Madeira – Corporation Tax
In 2007 the European Commission approved extension of Madeira’s preferential tax regime until the year 2020. The new regime applies to new companies which are licensed and established in Madeira’s International Business Centre during the years 2007 to 2013.
Details of New Regime
Under the new regime, companies will benefit from a reduced corporate tax rate as follows:
|2007 – 2009||– 3%|
|2010 – 2012||– 4%|
|2013 – 2020||– 5%|
The appropriate corporate tax rate is limited to a maximum of a particular organisation’s annual taxable income dependant upon the number of jobs created in Madeira. Details of these figures are listed in the table below:
|Job creation||Reduced Tax Rate applies to the following taxable income|
|1 – 2||€ 2 million|
|3 – 5||€ 2.6 million|
|6 – 30||€ 16 million|
|31 – 50||€ 26 million|
|51 – 100||€ 40 million|
|over 100||€ 150 million|
Additional Tax Benefits
In addition to reduced corporate tax rates, new companies will continue to enjoy the following tax benefits until the end of the year 2020:
Exemption from withholding taxes on the distribution of dividends, royalty and interest payments.
Exemption from capital duty, notary and registration fees.
Existing Companies Licensed Before 2001
Existing companies licensed before the year 2001 will continue to enjoy full exemption from corporate tax until the end of the year 2011. From the year 2012 onwards the new tax regime will apply to these companies.
Madeira Forms of Offshore Operation
Offshore operations may take place within the following forms:
- Private Limited Liability Company
- Stock Corporation
- Holding Company
- Shipping Company
Madeira Tax Treatment of Offshore Operations
See Domestic Corporate Taxes for the general principles of Madeiran corporate taxation, which also apply to offshore entities when they pay tax. Also see Withholding Taxes for a simplified description of the Madeiran withholding tax regime.
Manufacturing companies in the Free Trade Zone, if registered before 2001, receive exemption from income tax and capital gains tax, except in respect of transactions carried out in mainland Portugal, or with Portuguese residents. These exemptions apply until 2011, and an extension is not unlikely.
Under the Tax Reform Act of 2000, which was finally approved by the EU in late 2002, companies which register under the new regime are able to enjoy a reduced rate of tax of 1% in 2003-2004, 2% in 2005-2006 and 3% in 2007-2011 (instead of the normal rate, currently 25%).
In June 2007, the EU permitted an extension of the preferential tax regime for companies setting up in the Free Trade Zone. This allows new companies licensed to carry on business there between January 1, 2007 and December 31, 2013 to benefit from a reduced tax rate of 3% in 2007-2009, 4% in 2010-2012 and 5% in 2013-2020.
Access to the scheme is restricted to companies which meet specific eligibility criteria, based on the number of permanent jobs created. The tax benefits are limited by a ceiling placed on the taxable base per company which ranges from EUR2m (where less than three new jobs are created) to EUR150m (where more than 100 new jobs are created). The companies involved have to start business within a fixed time limit (six months in the case of international services, and one year in the case of industrial or shipping activities), beyond which they will lose their licences.
Admission to the Free Trade Zone is also restricted to the activities included in a list drawn up by the Portuguese authorities on the basis of the statistical classification of economic activities in the EU. As under the previous scheme, authorised by the Commission on December 11, 2002, financial and insurance intermediary activities, financial and insurance auxiliary activities and “intra-group services” (coordination, accounting and distribution centres) are explicitly excluded.
In January 2008, the Portuguese government published Decree Law n.º 13/2008 which adds Article 34-A to the Statute of Tax Benefits. This article regulates the extension of the preferential tax regime of the International Business Centre of Madeira until the year 2020.
Non-exempt Portuguese transactions are taxed at normal rates under the Corporate Tax Code.
Service or financial companies in the International Services Centre and the Offshore Financial Centre, including offshore banks and insurance companies, can could be constituted as Private Limited Liability Companies or as Stock Companies. Such institutions licensed before 2001 receive tax exemption until 2011 on revenues derived from other companies within the various sectors of the International Business Centre (ie manufacturing, services etc), and on revenue derived from non-residents on Portuguese territory.
However, the regime approved by the EU in late 2002 does not allow for new formations of financial services companies.
Companies setting up in the IBC pay an ‘Installation’ fee of EUR1,000. Annual operating fees for a holding company were as follows:
- 1st year – EUR1,800;
- Subsequent years – EUR1,800 plus 0.5% of the previous year’s profit, the first million euros being exempt.
Ships and vessels owned by companies licensed to operate under the Free Trade Zone legislation are eligible for a number of tax incentives, namely:
- Until the year 2011 no corporation tax is payable on profits made from ships flying the Portuguese flag that operate in international waters. The same applies to corporate profits made by ships owned by companies licensed to operate under the free trade zone legislation but flying a foreign flag. However, corporation tax is levied on income earned carrying cargo and passengers between national ports;
- No capital gains tax is payable on profits made on the sale of a ship; nor is any capital gains tax payable on the sale of a ship by way of the sale of the shares in the company which owns the ship provided the shares sold are owned by a non-resident;
- Neither income tax nor Portuguese social security is payable by the officers or crew of ship operating in international waters.
A number of VAT advantages flow from having a vessel owned by a corporate entity licensed to operate under the Free Trade Zone Legislation:
- Since 1993 a leisure boat cannot remain in European Union waters for more than 6 months in any one year unless it can prove that VAT has been paid on the yacht in one member state. A boat purchased by a company licensed to operate under the Free Trade Zone Legislation of Madeira company would automatically pay VAT so would not fall foul of the 6 months rule;
- A company licensed to operate under the Free Trade Zone Legislation of Madeira pays 15% VAT on the purchase of a vessel as from 1st July, 2005 (subsequently reduced to 14%). The comparable rate in most other European Union jurisdictions is 17.5%;
- With a Madeira company VAT is paid on purchase and thereafter a vessel can move within the European Union free from VAT. In a number of other EU member states and dependent territories, tax-privileged companies which own vessels cannot register for VAT in the EU with resulting disadvantages when it comes to subsequent re-sale or transfer of the vessel within the EU.
Fees for ship registration are EUR1,800 initially plus a variable amount based on tonnage, and EUR1,400 annually plus a variable amount based on tonnage.
Holding Companies and Mixed Holding Companies in Madeira receive a 95% deduction from taxable income received from their holdings, so that they are taxed at 25% of 5% of income, equals 1.25%.
If a Holding Company is established under Free Trade Zone Legislation then income received from its holdings in the EU is taxable but income from non-EU sources is exempt from tax. Dividends distributed by such companies to non-resident shareholders are free of withholding tax.
Income earned by a Mixed Holding Company licensed under the Free Trade Zone Legislation from trading activities (other than through the holding of shares) is exempt from corporation tax until the year 2011. However income earned from trading activities carried out in mainland Portugal or with Portuguese residents is taxed at the Portuguese corporation tax rate.
Note however that most EU member states consider that Madeiran Mixed Holding Companies fall outside the ambit of the EU Parent/Subsidiary Directive, so that participation exemption is not given in respect of payments made to such companies.
Capital gains tax is payable by a Madeira Holding Company on the profitable sale of shares in a company in which it has a participating shareholding. Until 2000 these gains were not taxed where they are re-invested in the purchase of shareholdings in other companies (“roll over relief”), but the Tax Reform Act 2000 made them subject to Portuguese capital gains tax, payable in five equal annual instalments after the gain occurs.
Holding companies registered under Free Trade Zone Legislation pay an application fee and continuing annual fees.
Mixed Holding Companies: Where a Madeira Mixed Holding Company receives dividends from a corporate entity in which it holds a participating shareholding and the participating company is a European Union entity then only 5% of these dividends will be taxed at a corporation tax rate of 25% meaning that the effective tax rate is 1.25%. If the participating entity is a non European Union company then no corporation tax is payable on the dividends received by the Mixed Holding Company.
Mixed Holding Companies registered under the Free Trade Zone Legislation pay an application fee of USD1,500, then USD1,500 annually plus 0.5% of the previous year’s profits in excess of USD1m, with a ceiling of USD30,000.
Withholding Taxes All types of company in the International Business Centre (ie licensed under the Free Trade Zone Legislation) are exempt until 2011 from charging withholding tax on remittances of dividends, interest or other payments to non-residents (whether on Portuguese territory or not) or to other companies within the Centre.
Broadly speaking, the shareholders of companies in the International Business Centre (other than Portuguese residents) are exempt from tax until 2011 on dividends and other payments received from them.
NB: The Tax Reform Act 2000 made some changes to the withholding tax regime applying to Holding and Mixed Holding Companies, particularly for Portuguese residents. The Act also made the non-resident status of MISC companies subject to documentary evidence that all transactions are with non-Portuguese residents.
Death Duties: No death duties are payable in Madeira on the transfer of a shareholding in a company licensed to operate under the Free Trade Zone Legislation unless the shareholder was resident in Portugal.
Stamp Duty: No stamp duties are levied on the documents or transactions of companies incorporated under the Free Trade Zone Legislation.
Capital Transfer Tax applies to real estate purchases made by Free Trade Zone companies, except that the purchase of land or buildings for use as a head office is exempt. Standard rates apply: 8% for urban properties and 10% for rural ones.
VAT applies in Madeira at the rate of 15% as from July 1, 2005 (subsequently reduced to 14%. The VAT rate is 20% in Portugal.
Offshore Trusts established in the International Business Centre under Free Trade Zone Legislation have Madeiran-resident trustees. All income earned by a trust and all income distributed in favour of a beneficiary is free of tax in Madeira unless the source of that investment income is Portugal in which case it is taxed in the hands of the trustee.
For a further review of recent changes to the offshore regime in Madeira see a Briefing Paper by Corporate & Treasury and Barros, Sobral, G Gomes & Associados.
Madeira Taxation of Foreign Employees of Offshore Operations
This section refers to the taxation of foreign employees of the various types of offshore entity; see Domestic Personal Taxes for the general principles of individual taxation in Madeira, which also apply to the resident employees of non-resident entities.
There is in fact no distinction between the employees of resident or non-resident operations. It is a question of individual status; residents and non-residents are treated differently of course. Most types of compensation and benefit paid to employees are taxable; there are no special privileges or exemptions for expatriate workers, except that the officers and crew of ships registered under the Madeiran Shipping Registry are exempt from income and social security taxes.
Madeira Exchange Control
Although under EU legislation capital and exchange controls have been abolished, some rules remain.
Significant capital transactions are reported to the Bank of Portugal ‘for statistical purposes’. Again, ‘for statistical purposes’, foreign investment operations are reported to the Institute of Foreign Trade of Portugal after the event. These reports are made by the banks involved.
Foreign investments in the banking and finance industries are subject to Bank of Portugal approval.
Madeira Offshore Activities
The International Business Centre is a concept applying to the whole of Madeira rather than a particular physical location, except for the manufacturing Free Trade Zone itself. Manufacturing entities, light and heavy industry can only be licensed to operate under the Free Trade Zone Legislation if they locate within the physical confines of the Industrial Free Trade Zone. By contrast, service entities such as banks, insurance companies and trust managers can locate anywhere on the Islands and still be licensed to operate under the Free Trade Zone Legislation (although new formations of financial services companies have not been possible for several years now).
The question often asked is whether residents of Portugal can avail themselves of the Free Trade Zone Legislation. Although the answer is formally, yes, the purpose of the legislation was to develop the economy of Madeira, and not to reduce the tax which could be levied by the Portuguese Treasury on its own citizens.
Thus the general rule (which is subject to exceptions) is that tax exemptions which apply to entities licensed to operate under the Free Trade Zone Legislation will only apply in so far as the income relates to activities carried out abroad, within the free trade zone area or with other entities licensed to trade under the legislation. Likewise, unless an exception applies income from Free Trade Zone companies distributed to Portuguese residents is taxed in the hands of the same under normal Portuguese tax rules.
Holding Companies are limited to holding participations in other companies. A Holding Company is not permitted by law to buy its own shares, purchase debentures in companies in which it does not hold a participating shareholding (subject to certain exceptions), make loans other than to companies in which it holds part of the share capital or engage in any commercial activities other than holding shares in other companies.
Mixed Holding Companies can both hold shares in other companies and trade in their own right. They cannot engage in the type of trading activities which are carried on by banks and financial institutions and which require licensing and authorization from the Bank of Portugal.
A Mixed Holding Company must combine its activities. Its trading activity cannot be exclusively limited to the holding of shares; nor can it be a pure trading company which does not hold shareholdings in any other company.
The property of Offshore Trusts must be outside Portugal, and income derived from outside the country.