Canary Islands ZEC vs. Madeiras Zona Franca: Tax Comparison for Entrepreneurs on Atlantic Islands

Canary Islands ZEC vs. Madeira Zona Franca: The Ultimate Atlantic Tax Comparison 2025

Imagine this: 4% corporate tax in the Canary Islands. Or even 5% in Madeira. Too good to be true?

That’s exactly what I thought.

Until three years ago, when I helped a client set up his holding company in Tenerife. Today, he really does pay just 4% corporate tax on his international profits.

Here’s the truth: Most entrepreneurs have heard of Dubai, Cyprus, or Estonia. But the Atlantic islands? Completely off the radar.

Yet both Spain’s Canary Islands and Portugal’s Madeira offer unique tax benefits. The ZEC (Zona Especial Canaria) and the Zona Franca da Madeira are two of Europe’s best-kept tax optimization secrets.

In this article, I’ll take you on a journey to both Atlantic gems. Not only will you get the cold hard numbers, but also my hands-on insights from 20+ years of international tax advising.

The special part? Both systems are fully EU-compliant. No gray areas, no legal risks.

Ready for your personal Atlantic tax showdown?

Yours, RMS

What is the Canary Islands ZEC and How Does It Really Work?

The ZEC is Spain’s answer to international tax flight. A special zone with dramatically reduced tax rates.

But let me be honest: very few people actually understand how it really works.

ZEC Basics: More Than Just Low Taxes

The Zona Especial Canaria was introduced in 2000. The aim was simple: establish the Canaries as an international business hub. Today, many companies benefit from this system.

The main advantages at a glance:

• 4% corporate tax instead of Spain’s usual 25%
• Tax exemption on dividends under certain conditions
• Holding benefits for international structures
• EU directives fully applicable
• Access to Spain’s double tax treaties

Sounds enticing. But now let’s talk conditions.

ZEC Requirements: What You Really Need to Meet

Not every company qualifies for the ZEC. The requirements are specific:

This is where it gets interesting: most online articles gloss over the practical hurdles.

For example: In my practice, a German e-commerce entrepreneur wanted to structure his holding via the ZEC in 2023. The problem? The 5-jobs rule. In the end, hiring locals cost him more than the tax savings.

ZEC Tax Benefits: The Actual Numbers

Let’s crunch the numbers. A typical ZEC company with €500,000 annual profit:

• Regular Spanish taxation: €125,000 (25%)
• ZEC taxation: €20,000 (4%)
• Savings: €105,000 per year

This calculation only applies to qualifying activities. Passive income is often not covered by ZEC benefits.

Also important: The ZEC is currently due to expire in 2027. Extensions are possible, but not guaranteed.

Madeira’s Zona Franca: Portugal’s Hidden Tax Haven in Detail

While the Canaries are gaining international attention, Madeira remains an insider tip. That’s undeserved.

The Zona Franca da Madeira is older, more established, and in some ways more flexible than the ZEC.

Madeira Zona Franca: History and Current Situation

Since 1987, Madeira has attracted international businesses with tax privileges. Over 35 years of experience speaks for itself.

Today, many companies use the Zona Franca—not just big multinationals, but also medium-sized firms.

The key advantages:

• 5% corporate tax instead of Portugal’s regular 21%
• No withholding tax on dividends, interest, or royalties
• Flexible holding structures possible
• Full use of EU freedom of establishment
• Portugal’s double tax treaties apply

The crucial difference to the ZEC? The flexible requirements.

Madeira Requirements: Less Restrictive than ZEC

This is Madeira’s strength. The requirements are more practical:

A real-life example: In 2024, I helped a software entrepreneur set up his IP holding in Madeira. Instead of five full-time positions, two part-timers plus external contractors were sufficient.

That makes all the difference in practice.

Madeira Tax Benefits: The Whole Picture

Madeira’s tax system is especially interesting for holding structures:

• Corporate tax: 5% on all profits
• Dividend tax: 0% for EU parent companies
• Royalties: 0% withholding tax
• Interest income: 0% withholding tax for EU companies

Example calculation for a holding with €300,000 dividend income:

• Germany: approx. €78,000 taxes
• Madeira: €15,000 taxes
• Savings: €63,000 per year

Especially attractive: Zona Franca runs through 2027, with a high likelihood of extension.

Madeira vs. Other EU Locations: The Decisive Advantage

Why choose Madeira over Cyprus or Malta?

The answer is in the combination: EU benefits plus real tax savings plus moderate requirements. This is a rare combo.

Plus, you enjoy Portugal’s legal stability and positive reputation in the EU.

ZEC vs. Zona Franca: Direct Comparison of Key Factors

Now let’s get specific. Which Atlantic option fits your company?

I’ll compare both systems on the factors that really matter in practice.

Tax Burden: 4% vs. 5%—Does It Really Make a Difference?

At first glance, ZEC’s 4% seems impossible to beat. But don’t jump to conclusions.

The result? In practice, both systems are on par. Due to extra withholding taxes, the ZEC can even end up costing more.

Requirements: Where Is the Real Difference?

Here’s where it gets real:

ZEC Challenges:

• 5 full-time staff = around €150,000 annual payroll
• Strict substance audits by Spanish authorities
• Higher minimum investment required

Madeira Advantages:

• More flexible staffing requirements
• More pragmatic authorities in practice
• Lower entry barriers

Based on my experience with over 50 island structures: Madeira is more practical for 80% of entrepreneurs.

Legal Certainty and Outlook

Both systems are EU-compliant and established. But there are nuances:

ZEC:

• Newer system, less case law
• Spain under increased EU scrutiny
• Extension beyond 2027 not guaranteed

Madeira:

• 35+ years of experience and jurisprudence
• Portugal less under EU spotlight
• Greater probability of extension

In terms of legal certainty, Madeira is ahead.

Quality of Life and Practical Considerations

An often overlooked factor: Where do you actually want to spend your time?

Canaries:

• Larger German community
• Better flight connections to Germany
• Greater variety of islands to choose from
• Established infrastructure for digital nomads

Madeira:

• Quieter and more exclusive
• Excellent quality of life
• Less crowded than the Canaries
• Stable, well-educated local population

The decision depends on your personal preferences.

How to Put Atlantic Tax Advantages into Practice

Theory is nice. But how do you actually implement an Atlantic structure?

Here’s my proven step-by-step guide.

Step 1: Assess Suitability—Is an Island Structure Right for You?

Not every entrepreneur benefits from Atlantic structures. An honest self-assessment is essential:

Youre a good candidate if:

• Your annual profit exceeds €200,000
• You already operate internationally or plan to
• Youre willing to build real substance on site
• You can spend at least 2–3 months onsite per year
• Your business is digitalizable

Warning signs:

• You’re only looking for a “shell company”
• Your business is entirely local in Germany
• You shy away from the complexity of international structures
• Budget under €50,000 for setup and the first years

Step 2: Choosing Your Location—ZEC or Zona Franca?

Based on my experience, I recommend the following decision matrix:

Opt for the ZEC if:

• You run a manufacturing business
• You’ll need at least 5 employees anyway
• The German market is your main focus
• You want to squeeze out the maximum tax benefit (1% difference)

Choose Madeira if:

• You’re planning a holding or IP structure
• Flexibility around staffing is important
• You value long-term legal certainty
• You prefer a quieter, more exclusive environment

Step 3: Structure Setup—The Proven Atlantic Blueprint

Here’s the standard structure I use for 90% of my clients:

Basic structure:

1. Atlantic Holding (ZEC or Zona Franca) – central management
2. Operating Company (Germany or EU) – day-to-day operations
3. IP Company (Atlantic) – royalties and intellectual property
4. Service Company (Atlantic) – management services

This structure optimizes both the tax burden and substance requirements.

Step 4: Registration and Administration

The administrative work is manageable, but specific:

For ZEC companies:

• Application to the ZEC Consortium
• Proof of minimum investment
• Staff contracts and office lease
• Business plan for 3–5 years
• Processing time: 3–6 months

For Madeira companies:

• Application to the competent authority
• Proof of business activity
• Establish local presence
• Compliance documentation
• Processing time: 2–4 months

Step 5: Ongoing Compliance and Optimization

After formation, the real work begins:

Annual obligations:

• Local tax returns and financial statements
• Documenting local substance
• Meeting EU reporting requirements
• Avoiding German CFC (“Hinzurechnungsbesteuerung”)

My tip: Invest in professional local support from the start. The €10,000–€15,000 per year for top-notch advice will save you many times that in tax risk.

Cost-Benefit Analysis: What Does an Atlantic Structure Really Cost?

Transparency is key for me. Here are the realistic costs:

At what profit level is it worthwhile? Rough rule: ZEC from €1.5 million up, Madeira from €500,000 annual profit.

Common Pitfalls and How to Avoid Them

In 20 years, I’ve seen every possible mistake. Let me help you sidestep the most common traps.

Pitfall 1: Underestimating Substance

The biggest myth: “I’ll just set up a company on the islands and save tax.”

It doesn’t work that way.

Both systems require real economic activity on site. Auditors will look closely:

• Management: Decisions must be made on the ground
• Staff: Qualified employees with real duties
• Office space: Fitting to your business size
• Documentation: All activities must be provably onsite

My advice: Plan for more substance than the bare minimum from the outset. It costs less than retroactive tax payments.

Pitfall 2: Ignoring German CFC Rules

Many underestimate German CFC taxation (§7–14 AStG). It can undo all your tax savings.

Risky are:

• Passive income without real activity
• Companies under German control
• Artificial profit shifting

Protective measures:

• Local directors with real authority
• Prove on-the-ground business operations
• Arm’s length pricing for group transactions
• Regular legal reviews

Pitfall 3: Neglecting Compliance

Atlantic structures require meticulous compliance. Forgetting a report can be expensive.

Critical reporting requirements:

• Germany: Foreign tax law notifications
• EU: DAC6 filing requirements
• Local: Substance proof and annual reports
• USA: FATCA reporting (if relevant)

Missed filings can lead to fines up to €25,000.

Pitfall 4: Not Considering Your Exit Strategy

What happens if you want to unwind the structure?

Common exit problems:

• Hidden reserves taxed on dissolution
• Capital gains on liquidation are fully taxable
• Compliance backlogs must be resolved

My recommendation: Always include a clean exit strategy from the start.

Pitfall 5: Overestimating Tax Savings

4% or 5% corporate tax sounds amazing. But don’t forget the big picture:

• Setup and running costs
• Additional compliance work
• Currency risks
• Possibly higher cost of living

Realistic calculation for a €500,000 company:

• Potential tax savings: €100,000
• Additional costs: €60,000
• Net savings: €40,000

Still attractive, but more realistic than the dream figures often advertised.

How to Systematically Avoid Pitfalls

My 5-point checklist for safe Atlantic structures:

1. Thorough upfront analysis: Does the structure fit your business model?
2. Oversized substance: Invest more than the minimum required
3. Professional support: Use both local and German experts
4. Ongoing monitoring: Quarterly compliance checks
5. Documentation: Document and archive everything meticulously

Follow these principles and your Atlantic structure will deliver safe tax benefits for years to come.

Frequently Asked Questions

Are the ZEC and Zona Franca legal and EU-compliant?

Yes, both systems are fully legal and EU-compliant. They are based on approved special economic zones and have EU Commission approval. Key is proper implementation with genuine local substance.

How long does it take to set up an Atlantic company?

Setting up a ZEC company takes 3–6 months; a Madeira company 2–4 months. The exact timing depends on your structure’s complexity and the completeness of your documents.

What’s the minimum onsite presence required?

You should be able to spend at least 2–3 months onsite per year. Management decisions must actually be made on location. A “shell company” won’t work.

Can I convert my existing German GmbH into an Atlantic structure?

A direct transformation isn’t possible. But you can set up a new Atlantic holding and make your German GmbH its subsidiary. Careful tax planning is essential.

Which industries benefit most from Atlantic structures?

Especially suitable: IT businesses, consulting firms, online trade, licensing businesses, and international trading companies. Manufacturing is less suited, as substance requirements are tougher to meet.

What happens in the event of Brexit or other political changes?

Both islands are part of the EU and not affected by Brexit. Political risks are minimal, as both Spain and Portugal are stable democracies. The tax regimes are EU-approved through 2027.

What are the ongoing costs of an Atlantic structure?

For a ZEC structure, budget €150,000–250,000 annually; for Madeira, €60,000–120,000. Exact costs depend on your substance requirements.

Can German CFC rules wipe out my tax savings?

Yes, if you don’t meet the substance requirements. With genuine local operations and proper structuring, you can avoid CFC taxation.

What are alternatives to the Atlantic islands?

Classic alternatives are Dubai (9% corporate tax), Cyprus (12.5%), or Estonia (20% upon distribution). Each location has specific pros and cons depending on your circumstances.

How long are the tax privileges guaranteed?

Both regimes are currently approved through 2027. Extensions are likely but not certain. Always plan an exit strategy in case privileges aren’t extended.