After a protracted process involving several years of negotiation with the EU Commission to obtain the necessary approval the Spanish government has recently passed Decree-Law 2/2000 dated 23rd June 2000 which regulates all aspects of The Canary Islands Free Zone or ZEC (Zona Especial Canaria). The regime originally approved without Brussels consent through Law 6/1994 has been heavily modified to meet the EU Commission's objections and bears little resemblance to The Madeira look-alike originally envisaged, its scope and the attractiveness of its tax benefits having been substantially curtailed so as to avoid qualification as a harmful tax practice or illegal state aid, the most relevant aspects of the new regulation, compared with the original proposals, are the following:

1. Temporary scope
   
   Has been reduced from 25 years to the 31st December 2008, with no entities being approved beyond the 31st December 2006.
2. Criteria for approval
   
   

• A new requirement for the creation of a minimum of 5 new net jobs has been introduced.
• A minimum capital investment requirement of euros 100.000 has been introduced.
• Only certain activities can benefit from the regime.

3. Approval Process
   
   All candidate entities are now required to submit a Business Plan to obtain approval and an Advisory Committee has been created to assess their feasibility.
4. Geographical scope of operation
   
   The previous ring fencing of transactions with the Spanish mainland has been eliminated. ZEC companies can operate freely anywhere in the world although only Canary Islands source profits are entitled to the special tax regime.
5. Tax Treatment
   
   The fat 1% rate on all profits has been replaced by a variable 1% to 5% rate. The particular tax treatment on a given tax year being dependent upon:

• Time lapsed since incorporation.
• Number of jobs created
• Economic sector in which the company is involved
• The company's profits

The reduced rates not being applicable on any profits exceeding certain thresholds and applying only to profits arising in The Canary Islands.