Film and digital chaos in the Canary Islands: a judgment that exposes the political and legal disorder of the State

By Antonio Tejeda Encinas, Lawyer. Techno-political analyst

Introduction: a judicial setback with a political and legal backdrop:

The Audiencia Nacional has recently dealt the Agencia Tributaria several significant blows by ordering multimillion-euro refunds to Economic Interest Groupings (AIEs) for tax incentives wrongly denied in the Canary Islands. One of the most recent, dated 7 March 2025, concerns the production company behind The Cold Light of Day (5.5 million euros), but it was preceded by another of enormous value: the Wrath of the Titans case, which resulted in an order to refund 22.5 million euros. These judicial rulings not only correct restrictive interpretations that created legal uncertainty in an industry that is key to regional economic diversification, but also reveal a structural problem of governance in the Administration: a State that issues digital certificates, but whose agencies operate as disconnected data silos (at least in key areas where effective mechanisms of functional interoperability have not yet been deployed), incapable of sharing basic information.

The contradiction between State bodies – where the ICAA endorses projects with an electronic signature, while Hacienda rejects them as if they were worthless scraps of paper – calls into question the Government’s capacity to articulate coherent policies. Not the least of the ironies is that, while the Prime Minister himself proclaimed in 2021 his intention to make Spain the ‘Hollywood of Europe’, administrative reality displayed a lack of coordination and opposing criteria that held back those aspirations. This context gives the case obvious political relevance and serves as the starting point for a debate that goes beyond the legal sphere, reaching institutional design and the digital transformation of the public sector.

A legal dispute over tax incentives and a lack of institutional coordination The legal core of the case revolves around the tax incentives for film provided for in the corporate income tax legislation, which are especially generous in the Canary Islands because of their special Régimen Económico y Fiscal – REF. AIEs – Economic Interest Groupings – are legal vehicles that allow companies (or professionals) to join together in order to facilitate or carry out an economic activity ancillary to that of their members, in this case to channel investment into audiovisual productions: several companies join together in an AIE to carry out a project (a film, in this case) and in return can benefit from tax deductions in their corporate income tax.

This formula, entirely lawful and routinely used in film, was the one employed by the production company of ‘The Cold Light of Day’ and of other international shoots on the islands. However, the Agencia Estatal de Administración Tributaria (AEAT) adopted for years a rigid and sui generis position: it denied these AIEs the status of producers, and with it the right to the deductions, arguing that they lacked resources of their own and that the initiative and responsibility for the production supposedly lay with foreign co-producers.

In practice, Hacienda was disregarding the very nature of the AIE, even though the State, on the other hand, protected and promoted it as a vehicle for film financing – an obvious paradox that one media outlet described as ‘the State protects AIEs on the one hand and on the other finds itself compelled to question them’ owing to the unjustified war declared by Hacienda. Here a failure of digital governance is at work: the AEAT did not access the data already validated by the ICAA (electronic certificates, production reports), acting as if they were agencies of different countries rather than parts of one and the same State.

This internal lack of coordination between bodies translated into multimillion-euro penalties and tax assessments against several productions, undermining the confidence of investors and creators in the incentive system. The legal response was not long in coming: the affected AIEs first appealed through the administrative channel (Tribunal Económico-Administrativo) without success, and finally took the dispute to the courts.

The Audiencia Nacional, in its judgment of 7 March 2025 (preceded by that of 29 January on ‘Wrath of the Titans’), found in favour of the production companies and dismantled Hacienda’s argument point by point. First, the court explicitly recognised that the AIE acted as a film producer for all purposes, dismantling the idea that it ceased to be one because it subcontracted services or shared the initiative with foreign partners. It stressed that, under the co-production agreements, the AIE assumed full management of the film in Spain (in this case, in the Canary Islands) and therefore meets the production requirements.

A key argument of the Audiencia was to highlight that the AIE had prior administrative backing: it had obtained from the Instituto de la Cinematografía y de las Artes Audiovisuales (ICAA) – a body of the Ministry of Culture – the certificates of Spanish nationality of the work and of cultural classification, as well as the ‘Canarian audiovisual work’ certificate issued by the regional Government. Those certificates officially recognised the AIE as the producer of the film and attested to its entitlement to the tax incentive.

That Hacienda nevertheless denied the deduction reveals a worrying lack of institutional coordination. As the Audiencia Nacional itself points out, the AEAT cannot ignore or contradict the decisions of other competent bodies of the same Administration without extraordinary reasons to justify it. This legal principle (the single legal personality of the State) clashes with technological reality: without interoperable systems, Hacienda has no automatic access to the ICAA’s certificates, which turns coordination into an act of will, not a technical obligation.

In support of this position, the judgment invokes principles enshrined in our legal system, such as the doctrine of one’s own acts, the principle of legitimate expectations and, very emphatically, the idea that the General State Administration has a single legal personality. By virtue of that single legal personality, acts emanating from one body (for example, the ICAA certifying a project as an eligible cinematographic work) bind and are binding upon the other bodies of the General State Administration.

There is no room for watertight compartments or unilateral action to the detriment of third parties, all the more so when the legislature itself has encouraged the very scheme that Hacienda was questioning. Accordingly, the Audiencia Nacional annulled the AEAT’s tax assessments, ordered the repayment of the sums wrongly withheld and consolidated an important precedent: the need to interpret tax legislation in line with sectoral (audiovisual) legislation, ensuring coherence and coordination between the various administrative bodies involved.

In sum, the underlying legal problem turned out to be a problem of administrative lack of coordination: Hacienda went its own way where there should have been institutional cooperation, and the judicial correction made that plain.

Beyond the law: the institutional failure of the digital State: To reduce the matter to a legal error would be to fall short. This case exposes a structural failure in the way the State operates in the digital age (especially when different bodies share functional competences but not integrated decision-making mechanisms): it certifies electronically on the one hand, but acts as if that data did not exist on the other. It is not merely fiscal arbitrariness; it is a symptom of an Administration that has not learned to govern with the digital tools that it itself promotes (at least in sensitive areas such as tax incentives in the audiovisual sector, where inter-ministerial coordination is critical).

The lack of coordination between Hacienda and the ICAA (together with the Canarian regional administration) is not simply a discrepancy in legal criteria, but a failure of institutional interoperability in the twenty-first century. In an increasingly digitalised environment, the Public Administration must behave as a cohesive entity, in which information and decisions flow efficiently between bodies – in Estonia, for example, the X-Road system allows agencies to share data in real time; in Spain, there is not even a protocol for Hacienda to consult the ICAA’s certificates.

The very concept of interoperability refers to the capacity of systems and processes to share data and to exchange information and knowledge automatically and securely. Since 2010 Spain has had the Esquema Nacional de Interoperabilidad (ENI), a regulatory framework that seeks to guarantee an adequate level of technical, semantic and organisational interoperability between the systems of the Public Administrations. That, despite these formal advances, we find ministries or agencies acting as isolated silos reveals a gap between the theory and the practice of public governance.

What this dispute lays bare is a structural deficiency: the Administration has digitalised citizen-facing procedures, but has still not integrated its internal functioning. In the digital age, it is not enough to offer electronic services; what is essential is that the organs of the State work on a common basis. In this case, all the elements for coordinated action were — and are — available: there was clear legislation conferring powers on Culture (ICAA) to certify film production and on Hacienda to grant the corresponding tax deduction, as well as legal principles of inter-administrative cooperation.

There were also electronic data and certificates that could (and should) have been shared. However, the governance of that data and of those powers failed. The flow of information between bodies was insufficient or ignored; the AEAT apparently operated with its back turned to the files already processed by Culture, instead of integrating them into its decision-making process. This is the heart of the problem: digital certificates that travel as PDFs by email, not as structured data in interconnected systems.

This functional isolation (present at different levels of the Administration, although here it shows itself especially visibly because of its direct economic impact) points to structural problems: disconnected information systems, an absence of effective communication protocols and, more profoundly, an administrative culture that does not incentivise cross-cutting collaboration. The result is a State that, despite having modern digital tools at its disposal, still fails to act in a univocal or coherent manner. It has digitalised the façade — online services, electronic certificates, automated procedures — but has not transformed its internal logic, where bureaucratic inertia from the last century persists (something that continues to happen in numerous sectors, despite the regulatory and technological advances available).

This failure of institutional interoperability has serious practical consequences. On the one hand, it undermines the effectiveness of public policies: the central Government was announcing tax incentives to attract film shoots and investment (as part of its economic recovery and Marca España agenda), but that policy was frustrated in its implementation by a lack of internal alignment. On the other hand, it erodes the trust of citizens and businesses in the institutions: if a company receives the green light from one State body and is simultaneously penalised by another, how can it trust the system?

In the midst of the digital transition, trust in the Administration depends to a large extent on its acting in a predictable, integrated and transparent manner. When that does not happen, the problem transcends a specific tax file and points to a systemic deficiency in governance.

In short, the AIE controversy in the Canary Islands shows that administrative digitalisation is not enough on its own: it must be accompanied by organisational and cultural reforms. There is no point in having digital certificates or advanced rules if each body continues to act on its own account. Solving this requires technical responses — interconnection of systems, shared data, automation of cross-checks between bodies — but also political ones: a genuine willingness to cooperate, institutional leadership and the redesign of processes. Only by tackling both dimensions will it be possible to prevent dysfunctions such as this from recurring.

Towards coherent governance in the digital age The case of tax incentives for film in the Canary Islands leaves us with important lessons and points to solutions that go beyond settling a multimillion-euro claim. The first lesson is that the State must act as a cohesive whole. It cannot afford internal contradictions in the application of its policies, still less when it comes to promoting strategic sectors.

The recent judgments of the Audiencia Nacional have restored legality and given a boost to legal certainty in the audiovisual sector, but we should not always have to wait for the judiciary to harmonise what the Administration itself fragments. Structural reforms need to be undertaken.

On the legal front, inter-administrative coordination mechanisms should be strengthened: for example, by explicitly ensuring that certificates and reports issued by competent bodies (such as the ICAA) are binding on the other bodies responsible for the same matter, something that has in fact already been incorporated into legislation since the events at issue in the litigation. Hacienda’s internal protocols should also be reviewed so that, before issuing a tax assessment concerning incentives that fall to another entity, there is a consultation with, or at least formal consideration of, that entity’s prior decisions.

On the organisational and technological front, the solution lies in driving genuine operational interoperability. This means developing shared digital platforms on which, in cases such as film deductions, the various administrations involved (the Ministries of Finance and Culture, the regional Governments) work on common information, avoiding duplication and contradictions. One concrete solution would be to implement a blockchain register of audiovisual certifications, in which each ICAA approval generates an unalterable node visible to Hacienda in real time.

One possibility would be a digital ‘one-stop shop’ for cultural incentives, so that producers and managers interact with a single system that brings together the requirements of all the competent bodies. If the ICAA grants a certificate of an audiovisual work valid for the deduction, that data should be recorded in a system that the AEAT accesses automatically at the time of the inspection, with no scope for disregarding it.

In addition, it is crucial to foster a collaborative administrative culture: civil servants must internalise that they are part of one and the same Administration serving the general interest, and that coordination is not a courtesy but a legal and functional obligation. Training in digital skills and interdisciplinary work can help, but above all what is needed is political leadership that breaks down bureaucratic fiefdoms.

In conclusion, the debate is not only about how a tax law is interpreted, but about how public governance is designed in the digital age. The Canarian AIE case is a symptom that our institutions need to update their interoperability and internal governance frameworks in order to live up to the policies they promote. It is not a question of more technology, but of less bureaucracy: a State where data flows with the same agility as laws.

A truly digital administration does not consist merely in having online services, but in being able to provide coordinated and single responses, regardless of how many departments are involved behind the screen. In the long term, tackling this structural dysfunction will strengthen not only the audiovisual sector but also the State’s capacity to generate coherent and reliable policies in any field. Only by moving beyond the isolated approach of each body and adopting a comprehensive vision of digital public governance will we be able to prevent dysfunctions such as the one analysed here from recurring, and ensure that strategic objectives — from turning Spain into a hub of audiovisual production to any other national goal — are not frustrated by the institutional tangle itself. The solutions exist; it is now a matter of implementing them with resolve and a statesmanlike vision.