MADEIRA: COUNTRY AND FOREIGN INVESTMENT REGIME

Madeira Geography

Madeira was discovered by Portuguese explorers in the 15th century and was subsequently colonized by farmers from the Algarve region of southern Portugal. In the Portuguese constitution of 1821 Madeira was recognized as part of metropolitan Portugal.

The population is about 245,800 making Madeira one of the European Union's most populated regions with an estimated average population density of 195 persons per square mile. The Islands are largely Roman Catholic and as with most traditional societies the church exercises a strong influence over organs of government and the cultural life which largely revolves around religious and harvesting festivals.

The official language is Portuguese, but English is quite widely spoken, particularly in business. Madeirans tended to emigrate in search of work until recently, when the trend has somewhat reversed. The global Madeiran diaspora is supposed to be near 1m. The Madeiran life-view was traditionally somewhat melancholy, although tourism and EU money infusions have tended to flatten out this idiosyncracy, like so many others.

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Madeira Relationship with the EU

Madeira is part of Portugal and is fully integrated into the European Union. However, a number of special local regimes which are accepted by the EU combine to make Madeira a particularly advantageous location for many types of company with business activities in the EU. See the Free Trade Zone below; also see Offshore Business Sectors and Offshore Legal and Tax Regimes.

Madeira was declared an outermost region of the European Union both by the declaration on the outermost regions of the Community attached to Final Act of the Treaty of the European Union and subsequently by the Treaty of Amsterdam. Both of these treaties provided for the possibility of regional aid schemes that included special tax incentives to stimulate economic and social development.

Although Madeira's Free Trade Zone legislation represents a temporary regional aid scheme enacted by the Portuguese Government under the authorization of the European Commission pursuant to Article 92(3)(a) of the Treaty of Rome, the report of the Primarolo Code of Conduct Committee in 2000 included Madeira's Free Trade Zone on a list of 66 'harmful tax practices'.

The EU asked Portugal to review the tax regime in Madeira, and in December 2000 the government enacted a Tax Reform Act which moderated the existing tax incentives and somewhat reduced banking secrecy in Madeira.

During 2001 there were some doubts about the EU's willingness to continue its approval of the MIBC (Madeira International Business Centre) but a newly-elected Portuguese government in 2002 emphasised its support for the MIBC, and at the end of 2002 the EU approved the continuation of the MIBC regime, although with modifications.

Companies that, between 1 January 2003 and 31 December 2006, applied for and obtained a proper licence to carry out their activities within the MIBC benefited from a reduced rate of corporate tax of 1% in 2003-2004, 2% in 2005-2006 and 3% in 2007-2011. However, companies are obliged to create a certain number of permanent jobs. Companies that create more than five jobs will have access to the regime without further conditions. Those that create between one and five jobs will be eligible only if they undertake a minimum investment of EUR75,000 during the first two years of operations.

In January 2008, the Portuguese government issued a decree that will allow new companies licensed from January 2007 to December of 2013 to enjoy reduced corporate tax rates of 3% between 2007 and 2009, 4% between 2010 and 2012 and 5% between 2013 and 2020. Companies licensed to operate within Madeira's International Business Centre before the year 2001 will continue to benefit from a full exemption from corporate tax until the end of 2011, as well as from withholding taxes on dividends, royalty payments and capital duty. As of 2012, such companies will fall under the new regime which shall be valid until the year 2020.

In September, 2005, Madeira's senior minister, Alberto Joao Jardim, threatened to sever constitutional ties with Lisbon if Portugal's Socialist Party government continued down a path of "Iberianism", which he said could lead to Portugal's absorption by Spain.

In a pre-election address, Joao Jardim launched a scathing attack on Prime Minister, José Sócrates and his government, accusing him of being influenced by Portugal's freemasons which, according to Madeiran Governor, are in cahoots with Spanish masons and intent on reviving a 19th Century dream “for Portugal to become a part of Spain”.

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Madeira Government

During the fascist dictatorship of Salazar, Madeira had little autonomy, but since 1976 Madeira has been an autonomous region of metropolitan Portugal with its own local Parliament, legislature and elected officials who are responsible for all matters of government with the exception of foreign affairs and international relations, these remaining the exclusive domain of the central government in Lisbon.

The Portuguese central government exercises control through a 'Minister of the Republic' who is appointed and dismissed by the President of Portugal. The Minister of the Republic resides in Funchal, and when regional Portuguese matters are being discussed represents Madeira at the forum known as the Council of Ministers. The government of Madeira is headed by a President who is appointed by the Minister of the Republic. Usually the leader of the party that wins the election is the individual to be appointed President.

Madeira has enjoyed great political stability, with the same party in power since 1976.

Madeira is a civil law jurisdiction. Private law is derived from the Napoleonic code.

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Madeira Economy and Currency

The 4 pillars of the Madeiran economy are farming, fishing, tourism and offshore financial services. The increased economic prosperity of recent years has resulted in an unemployment rate of 3.4% (2005) which is extremely low by Portuguese standards, and has had the happy result that the people of Madeira no longer emigrate in droves in search of a better life.

To cater for the labour demands that increased economic prosperity brought about, the government set up the Centro Regional de Formacao Profissional whose objective was to train young Madeirans for the skills required in the new developing market place.

Fishing and farming are the traditional industries of Madeira, with wine production having been a particular success recently. Tourism followed the advent of democracy in 1974 and was given added impetus by Portugal's accession into the European Community in 1986. 1990-3 saw an estimated USD370m of grants to Madeira resulting in a construction boom.

The official currency is the Euro. In September, 2002, Moody's assigned an Aa3 foreign currency issuer rating to the Region of Madeira based on the region's buoyant economy, its improving financial performance and manageable debt burden.

Moody's said at the time that its rating took into account the rapid pace of growth recorded by the local economy, which enabled the region to partially catch up with EU and domestic GDP per capita and achieve very low unemployment rates. GDP per head is approximately EUR15,000 (2005).

In 2005, inflation was falling, reaching a rate of 2.5% in June.

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Madeira Entry and Residence

As part of the EU, Madeira freely admits citizens of EU member states. EU workers must obtain a residence card but are not required to have work permits. Non-EU workers are required to have both a residence visa and a work permit. Companies employing more than five workers must limit foreign workers to 10% of the workforce. Companies can request exceptions to this limit if the foreign workers have special technical expertise. EU and Brazilian workers are not considered foreign for the purpose of calculating the 10% limit.

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Madeira Business Environment

Madeira is not a traditional volume-based tax haven with elaborate laws and procedures designed to protect secrecy. The financial center was set up with the full approval of the European Community and the tax incentives have been structured in such a manner as to avoid Madeira being perceived in the negative way that many traditional tax havens are currently viewed.

The type of clients that Madeira attracts are those who wish to have access to the single market of the European Union and who are prepared to comply with the regulations emanating from Brussels and Lisbon. Unlike other offshore jurisdictions, supervision remains very strict, in fact exactly the same supervision as applies to mainland Portuguese companies. Madeira tends to be a more expensive financial center than some since it is used by sophisticated international groups who seek the assistance of international tax lawyers and advisers before implementing their structures

The allocation of a VAT number to a Madeiran company means unrestricted access to the European single market. A company licensed to operate under the Free Trade Zone legislation (see below) pays 14% VAT, compared with the corresponding rate of 20% in continental Portugal.

As a result of heavy government investment telecommunications are excellent.

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Madeira Import of Foreign Capital

As with all European Community territories there are no formal exchange controls in Madeira, although substantial transactions need to be reported to the Central Bank of Portugal, which regulates the banking sector. Inward investment to the banking and financial sector requires the Central Bank's approval.

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Madeira Investments by Foreigners

Madeira is part of Portugal, which sees foreign investment as an essential part of its overall strategy to modernize the economy. A key objective of the government's 1994-1999 Regional Development Plan was to boost international competitiveness through increased foreign investment in transport, telecommunications, energy, agriculture, fisheries, and tourism.

Under a simple post facto registration regime for foreign investment established in 1995, foreign investors need only register with the Foreign Trade, Tourism, and Investment Promotion Agency (ICEP) within thirty days from the day they make their investment. The regime is designed to obtain administrative or statistical information and applies to all foreign investors, EU and non-EU alike.

Portugal applies some percentage limits to ownership of entities in certain sectors, including air transport, television and telecommunications.

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Madeira Free Trade Zone

In the 1980s a deep sea port was constructed at Canical, 19 miles from Funchal, where only a fishing village had existed before and it was here that an industrial free trade zone was established. The industrial free trade zone now measures some 296 acres in size. A large number of companies engaged in such diverse activities as foodstuffs, tobacco, metal works and electrical appliances have set up there.

Since the establishment of the original Free Trade Zone, the concept has broadened out. With the active assistance of the Portuguese government, and the compliance of the EU, the Madeiran authorities have constructed an offshore sector known as the International Business Centre (MIBC). This consists of four sections:

The principal attraction of operating within the International Business Centre is that all entities licensed to operate there are entitled to highly attractive fiscal exemptions and reliefs offered under the Free Trade Zone legislation. See Offshore Legal and Tax Regimes for further details.

Goods and raw materials imported into the Free Trade Zone are free of import duty, and manufactures exported from the zone are duty-free in the single market except in respect of that part of their value that can be attributed to non-EU origin. The zone is therefore ideal for 'screwdriver' assembly plants for imports into the EU. The zone also has some exemptions from EU import quotas.

A further attraction of locating a factory in the industrial free trade zone is access to special subsidies provided by European Community structural funds. Currently the European Community will refund up to 50% of the training costs of apprentices in certain trades and up to 50% of the purchase costs of energy-saving technology.

By the end of 2003, over 5,000 entities had been licensed under the Free Trade Zone Legislation (including 50 within the financial center alone). More than 5,000 jobs had been created directly and indirectly at that point.

After a hiatus in the formation of new companies during 2001 and 2002 while the EU investigated Madeira's MIBC, a new regime was approved by the EU at the end of 2002; but it does not provide for the inclusion of new financial services companies.

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