The Reinvestment Reserve for the Canary Islands (RIC): A Practical Guide

The Reinvestment Reserve for the Canary Islands (Reserva para Inversiones en Canarias, RIC) can cut a company's taxable profit very substantially — and it is also the incentive most often applied badly. Here is what it actually requires, and where foreign-owned businesses in the islands tend to get it wrong.

What the RIC is

The RIC is set out in Article 27 of Law 19/1994, of 6 July, on the Economic and Fiscal Regime of the Canary Islands. It lets companies operating in the archipelago reduce their Corporate Tax base by the amount they allocate, out of undistributed profit for the year, to a restricted reserve — provided that amount is later invested in specific qualifying assets.

The mechanism is easy to describe and demanding to execute correctly: setting the reserve aside on the balance sheet is not enough. The company has to actually invest, within set deadlines, in assets that meet the legal requirements, and keep that investment in place for years afterwards. This is a conditional tax benefit, not an automatic saving.

Who can apply it

Companies and other entities subject to Spanish Corporate Tax, and permanent establishments of non-resident entities subject to Non-Resident Income Tax, can apply the RIC — provided the establishment is located in the Canary Islands and the profit being reduced actually comes from activity carried out there.

The substantive requirement is that the profit must genuinely originate from activity in the archipelago. A company with its registered office in the Canary Islands but whose real economic activity takes place elsewhere cannot apply the reserve to that profit.

How much you can set aside

The reduction is capped at 90% of the undistributed profit for the year attributable to establishments located in the Canary Islands, with a further cap equal to the period's positive taxable base. In practice, this requires a clear accounting separation between profit generated in the archipelago and any profit generated elsewhere.

The allocation must be formalised before the deadline for approving that year's accounts, through a corporate resolution that expressly assigns the amount to a restricted reserve within equity.

What counts as an eligible investment

The amount set aside must be invested in one of the categories listed in Article 27.4 of Law 19/1994. The ones we see most often in practice are:

• New fixed assets used in the business, located in or delivered to the archipelago.
• Used fixed assets, under certain conditions, where they represent a technological improvement for the business.
• Canary Islands public debt or certain securities issued by public entities, capped at 50% of the amounts set aside.
• Shares or holdings in companies that themselves make the investments above or carry out certain priority activities in the Canary Islands, subject to the conditions and limits the law sets out.
• Job creation directly linked to the investments above, within the applicable limits and employment-maintenance conditions.

Not every investment qualifies. Buying premises to lease out to third parties, acquiring mixed-use vehicles without proving genuine business use, and subscribing to shares in companies that don't meet the activity requirements are the three most common reasons we see these reserves reassessed.

The three-year investment deadline

The investment must be made within a maximum of three years from the date the tax accrues for the year in which the reserve was set aside. This is not a soft target: if the investment hasn't been made by the end of the third year, or has been made in an asset that doesn't meet the requirements, the unspent amount is added back to the taxable base for the year the deadline expired — with late-payment interest on top.

Setting the RIC reserve aside without already having decided — not just intending — what it will be invested in is the single most common reason the incentive ends up costing more than it saved.

The holding period

Once made, the investment must remain in use in the business for a minimum of five years, or its useful life if shorter. Selling the asset, taking it out of business use, or ceasing the activity before that period ends also triggers a reassessment, except in the reinvestment scenarios the law itself allows for.

This makes the RIC a medium-term commitment rather than a year-end tax decision: the business needs to be able to sustain the investment, and its business use, for several years running.

RIC, DIC and ZEC don't always combine

The RIC sits alongside other incentives under the Canary Islands' Economic and Fiscal Regime — the Canary Islands Investment Deduction (DIC) and the Canary Islands Special Zone (ZEC) — but they cannot always be applied to the same investment, or stacked without limit. Choosing the wrong regime, or applying two incentives to the same asset without checking exactly how they interact, is another recurring source of reassessment.

Which combination makes sense depends on the corporate structure, the level of profit, and whether the activity qualifies for the ZEC. There is no single right answer — it needs modelling case by case before deciding.

The mistakes the Canary Islands Tax Agency flags most

• Setting the reserve aside without a detailed decision on what it will be invested in.
• Investing in assets that don't meet the legal requirements, particularly holdings in other companies.
• Not keeping the accounting separation the law requires between profit generated in the Canary Islands and profit generated elsewhere.
• Letting the investment deadline run out uncontrolled, on the assumption it will get sorted eventually.
• Not documenting the corporate resolution allocating the reserve with the formality, and within the deadline, the law requires.

The RIC is a real, significant incentive, not an aggressive tax-planning device — it is built for businesses that genuinely intend to reinvest in the archipelago. The problem is almost never the rule itself; it's applying it without a concrete investment plan behind it. Before setting the reserve aside, it is worth having the destination of the investment worked out in as much detail as the tax return itself.

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Notice: this article is for general information purposes and reflects the law in force on its publication date. It is not legal or tax advice for any specific case. Before making any decision, consult a professional.