For
a country to be an attractive location in which to set
up a holding company 4 criteria must be satisfied:
A "holding"
company licensed to operate under the Free Trade Zone
legislation of Madeira is entitled to significant fiscal
benefits. For a country to be an attractive location
in which to set up a holding company 4 criteria must
be satisfied:
- Incoming
Dividends:
Incoming dividends remitted by the subsidiary to the
holding company must either be exempted from or subject
to low withholding tax rates in the subsidiary's jurisdiction.
- Dividend
Income Received:
Dividend income received by the holding company from
the subsidiary must either be exempted from or subject
to low corporate income tax rates in the holding company's
jurisdiction.
- Capital
Gains Tax on Sale of Shares: Profits realized
by the holding company on the sale of shares in the
subsidiary must either be exempt from or subject to
a low rate of capital gains tax in the holding company's
jurisdiction.
- Outgoing
Dividends:
Outgoing dividends paid by the holding company to
the ultimate parent corporation must either be exempt
from or subject to low withholding tax rates in the
holding company's jurisdiction.
By these
criteria Madeira is a relatively attractive jurisdiction
in which to set up a holding company although not the
most attractive.
BACK
TO TOP
Withholding
Taxes on Incoming Dividends
Withholding
taxes on incoming dividends remitted to a Madeira holding
company are reduced in 2 situations:
- Parent-Subsidiary
Directive:
When the subsidiary is resident in an EU territory
the provisions of the EU Parent-Subsidiary directive
apply. The effect of this directive is that where
a Madeira holding company controls at least 25% of
the shares of an EU subsidiary for a minimum period
of 24 months any dividends remitted by the EU subsidiary
to the Madeira holding company are free of withholding
taxes. (N.B. Some countries consider Madeira a tax
haven and have anti-avoidance legislation in place
against both Madeira holding companies & Madeira
"mixed" holding companies - the effect is
to negate the effects of the Parent-Subsidiary directive).
- Double
Taxation Treaties: Where the provisions of the
EU Parent-Subsidiary directive do not apply (or where
anti-avoidance provisions are in place) Madeira holding
companies can rely on Portuguese double taxation treaties
the effect of which is to obtain a reduction in withholding
tax rates on dividends remitted to Madeira from the
subsidiary jurisdiction. However, Portugal has only
around 40 double taxation treaties in place. The greater
a country's network of double taxation treaties the
greater its leverage to reduce withholding taxes on
incoming dividends. An elaborate network of double
taxation treaties is thus a key factor in the ability
of a territory to develop as an attractive holding
company jurisdiction. (N.B. Some countries consider
Madeira a tax haven and have anti-avoidance legislation
in place against both Madeira holding companies &
Madeira "mixed" holding companies - the
effect is to exclude Madeira holding companies from
the benefits of the tax treaty signed with Portugal).
BACK
TO TOP
Corporate
Income Tax on Dividend Income Received
Corporate
income tax payable on dividend income received by a
Madeira "holding" company or mixed holding
company depends on the location of the foreign subsidiary
making the remittances. Thus:
- If the
foreign subsidiary is resident in the EU then a rate
of 24.75% is payable on a notional figure representing
5% of the dividends received from the foreign subsidiary.
This effectively means a corporate income tax rate
on incoming dividends of 1.25% (at the time of writing).
- If the
foreign subsidiary is not resident in the EU then
no corporate income tax is payable on dividends received.
To qualify
for the fiscal benefits which apply to a Madeira "holding"
company the corporate entity must pass the following
3 tests:
- The
holding company must be licensed to operate under
the free trade zone legislation of Madeira. If the
holding company is not licensed to operate under the
free trade zone legislation of Madeira then normal
Portuguese tax rates apply.
- The
holding company must hold at least 10% of the shares
in the foreign subsidiary at the time of the dividend
remittance.
- The
holding company must have held its shareholding in
the foreign subsidiary for a minimum period of 12
months prior to the dividend distribution.
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 Portuguese
corporation tax rate of 25%. 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 of 25% 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 if they were 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.
BACK
TO TOP
Capital
Gains Tax on the Sale of Shares
In Portugal
capital gains are taxed as corporate income. A Madeira
holding company pays the Portuguese corporate income
tax rate of 25% on any profits made on the disposal
of its shares in a foreign subsidiary unless those profits
are re-invested in shareholdings in other corporations
within 3 years of their realization ("roll over
relief").
BACK
TO TOP
Withholding
Taxes on Outgoing Dividends
- Dividends
paid by Madeira holding companies to non-residents
and which do not relate to income earned inside Portugal
are exempt from any withholding taxes irrespective
of the existence of any double taxation treaties and
irrespective of the applicability of the EU Parent-Subsidiary
directive. Most holding company regimes (with the
exception of Denmark) only reduce or exempt withholding
taxes on outgoing dividends in one of 2 circumstances:
- Where
there is a double taxation treaty in place between
the holding company jurisdiction and the ultimate
parent company jurisdiction withholding taxes are
normally reduced from the usual standard rate to a
rate varying between 0-15%;
- Where
both the holding company and the parent corporation
are resident in the EU and where the relevant criteria
are met no withholding taxes are imposed on outgoing
remittances.
BACK
TO TOP
Comparison
with Danish Holding Companies
Since Denmark
is currently the benchmark holding company jurisdiction
which other holding company jurisdictions seek to emulate
a comparative assessment of the 2 jurisdictions is a
useful exercise:
i) Withholding
Taxes on Incoming Remittances: Many countries consider
Madeira an offshore haven and not an integral part of
Portugal for the purposes of double taxation treaties
and the EU parent-subsidiary directive. Accordingly
they have introduced anti-avoidance legislation with
the consequence that Madeira holding companies often
do not enjoy the reduced withholding taxes on incoming
dividends which should otherwise apply to them by reason
of Portuguese double taxation treaties or by reason
of the provisions of the EU parent-subsidiary directive.
Even where anti avoidance legislation is not in place
Portugal's network of around 40 double taxation treaties
is limited in comparison with the number executed by
other holding company jurisdictions such as the UK or
Denmark.
Denmark
by contrast is not considered a tax haven and so is
generally able to benefit from the provisions of the
EU parent-subsidiary directive and its extensive double
taxation treaty network to reduce withholding taxes
on incoming remittances. In this respect Danish holding
companies enjoy a significant advantage over Madeira
holding companies.
ii)
Incoming Dividends & Double Taxation Treaties:
In Denmark dividend income received by a Danish holding
company from a foreign subsidiary is exempted from Danish
corporate income tax provided that the Danish holding
company meets the "participation exemption criteria"
in that for a minimum period of 12 months prior to the
dividend distribution it holds at least 25% of the shares
of the foreign subsidiary (which subsidiary must not
be deemed a "financial company"). The Madeira
holding company is either exempted from or pays 1.25%
corporate income tax on dividends received provided
that it has held at least 10% of the shares in the foreign
subsidiary for a minimum period of 12 months prior to
the distribution. In this respect neither jurisdiction
has an advantage over the other although the Danish
participation exemption criteria are marginally harder
to meet.
iii)
Capital Gains Tax On The Sale Of Shares: A Danish
holding company is exempt from any capital gains on
the profitable sale of shares in a foreign subsidiary
provided that it has held at least 25% of the foreign
subsidiary shares for a minimum period of 3 years prior
to the disposal of those shares and provided the foreign
subsidiary is not a "financial company". A
Madeira holding company is not exempt from capital gains
tax on the profitable sale of shares in a foreign subsidiary
but it is entitled to defer payment of tax on the capital
gains if it re-invests the sale proceeds in other shareholdings
("roll over relief"). Roll over relief is
sometimes described as the temporary or indefinite postponement
of capital gains tax. This makes the Danish holding
company a considerably more attractive entity than its
Madeira counterpart.
iv)
Withholding Taxes on Outgoing Dividends: In Denmark
no withholding taxes are deducted from outgoing dividends
irrespective of the existence or non existence of a
double taxation treaty and provided the ultimate foreign
parent corporation holds at least 20% of the shares
in the Danish holding company for a minimum period of
12 months. In Madeira no withholding taxes are deducted
from outgoing dividends irrespective of the existence
or non-existence of a double taxation treaty and (generally
speaking) provided the income from which the dividends
are being paid does was not earned in Portugal and provided
the shareholder to whom the remittance is being paid
is not a Portuguese resident. In this respect there
is little to distinguish both jurisdictions.
NB:
The Tax Reform Act of December 2000 has somewhat reduced
the tax advantages of both Pure and Mixed Holding Companies,
particularly for Portuguese residents.
BACK
TO TOP
|
Daily, updated news about tax and offshore from our
team of 20 international journalists
