduced or eliminated with many countries
• IP taxation: Attractive rules for license income
• Double dip: Can be combined with the Portuguese NHR program
• EU directives: Full application of all EU tax directives

One especially exciting feature is the combination with Portugal’s NHR program (Non-Habitual Resident). As a director of your Madeira company, you may also (personally) benefit from reduced tax rates.

Canaries vs. Madeira: The Direct Tax Comparison

Tax rates and conditions head to head

Let’s get down to the details. I’m comparing both regimes point by point—no sugar-coating, just the reality from my hands-on experience.

Cost comparison in reality

Let me show you what both options really cost in practice, using a concrete scenario:

Scenario: IT consulting company, €500,000 annual profit, international clients

Canaries (ZEC):

• Corporate tax: €20,000 (4% of €500,000)
• Setup costs: €15,000 (lawyer, notary, authorities)
• Annual compliance: €8,000
• Office + staff: €45,000 (3 employees)
• Total costs year 1: €88,000

Madeira (ZFM):

• Corporate tax: €25,000 (5% of €500,000)
• Setup costs: €12,000
• Annual compliance: €6,000
• Office + staff: €35,000 (2 employees)
• Total costs year 1: €78,000

The result surprises many of my clients: despite the higher tax rate, Madeira often works out cheaper—mainly thanks to lower ancillary costs and fewer staffing requirements.

Which type of business fits where?

After hundreds of consultations, I see clear patterns. Here are my recommendations:

The Canaries are ideal for:

• Larger companies with high profits (€1 million+)
• Industrial or logistics activities
• Businesses focused on the DACH region
• Teams who value a larger German-speaking community

Madeira is better suited to:

• Medium-sized consulting or IT companies
• IP-focused business models
• Internationally diversified companies
• Entrepreneurs who value flexibility

From Theory to Practice: How to Make the Most of Island Benefits

The step-by-step process

Theory is nice, but how do you actually put it into practice? Here’s my proven roadmap:

Phase 1: Preparation (2-3 months)

1. Business model analysis: Does your activity suit ZEC or ZFM?
2. Substance planning: Which activities are you really relocating?
3. Tax optimization: Integration with your existing structure
4. Compliance check: CRS, reporting obligations, documentation

Phase 2: Implementation (3-4 months)

1. Company establishment: Notary, commercial register, authorities
2. Licensing: ZEC or ZFM status
3. Setting up infrastructure: Office, staff, banking
4. Migration: Gradually relocate activities

Phase 3: Optimization (ongoing)

1. Compliance monitoring: Meeting all requirements
2. Tax optimization: Adjusting the structure
3. Expansion: Relocating further activities to the island

The most common implementation mistakes

From experience, I see the same mistakes repeated over and over. Here are the top five—and how to avoid them:

Mistake #1: Underestimating substance requirements
Many think renting an office is enough. Wrong. You need real, documentable business activity on site.

Mistake #2: Ignoring German taxation
Even with an island-based company, you might still be taxed in Germany. Dont ignore permanent establishment risk!

Mistake #3: Poor documentation
Both regimes demand detailed reports. Sloppy bookkeeping can cost you your status.

Mistake #4: Unreliable cost planning
Setup and running costs are often underestimated. Budget €50,000-100,000 in the first year.

Mistake #5: No exit strategy
What happens after 2027? Both regimes are time-limited. Make sure you have alternatives.

Banking and practical challenges

One issue many people underestimate: banking on the islands. Here’s what I’ve found:

Canaries:

• Bankia, Santander and BBVA are well established
• Account opening is usually straightforward
• Online banking at German standards
• Easy integration in the EU payment system

Madeira:

• Banco Santander Totta, Millennium bcp are available
• Personal presence often required to open an account
• Online banking is functional, but not German standards
• SEPA transfers are standard

In both cases I recommend: plan for at least one on-site appointment to open your account. Purely online account setups are possible, but often much more complicated.

Pitfalls and Hidden Risks

Don’t forget German taxation

The most common mistake my clients make: they focus only on island taxation and forget about Germany. This can get expensive fast.

Here are the most important German tax risks:

• Permanent establishment risk: Too much German activity can trigger German taxes
• Controlled foreign company rules: Passive income may trigger German tax liability
• Exit taxation: Moving existing companies can trigger tax charges
• Function transfer: Transferring functions is often taxable

My recommendation: Always have any structure checked by a German tax advisor upfront. An investment of €2,000-5,000 can save you six-figure tax payments later on.

EU regulation and compliance

Both regimes are under constant EU scrutiny. The Commission regularly reviews whether the tax benefits still comply with EU law.

Current risk factors:

1. State aid rules: EU state aid law is being interpreted more strictly
2. Substance requirements: Continuously tightened
3. Transparency: More reporting and documentation required
4. Anti-BEPS: OECD rules influencing EU law

This doesn’t mean the regimes will disappear, but requirements are rising. If you’re getting started now, ensure you are compliant from day one.

Expiry in 2027 – and what comes next

Officially, both regimes expire in 2027. What happens after is still undecided. Here’s my assessment based on political developments:

Most likely scenarios:
An extension with stricter conditions is likely. It’s possible the programs will continue, but the details are not set in stone yet.

My strategy for clients: Make use of the remaining years, but have a plan B. Malta, Ireland or even Cyprus can be alternatives.

My Conclusion: Which Island Suits You Best?

After everything we’ve discussed, let me be honest: both options work. The real question isn’t whether the Canaries or Madeira are better. It’s which better fits your individual situation.

Here’s my personal recommendation based on a decade of consulting experience:

Choose the Canaries if:

• You run a larger business (profit of €1 million+)
• Your focus is on the DACH region
• You have industrial or logistics activities
• You value an established German-speaking community
• The one percentage point tax difference is decisive for you

Choose Madeira if:

• You have a medium-sized consulting or IT business
• Flexibility in business activities is key
• You operate IP-heavy business models
• You are internationally diversified
• You prefer less bureaucracy

What both options have in common: They are legal, EU-compliant, and—with the right implementation—highly effective.

But let me be totally clear as your tax mentor: They’re not for everyone. If you’re not willing to build real substance and ongoing compliance, keep your hands off.

For everyone else, both Atlantic Islands offer a unique opportunity: EU tax optimization with a sunshine guarantee.

Have questions about your specific situation? Get in touch. As your tax mentor, I’m happy to help you find the optimal solution for your international tax structure.

Yours, RMS

Frequently Asked Questions about Canaries and Madeira Tax Optimization

Can I benefit from ZEC or ZFM as a sole proprietor?

No, both regimes require a corporation. You must set up at least a Spanish S.L. (Canaries) or Portuguese Lda. (Madeira). As a managing director, you can, however, benefit from favorable salaries and dividend distributions.

How long does it take to obtain a license?

For the Canaries (ZEC), expect 4 to 6 months from application to approval. Madeira (ZFM) is quicker: usually 2 to 3 months. In both cases, you can start operating before the license is granted.

What happens if I no longer meet the minimum requirements?

In this case, you lose your special status and pay the standard Spanish (25%) or Portuguese (21%) tax rates. Retrospective repayments may be due. This is why ongoing compliance monitoring is so important.

Can I simply relocate my German company to the islands?

It’s complicated and can trigger German exit taxes. Usually, it’s more tax-efficient to set up a new company and gradually shift activities. Be sure to check this beforehand.

What hidden costs should I expect?

In addition to taxes, plan for: lawyer and notary fees (€10,000–15,000), local accounting (€6,000–12,000 annually), office costs (€12,000–30,000 annually), staff costs (€20,000–50,000 annually), and compliance costs (€5,000–10,000 annually).

Does this still work after Brexit?

Yes, both regimes are independent of Brexit. In fact, you benefit because British alternatives (such as Gibraltar) have lost attractiveness. As EU locations, the Canaries and Madeira have actually become more appealing.

Do I have to live on the islands personally?

No, but you or a managing director must be regularly present. As a rule of thumb: at least once per quarter for several days. Many of my clients combine this with workations or vacations.

How secure are the regimes in the long term?

Both officially end in 2027 but are likely to be extended. The EU Commission has already indicated that special zones for outer regions will continue to be supported. Still, make sure you have alternatives in mind if requirements are tightened.