WRITTEN QUESTION E-3926/97 by Angela Sierra González (GUE/NGL) to the Commission (11 December 1997)

Subject: Canary Island economic and tax system

The Canary Island economic and tax system adopted through Laws 20/1991, 19/1994 and Royal Decree - Law 3/1996 makes provision for a number of economic and tax incentives aimed at developing the islands' economic sectors.

These include:

1. the Canaries special zone;

2. company tax rebates amounting to 40% of profits on income accruing from a company's agricultural, industrial and fisheries assets in the Canaries;

3. investment incentives geared to setting up businesses;

4. the investment reserve, with a reduction of up to 90% on the basic rate of personal income tax and company tax for non-distributed profits destined for reinvestment or the public debt;

5. tax credits on investment, higher than in the rest of Spain, and

6. a 95% rebate on company tax for businesses set up on or before 31 December 1996.

During the negotiating process between the Commission and the Spanish Government, the former has questioned some of these measures and has in some cases set a time-limit.

What reforms is the Commission proposing with regard to the current Canary Island economic and tax system? What impact will they have on each of the incentives described above?

To what extent will the Canary Island economic and tax system be affected by the drawing-up of a 'tax harmonization code' by the Commission?

Answer given by Mr Santer on behalf of the Commission (11 February 1998)

The Commission decided that the state aid included in the Canary Islands economic and tax system is compatible with the common market under the conditions notified by the Spanish Government. This aid takes the form mainly of tax incentives to promote formation of new firms in the Canary Islands and to safeguard existing firms. The aggregate volume of aid under the economic and tax system could not exceed ESP 45 billion (ECU 268 million) per year, the bulk of this aid (ESP 38 million or ECU 227 million) being kept in reserve for investment.

This system includes:

- reduction, by up to 90% of the share of the undistributed profits, of the basis of assessment to tax on profit to be set aside as a reserve for investment. Investments must be made within three years and the aid intensity must not exceed 35% of the investment;

- corporate and personal income tax relief with regard to the part of these taxes on income from the production of tangible assets. The exemption is degressive: initially it cannot exceed 50% and it will fall to 30% in 2003;

- tax exemption on transfer and registration fees of company deeds relating to their formation, capital increase and their acquisition of assets. These exemptions are considered as compatible only up to 2003. Moreover, they are degressive.

The Commission considers that the foregoing measures, which are aids to finance investments in the Canary Islands, are regional development aids. It notes that the maximum level of aid granted under the system in question, even in the case of aggregate aid, was 50% net grant equivalent (NGE) and thus in keeping with the ceilings set by the regional aid map currently in force. With regard to compliance with the new ceilings established by maps approved by the Commission during the life of the aid in question, the Commission notes that the Spanish authorities have undertaken to ensure that the levels of aid granted under the system in question, even if aggregated, would not exceed those ceilings.

With regard to the measures which take the form of operating aid, the Commission considers that they are a necessary means of compensating for the handicaps arising from the nature of the region, which is eligible for regional development aid for a limited period ending in 2003, by way of exception to Article 92(3)(a) of the EC Treaty. Since this aid is limited in time and degressive, the Commission considers that it is regional development aid compatible with the common market.

The Council and the representatives of the governments of the Member States, meeting within the Council adopted a code of conduct for business taxation on 1 December 1997. The code provides for a review process to determine which tax measures are harmful, and are required to be rolled back. Harmful measures should in principle be rolled back by 31 December 2002. For new measures there is a standstill clause. Member States will refrain from introducing new harmful measures.

Letter G of the code contains a special reference to outermost regions with special tax regimes: 'Insofar as the tax measures are used to support the economic development of particular regions, an assessment will be made of whether the measures are in proportion to, and targeted at, the aims sought. In assessing this, particular attention will be paid to special features and constraints in the case of the outermost regions and small islands, without undermining the integrity and coherence of the Community legal order, including the internal market and common policies.'