Madeira: Offshore Legal and Tax Regimes
Tax Treatment of Offshore Operations
See Domestic Corporate Taxation 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, received 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 registered under the new regime were 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, could be constituted as Private Limited Liability Companies or as Stock Companies. Such institutions licensed before 2001 received 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 was payable on profits made from ships flying the Portuguese flag that operated 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;
- 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) was 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.
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) were 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) were 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 22% from April 2012. Prior to that it was 16%. The VAT rate in Portugal is 23%.
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.