The Canary Island Investment Reserve entered into effect in the year 1994 following a long period of elaboration and with the approval of all the political forces. The fiscal benefits included in this scheme were mainly justified by the geographical location and economical situation of the Canary Islands and by a long tradition of fiscal incentives applicable regarding the economy of the islands.

During the course of the past years the Canary Island Investment Reserve or “RIC” has become an important part of our economy to which we owe a considerable part of our economical growth. It has also promoted the capitalisation and diversification of activities carried out by Canary Island companies and created a basis for the creation of business organisations with sufficient dimensions to be able to compete with international companies on the tourist market.

The Public Administration Authorities of the Canary Islands have also benefited from this situation with interest rates on public debt that can only be justified by the fiscal benefits of the reserve. This has permitted investments to be made in infrastructures that has extended the benefits of the reserve scheme to cover all social sectors of the archipelago.

Nevertheless, since the reserve was created it has been a constant source of criticism. This is mainly because this fiscal measure with such impact on the economy of the Canary Islands is found to be insufficiently regulated by one sole article: Namely Article 27 of the Law 19/1994 article which, in spite of various promises, has never been enlarged on.

The vagueness of the expressions and terms contained in the referred regulations has permitted the Inland Revenue to loosely interpret the regulations to their benefit, demanding fulfilment of requirements not contemplated in the law and converting the application of the RIC into a complicated obstacle course. First came the limitations regarding land investments. Once this extreme was clarified, then came the further demand for a series of formal requirements. When these were resolved came the controversy regarding the setting up of the inversion, technological improvements and a never-ending list of etceteras.

Naturally, as is the case with all taxation schemes, the investment reserve has criticizable aspects and others of doubtful interpretation. Nevertheless, what is incomprehensible is the hostility that the Inland Revenue has shown, right from the word go, towards this reserve.

The object of this article is not to enter into technicalities, but what is clear at this moment in time is that no other aspect of the Spanish taxation system has given rise to so much conflict as the investment reserve. A glance at the tax inspections open for this sole reason and the shear volume of economical-administrative claims issued before the Economical and Administrative Tribunal of the Canary Islands (TEAR) is more than sufficient to give us an idea of the impact of the application of this scheme.

Thanks to the pressure applied by professional and political business sectors of the Canary Islands, the Central Administration was forced to acknowledge the existence of a high grade of conflict and the so called “commission of knowledge” was created. This commission recorded in writing criteria for the correct interpretation of some of the more conflictive aspects of the RIC. Nevertheless, this commission was short lived and the Inland Revenue, with apparent unwillingness to apply this fiscal benefit, has used a wide variety of arguments to question practically all the benefits and investments carried out making use of the reserve. Clear examples of this are: The limitation of the number of benefits considered as apt for receiving the RIC, conditions for the application of the investments or technological improvements, among others.

But the final straw came with an aspect that up until now had not proved conflictive, as it is regulated by clear and unmistakable regulations: We refer to the fiscal repercussions of the letting of real estate as a business activity. The only requirement according to Law is that the company has independent premises and at least one full-time employee and nothing else. Based on this legal provision, both professionals and small business have been making use of the reserve to administrate their investments.

Nevertheless, in spite of the clarity of the mentioned legal requirements the Inland Revenue, basing their argument on resolutions reached by the TEAR pronounced on precise questions, has now started to act indiscriminately against this sector of small and medium business savers who were convinced until now that they had been operating according to Law.

The social and economical effects caused by this continuos harassment could prove serious, not only due to the volume of investments affected – various tens of millions of euros – but also because of the considerable number of persons who will be negatively affected, in their majority small and medium sized companies. The size of the guarantees that these companies have to provide to cover the debts claimed from them that they now appeal before the Tribunals, is diminishing the funding of these small and medium sized companies, negatively affecting their economical development and growth, preventing the creation of more jobs and limiting the volume of the investment itself.

Faced with this situation we feel that the time has come for the political forces within the Canary Islands to adopt a clear and conclusive position regarding the reserve. It is necessary to decide whether the system should be defended with all its consequences, if it should be modified or abolished. What is not feasible is that the current situation of juridical insecurity is maintained any longer. Businesses cannot be given the incentive to undergo investments in exchange for fiscal benefits, when once the investment has been made everything possible will be done to withdraw the benefit and to qualify those same businessmen as fraudulent. This is causing an unacceptable economical situation and is proving to be a discredit to the Canary Island Taxation scheme.