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Madeira: E-Commerce

Offshore Activities

This page was last updated on 30 June 2021.

The natural symbiosis between the Internet and offshore stems from the fact that both naturally manage to avoid tax. Businesses which can operate on the Internet without, so to speak, touching ground in a high-tax jurisdiction will naturally migrate to offshore jurisdictions; while businesses that already have offshore existence will find it highly convenient to be able to use the Internet to trade with their high-tax customers without having to make a landing in their countries.

As a major offshore jurisdiction with many thousands of offshore enterprises already installed, including many trading companies, it is only a matter of time before Madeira becomes a centre of e-commerce activity. The island's geographical location between continents, its good telecommunications links, sophisticated business infrastructure and the highly-educated work-force are all factors which will attract the sales, marketing and administrative departments of retail operations, particularly those trading into EU and African countries.

By locating websites in Madeira to carry out functions previously based in high-tax jurisdictions (such as sales and marketing, treasury management, supply of financial services, and most of all, the supply of digital goods such as music, video, training, software etc.,) businesses can take advantage of low rates of taxation for increasingly substantial parts of their operation.

In many countries, the distribution of goods from a warehouse does not constitute the carrying on of a trade or business in that jurisdiction, so that even for physical goods, in many cases it is possible to avoid a permanent establishment (taxable presence) altogether in many high-tax jurisdictions where trading activities currently take place.

In 2002, Madeira became the country of choice for EU internet service providers wishing to offer broadband services, due to its low VAT rate and the advantages of the International Business Centre (MIBC). These included British Telecom and Freeserve (now Orange.)

Madeira is also thought to have benefited from the European Union's decision to apply value added tax to digital downloads by consumers. Starting in July 2003, VAT has been payable by the supplier of goods and services downloaded over the Internet in the EU, including downloads of software, music and videos from non-EU companies, subject to de minimis rules. Before, these products had escaped VAT.

Under the single registration clause of the directive, companies are allowed to pay the combined tax liability that they have accumulated throughout the EU in one member state, which retains part of the tax before passing on the rest to the other states involved. Graeme Ross, head of indirect tax at KPMG, said that faced with the prospect of dealing with 15 (now 27) tax authorities, it was inevitable that internet companies and ISPs would opt for single registration. The island is also ideal for e-commerce, as following a decade of telecoms infrastructure investment, it now boasts the widest bandwidth in Europe.

Reverse charging of VAT on the electronic purchase of goods and services began in 2015. A revenue sharing agreement has been phased in over the subsequent three years. This was done to appease Luxembourg, which had used its veto to block the proposed reforms. Like Madeira, Luxembourg has become a popular location for internationally known e-commerce businesses with its low 15% rate of VAT.

The new rules require taxation for VAT on business-to-business supplies of services at the place where the customer is situated, rather than at the location of the supplier. For business-to-consumer supplies of services, the place of taxation is still  that where the supplier is established. However, in certain circumstances, the general rules for both businesses and consumers are not applicable, and specified rules apply to reflect the principle of taxation at the place of consumption. These exemptions concern in particular: restaurant services, the hiring of means of transport, cultural, sporting, scientific and educational services, and business to consumer supplies of telecommunications, broadcasting and electronic services.

To simplify VAT arrangements made necessary by the new rules for telecoms, broadcasting and electronic services, a "one-stop" system was introduced, to enable service providers to fulfil in their home member state a single set of obligations for registrations, declarations and payments, including for services provided in other member states where they are not established. VAT revenue is be transferred from the country the supplier is in to the one where the customer is. The latter’s VAT rates and controls will be applicable. As a general rule, the measures entered into force on 1 January 2010.

The Council's political agreement was made possible by a compromise regarding the change of rule on the place of taxation for business-to-consumer supplies of telecoms, broadcasting and electronic services. For this sector, application of the new rules and the one-stop scheme started on 1 January 2015. Until 1 January 2019, the member state of establishment will retain a proportion of VAT receipts collected through the one-stop scheme. This proportion was 30% from 1 January 2015 to 31 December 2016, is currently 15% (from 1 January 2017 to 31 December 2018) and will drop to 0% from 1 January 2019 onwards. The Commission will be asked to report on the feasibility of the new rules before their entry into force.

A company operating an e-commerce facility in Madeira will very probably choose to establish itself in the International Business Centre (see Offshore Legal and Tax Regimes) and will therefore have minimal local taxes to pay.

For information about the impact of e-commerce on a number of the main offshore activities which take place on the island, click on a link below to go to our specialist E-commerce site Offshore-e-com.com

Sales and Distribution of Physical Products 
Sales and Distribution of Digital Products 
Banking and Financial Services (including Investment Funds) 
Corporate Support Functions
To see an analysis of the current state of legal and tax issues surrounding offshore e-commerce, click here.

 

 

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