Portugal: Tax-Efficient Sectors
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 22% VAT (16% prior to April 2012). By contrast the Portuguese national VAT rate stands at 23% (21% prior to January 2011.
- 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.