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Madeira: Offshore Legal and Tax Regimes

Offshore Operations

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.

 

 

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