Tax incentives for investments in the Balearic Islands

The Balearic Islands are a highly sought-after destination for tourists and expats alike, thanks to their stunning beaches, rich culture, and favorable climate. But did you know that this region also offers a unique tax package designed to attract entrepreneurs and investors?

Moreover, the Balearic Islands have emerged as a leading HUB for TravelTech companies, boasting a vibrant business ecosystem that’s perfect for attracting top talent and fostering innovation.

In Spain, businesses engaged in investment activities may qualify for a range of tax incentives, including tax credits, deductions, and exemptions. These incentives are regulated by the Spanish Corporate Income Tax Law and can be applied against the corporate income tax payable by the business.

In general terms entities, tax residents in Spain are taxed at a flat rate of 25%. However, for those entities with a turnover below 1 million euros, the tax rate has been reduced to the 23%. Start-ups could be eligible to be taxed at a reduced rate of 15% for the first two-years period if they have a positive result.

Companies headquartered in the Balearic Islands may reduce their taxable base by an amount equivalent to the amount allocated to a special reserve for certain specific investments in the Balearic Islands, up to a limit of 90% of annual undistributed earnings for earnings directly related to business activities performed in this region, as well as for the transfer of the assets related to such business activities.

It is considered as undistributed earnings those used to fund reserves, excluding legal or mandatory reserves according to the corporate law in force. However, neither the earnings derived from the transfer of assets whose acquisition would have resulted in the investment of this reserve, nor those derived from securities representing ownership interests in the capital or own funds of other entities, nor transfers of own capital to third parties could be eligible to be regarded as undistributed earnings. 

This reduction may not result in a tax loss and is not compatible with expenses for goods and services used to credit R+D+i tax credits or job creation, or with any other incentive considered State Aid for EU Law purposes if the accumulated amount exceeds some thresholds.

Taxpayers are obliged to create a special reserve equivalent to the reduction applied and must be invested in qualifying investments within three years (including that in which the reserve is established). Investments will be subject to certain maintenance requirements.

Individuals taxed according to the Personal Income Tax PIT for business activities under the direct estimation regime will also be entitled to a tax credit for the net operating income allocated to the reserve resulting from business activities carried out in establishments in the Balearic Islands. The reserve must be invested in a qualifying investment within three years.

These incentives, combined with the recent measures introduced to attract digital nomads and inbound expatriates in Spain, makes Balearic Island a good alternative to be based on a long-term basis. In fact, in some cases businesses located on any of the four main islands – Mallorca, Menorca, Ibiza, or Formentera – would pay less than other EU countries when filing taxes each year. 

From Mylegalinbox we can help you to land in the gorgeous Balearic Islands archipelago, so do not lose your opportunity to learn more about it, and contact us. We will help you to invest in the most legal and tax-efficient manner.