Portugal: Madeira Free Trade Zone

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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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