MADEIRA: OFFSHORE LEGAL AND TAX REGIMES

Most offshore activity in Madeira takes place in and around the International Business Centre, which comprises the Free Trade Zone, and its associated services, together with financial institutions and the Shipping Registry. Offshore entities use conventional corporate forms, or the Offshore Trust, which exists only in the Free Trade Zone. The Holding Company exists independently of the Zone, but still uses conventional corporate forms.

Click on any of the forms for a description of its legal basis.

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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 22.5%).

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 also 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 paid an 'Installation' fee of EUR750. Annual operating fees for a holding company were as follows:

• 1st year - EUR1,500;
• Subsequent years - EUR1,500 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;

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 $1,500, then $1,500 annually plus 0.5% of the previous year's profits in excess of $1m, with a ceiling of $30,000.

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 1st July 2005 (19% 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.

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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.

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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.

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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.

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EU workers must obtain a residence card for EU nationals 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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