In the 19th Century the Spanish Government made the Canary Islands a free trade area to promote economic development. When Spain joined the EU in 1986 special fiscal measures were deemed incompatible with the European laws. For these reason the Canary Islands parliament decided to stay out of the European VAT area.  

In a similar way Ceuta and Melilla do not have VAT but have the tax for Production, Services and Importation (IPSI).Ceuta y Melilla do not form part of the customs territory of the EU and have two separate autonomous statutes approved respectively by article 144.b of the Spanish Constitutional Laws 1/1995 and 2/1995 of 13th March. 

We will try to provide a quick overview on the tax regime applicable in three special territories in Spain: the Canary Islands, Ceuta and Melilla. 

VAT 

These areas are excluded from application of VAT and considered third territories when it comes to VAT. 

The Canary Islands 

The Canary Islands are part of the European Customs Union, though they are excluded from VAT application.  

Though no VAT is levied, there are two special taxes in the islands: 

• The Canary Islands apply a tax equivalent to VAT: the IGIC –Impuesto General Indirecto Canario (General Indirect Tax of the Canary Islands), which is charged on supplies of goods and services on the Canary Islands by traders and professionals, as well as on imports of goods into the islands. 

The standard rate is 7%; besides there are higher rates for goods with external costs, such as automobiles or alcoholic beverages (9,5% and 13,5%) 

• The AIEM–Arbitrio sobre las Importaciones y Entregas de Bienes (Tax on the importation and supply of goods in the Canary Islands) is levied on imports of some types of goods that are produced in the islands. Its aim is to protect some local manufacturing sectors by means of charging some imports with rates of 0%, 5% or 15%. 

Ceuta and Melilla 

These two territories are excluded from VAT application and, besides, they are not part of the European Customs Union. They levy an indirect tax called IPSI – Impuesto sobre la Producción, los Servicios y la Importación (Tax on the Production, Services and Imports). The standard rate usually vary from 0,5% to 10%. The applicable rate for yacht import is 10% 

What is the treatment on the sales of goods to these territories?  

1. Sales to Canary Islands, Ceuta or Melilla, where delivery takes place to these territories will be invoiced without VAT and documented with the corresponding SAD (Single Administrative Document). 

1. Sale to an individual or company without direct shipment to the customer’s address in the Canary Islands, Ceuta or Melilla would be subject to VAT,  

Special tax on certain means of transports (matriculation tax) 

The Spanish matriculation tax (Special Tax on Certain Means of Transport), which applies on the first definitive registration of yachts under Spanish flag or their use of in the Spanish territory by Spanish residents or holders of establishments in Spain is usually levied at a 12% rate. However in the Canary Islands the applicable rate is 11%,  

Ceuta and Melilla are subject to the tax but the applicable rate there is 0%, therefore in practical terms the tax is not applicable there. 

The tax particularities of these jurisdictions have consequences in many aspects: changes of residency from the customs territory to these destinations, relocation of business, the use of the Spanish off-shore ships registry … making of these jurisdictions very interesting destinations for tax planning purposes.