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.
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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 10% of
the shares of an EU subsidiary for a minimum period
of 12 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. Portugal has around 50 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).
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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 (ie within, or without the EU).
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 the time of writing)
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 at least the year 2011 (See
here
for further details of the extension of the scheme).
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.
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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").
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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.
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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 50 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 10%
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 have traditionally
been marginally harder to meet. However, from Janbuary
1, 2010, the Danish 12-month holding requirement is
to nbe abolished.
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% (but see above)
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
(N.B. the capital gains taxation of Danish shares is
being overhauled as part of which the 3-year holding
requirement is being abolished).
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 the designated percentage of
the shares in the Danish holding company for a minimum
period of 12 months (the 12-month holding period is
being abolished as of January 1, 2010). 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 somewhat reduced
the tax advantages of both Pure and Mixed Holding Companies,
particularly for Portuguese residents.
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