The Canary Islands are consolidating their position as a platform for attracting cutting-edge technological projects, but also as a field of tax interpretation where nuance is everything. The case we are analyzing involves a peninsular consulting and engineering company specializing in territorial management, the environment, and cartography. It decided to take the plunge in the archipelago to lead, together with another partner, an ambitious project linked to the use of unmanned aircraft and R&D&I activities. It did so by forming a Temporary Business Association (UTE), domiciled in the Canary Islands.
A high-flying project
The task is no small feat: the contract awarded to the joint venture includes everything from software development to critical tasks such as aerial forest firefighting. The consulting entity owns 65% of the joint venture's share capital, compared to its partner's 35%.
The operational organization reflects a clear distribution by area and territory. Although the joint venture opened a work center in the Canary Islands—with a staff of between 10 and 14 people—the bulk of the technical and strategic management remains on the Peninsula. Three centers in Madrid and Barcelona lead project development, while programming and local management tasks are carried out on the islands. All staff in the Canary Islands operate under guidelines set by the mainland and have no representation or decision-making roles.
Two phases, one criterion
The project is divided into two phases: the first, from 2024 to 2026, covers the technical execution contracted by the awarding public body. The second, from 2026 to 2028, focuses on the exploitation of the results, boosting the Canary Islands aerospace industry through awareness campaigns, business development, and employment commitments.
In both stages, the partners re-invoice their costs to the UTE according to their participation percentage, allowing for clear traceability of the financial and operational distribution.
Permanent establishment in the Canary Islands?
The key tax issue—analyzed by the Tax Management Center—is whether or not this business structure creates a "permanent establishment" in the Canary Islands, with the resulting implications for the IGIC (Canary Islands General Indirect Tax).
The answer is blunt: no. Having an operational center or employees on the islands alone is not enough to consider the consulting company established in the archipelago. The determining factor is the lack of effective management from the Canary Islands and the subordinate nature of the local team.
The Agency concludes that neither the project execution phase nor the subsequent exploitation phase constitutes a permanent establishment for IGIC purposes. No tangible assets related to the activity are generated, the displaced personnel have no representation capacity, and all strategic decisions are made from the Peninsula.
A tax lesson for complex projects
This case leaves a clear lesson: in tax matters, form matters as much as substance. It's not enough to look at where the workers or computers are physically located. What counts is who decides, who signs, who directs.
