Unlike
the "dependent territory" status that defines
the relationship between the UK and its offshore jurisdictions,
Madeira is a fully integrated part of metropolitan Portugal.
All companies incorporated in Madeira are Portuguese
companies governed by Portuguese law and are entitled
to all benefits arising by reason thereof (e.g. reduced
withholding taxes on dividend income remitted from a
country with whom Portugal has signed a double taxation
treaty).
Domestic
fiscal benefits however depend on whether the corporate
entities are or are not licensed to operate under Madeira
Free Trade Zone legislation. If the companies are licensed
to operate under the Free Trade Zone legislation then
significant fiscal concessions are available whereas
if they are not licensed to operate under the Free Trade
Zone legislation normal Portuguese tax rates apply.
For the purposes of licensing a distinction should be
made between:
- Light
& Heavy Industry: Manufacturing, light &
heavy industry can only be licensed to operate under
Madeira Free Trade Zone legislation if the entities
locate within the 296 acre physical confines of the
zone. If such companies locate outside the physical
confines of the zone they cannot be licensed to operate
under the Free Trade Zone legislation and therefore
cannot qualify for the fiscal concessions otherwise
available.
- Service
Industries:
Service industries such as banks, insurance, shipping
and trust companies can be licensed to operate under
the Free Trade Zone legislation provided they locate
on the island of Madeira. There is no requirement
to locate within the 296 acre physical confines of
the zone in order to qualify for the fiscal concessions
available.
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. See below for information
on the extension of tax benefits for businesses establishing
in the Free Trade Zone beyond 2011.
Under
the Tax Reform Act of 2000, which was finally approved
by the EU in late 2002, companies which register under
the new regime have been 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). This scheme
has since been extended (see below).
Non-exempt
Portuguese transactions are taxed at normal rates under
the Corporate Tax Code. Manufacturing companies pay
an application fee and annual operating fees which are
calculated per square metre occupied.
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.
The
new regime approved by the EU in late 2002 did not allow
for new formations of financial services companies.
Banks
pay $25,000 annually (at the time of writing), and other
credit institutions pay $15,000 annually. Insurance
companies pay $10,000 annually (captives only $5,000).
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 (but again, see below) 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 a lower rate of VAT
on the purchase of a vessel than in most other European
Union jurisdictions.
In
June 2007, the European Commission announced that under
EC Treaty state aid rules, it had approved a scheme
providing tax reductions worth EUR300 million until
2020 to companies setting up in the free zone of Madeira
between 2007 and 2013.
The
granting of the aid was subject to requirements to create
jobs and to strict safeguards with regard to the implementation
of the aid. The Commission was satisfied that the aid
was intended to promote regional development in Madeira,
by enabling companies established in this outermost
region to overcome their structural handicaps.
Competition
Commissioner Neelie Kroes stated that:
“The
aid will contribute to attract investment and economic
activity to Madeira, supporting cohesion in the EU and
regional development in this outermost region.”
New companies licensed to carry on business there between
1 January 2007 and 31 December 2013 in the Free Zone
will 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 EUR2 million (where less than three
new jobs are created) to EUR150 million (where more
than 100 new jobs are created).
The
companies involved will 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, detailed above, and authorised
by the Commission on 11th December 2002, financial and
insurance intermediary activities, financial and insurance
auxiliary activities and "intra-group services"
(coordination, accounting and distribution centres)
are explicitly excluded.
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Fiscal
Advantages of the Free Trade Zone
The purpose
of the Free Trade Zone legislation was to develop the
economy of Madeira, and not to reduce the tax that could
be levied by the Portuguese Treasury on its own citizens.
Thus where companies licensed to operate under the legislation
are owned by or trade with Portuguese citizens or mainland
Portugal, fiscal concessions are often (though not always)
suspended. In this respect the legislation discriminates
between residents and non-residents.
Corporate
entities licensed to operate under the Free Trade Zone
legislation are entitled to the following fiscal concessions:
- Corporate
Income Tax: Current Portuguese corporate income
tax rates stand at 25%. However corporate entities
licensed to operate under the Free Trade Zone legislation
are exempt from corporate income tax until the year
2011 (and in certain cases this has been extended-
see above). By way of exception ships licensed to
operate under the Free Trade Zone legislation pay
the full rate of corporate income tax in respect of
income earned carrying cargo and passengers between
Portuguese National Ports.
- Customs
Duties: All goods imported by an entity licensed
to operate under the Free Trade Zone legislation are
exempt from customs duties until the year 2011. By
way of exception non-EU-origin raw materials used
in a manufacturing process for the production of goods
which are to be exported to the single market are
subject to customs duties.
- Capital
Gains Tax:
In Portugal capital gains are taxed as corporate income
and are subject to a corporate income tax rate of
25% plus local surcharge of up to 1.5%. Capital gains
made by entities licensed to operate under Free Trade
Zone legislation have traditionally been exempt from
capital gains tax, and will continue to be so, at
least until the year 2011.
- Capital
Transfer Taxes:
Entities licensed to operate under Free Trade Zone
legislation are exempt from capital transfer tax on
the purchase of real estate that will be used as the
corporate headquarters of the enterprise. In Portugal
capital transfer taxes on the transfer of real estate
has traditionally stood at between 8-10% so this concession
represents a significant fiscal benefit.
- Stamp
Duties: No
stamp duties are payable on the documents or transactions
of companies incorporated under the Free Trade Zone
legislation.
- Value
Added Tax:
All entities licensed under the Free Trade Zone legislation
are allocated a VAT number and pay 14% VAT (at the
time of writing).
By contrast the Portuguese national VAT rate stands
at 20%.
- Withholding
Taxes: The
general rule is that no withholding taxes are deducted
on remittances made by a company licensed to operate
under Free Trade Zone legislation unless the income
remitted by way of dividends, loan interest or royalties
relates to either income earned in mainland Portugal
or alternatively where the recipient is a Portuguese
resident. If the income is earned in mainland Portugal
but the recipient of the dividends is resident in
a country with whom Portugal has a double taxation
treaty then reduced withholding taxes are levied on
remittances in accordance with the terms of the double
taxation treaty. Likewise if the income is earned
in mainland Portugal by a Madeira subsidiary but the
recipient of the dividends is an EEC resident parent
corporation to whom the Parent-Subsidiary directive
applies then no withholding taxes are levied on remittances.
Withholding taxes are not deducted on interest earned
on bank deposits by non-residents. By way of exception
to the general rule discriminating against residents
withholding taxes are not levied on dividends distributed
to the resident shareholders of companies which own
ships and which are licensed to operate under the
Free Trade Zone legislation.
- Death
Duties on the Transfer of a Shareholding:
No death duties are payable in Madeira on the transfer
of a shareholding in a company licensed to operate
under Free Trade Zone legislation provided the shareholder
was not a resident of Portugal.
- Income
Tax & Social Insurance: Employees of manufacturing
and financial companies licensed to operate under
Free Trade Zone legislation who reside and work in
Madeira pay the same rates of social insurance and
income tax as local residents. By way of exception,
neither income tax nor social insurance is payable
by the officers or crew of a ship operating in international
waters which is licensed to operate under Free Trade
Zone legislation. Furthermore income tax is not payable
on dividend income earned by resident shareholders
who own entities licensed to operate under Free Trade
Zone legislation.
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