Let’s Talk about tax in Madeira

Madeira – Investment Trends

In Portugal, there are different types of companies, each with its own unique characteristics. The differences mainly relate to the number of shareholders and their respective level of responsibility, how the capital is represented, and the management and supervision.

Here are the main types of companies in Portugal:

  • Private Limited Companies (Lda.)
  • Single Partner Limited Companies (Unipessoal Lda.)
  • Public Limited Companies (S.A.)
  • Branch
  • Holding Companies (SGPS)
  • Limited Partnership
  • General Partnership

Each type of company has its own specific features and is suitable for different business needs. When in doubt, consult a professional.

Let’s Talk About the Fourth Regime in Madeira

The Fourth Regime of Madeira, a strategic initiative in Portugal, offers a unique blend of tax incentives and benefits designed to attract and retain businesses; such as:

Corporate tax rates are reduced (5%) until 2027.

There are no withholding taxes on dividend (and reserves) payments to non-resident shareholders, provided they are not residents in Portugal or in blacklisted jurisdictions. Additionally, there is no corporate income tax on dividends and reserves received from subsidiaries (applicable criteria), as these profits are removed from the taxable income.

There is no taxation of capital gains upon the sale of subsidiaries (applicable criteria). Similarly, there is no taxation on capital gains originated upon disposal by non-resident shareholders of participation held in a Madeira IBC Company.

There are no withholding taxes upon payment of royalties and services to non-resident entities, as well as upon interest payment (under certain conditions). The EU Directive on Interest and Royalties may also apply.

A possible tax credit mechanism (in order to avoid international double taxation) is available, and the possibility to use the tax credit for 5 years exists.

There is no capital duty, as well as no Registration or Notarial fees.

Taxation on Stamp Tax, Real Estate Transfer Tax (IMT), Annual Municipal Tax on Real Estate (IMI), Municipal Surtax (“derrama municipal”), and Regional Surtax (“derrama regional”) shall be exempt up to 80% of said taxes. Taxation on Stamp Tax, Real Estate Transfer Tax (IMT), Annual Municipal Tax on Real Estate (IMI), Municipal Surtax (“derrama municipal”), and Regional Surtax (“derrama regional”) shall be exempt up to 80% of said taxes.

Some Thoughts on the Future of Portugal’s NHR

The proposed 2024 State Budget, revealed in Parliament on October 10th, terminates Portugal’s Non-Habitual Resident (NHR) regime, confirming the Prime Minister’s earlier announcement. Implemented in 2009, the NHR regime lets eligible individuals achieve tax residency in Portugal, reducing or avoiding income tax on specific categories for 10 years. It concludes on January 1, 2024, but persists for:

Individuals already registered as NHR when the State Budget Law takes effect.

Those meeting access conditions until December 31, 2023, and holders of a valid residence visa, if the registration process is submitted by March 31, 2024.

Tax conditions for current NHR beneficiaries remain unchanged throughout the 10-year program.

Simultaneously, a new tax incentive for Scientific Research and Innovation is proposed. This applies to tax residents who haven’t lived in Portugal for five years and engage in academic research, specialized positions related to productive investments, or roles in research and development.

To avail these benefits, registration with specific entities is required. Details on reporting to the Tax Authority will be announced this year.

The new regime includes:

  • A 20% special personal income tax rate on earnings from specified fields for 10 continuous years.
  • Tax exemption on foreign-sourced income, calculated progressively.

This regime is accessible once. Those benefiting from NHR or under the ‘Former Residents’ regime are ineligible.

Minor changes to the 2019 “Programa Regressar” aid emigrants returning to Portugal, offering financial support and tax benefits for those who:

  • Resided abroad for 12+ months.
  • Started professional activity in Portugal between January 1, 2019, and 2026.
  • Were absent for at least three years.
  • Regularized social security and tax status.
  • Comply with IEFP obligations if they received financial support.
  • Family members in Portugal can also apply.
  • The 50% exemption can’t exceed €125,000.

Challenges of Doing Business in Madeira

Madeira is an autonomous region of Portugal, located in the North Atlantic Ocean. It’s a popular tourist destination known for its beautiful scenery, mild climate, and friendly people. However, doing business in Madeira presents certain challenges.

Here are some of them:

  • Small market: Madeira’s population of just over 267,000 people is relatively small compared to other parts of Europe. This can make it difficult for businesses to find a large enough market to be profitable.
  • Remote location: Madeira is located in the middle of the Atlantic Ocean, which can make it difficult for businesses to access suppliers and customers. This can also make it expensive to transport goods to and from the island.
  • Banking: Banking can be a challenge.
  • Complex regulations: Madeira has its own set of tax regulations that require renewal, which can be difficult for foreign businesses to understand and comply with.
  • Lack of skilled labor: Madeira has a shortage of skilled labor, which can make it difficult for businesses to find the workers they need.

Despite these challenges, there are also some advantages to doing business in Madeira. The island has a beautiful natural environment, a low crime rate, and a friendly population. Additionally, the Madeira government is supportive of businesses and offers a number of incentives to attract foreign investment.

Overall, Madeira can be a great place to do business for entrepreneurs who are willing to overcome the challenges. The island offers a unique opportunity to start and grow a business in a beautiful and welcoming environment.

Comparing Madeira’s Regime and Malta’s Tax System

Shareholders of companies registered in Malta are entitled to a tax refund upon the distribution of profits. In general, the tax refund amounts to 6/7ths of the tax paid by the company, resulting in a maximum effective tax rate of 5% after-tax refunds. If the company claims double taxation relief in respect of foreign tax suffered, the effective tax rate can be further reduced to 0%.

In situations where the distributed profits consist of passive interest or royalties, the tax refund is reduced to 5/7ths of the tax charge. This results in a maximum net tax paid in Malta of 10% after-tax refunds. Passive interest and royalty income is defined as income that has not been derived, either directly or indirectly, from a trade or business. It also refers to income where such interest or royalty has not suffered, or has suffered any foreign tax, directly, by way of withholding or otherwise, at a rate of tax which is less than 5%.

If the company has chosen to claim relief from double taxation on its income, which is allocated to its foreign income account, refunds to shareholders will amount to 2/3rds of the total tax paid (including foreign tax). If the relief from double taxation claimed is the Flat Rate Foreign Tax Credit (refer to the section on Double Taxation Relief), the tax refund will amount to 2/3rds of the Malta tax paid.

In general, the tax refunds are calculated on the total tax paid, including foreign tax, subject to the tax refund not exceeding the Malta tax suffered. The only exception is where the FRFTC is claimed, as mentioned above.

Let’s Talk About Madeira’s Regime vs UAE/Dubai’s Tax Systems

In general, Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (UAE Corporate Tax Law) outlines the application of a 0% (zero percent) rate on the income of “Qualifying Free Zone Persons” under the following conditions: 0% (zero percent) on “Qualifying Income”, and 9% (nine percent) on income subject to the UAE Corporate Tax Law that is not deemed as “Qualifying Income”.

A “Qualifying Free Zone Person”, according to the UAE Corporate Tax Law, is defined as a Free Zone juridical person that meets all of the following requirements:

  1. Maintains adequate substance,
  2. Derives “Qualifying Income”,
  3. Has not elected to be subject to Corporate Tax,
  4. Complies with transfer pricing requirements,
  5. Non-qualifying Revenue does not exceed the “de-minimis requirements”,
  6. Prepares audited financial statements, and
  7. Meets other conditions prescribed by the UAE Minister.

Among other requirements and exclusions, Cabinet Decision No. 55/2023 requires “Qualifying Free Zone Persons” to maintain adequate substance in a Free Zone under the following conditions:

Core income-generating activities (CIGAs) shall be undertaken in a Free Zone, Maintain adequate assets, an adequate number of qualified employees, and incur an adequate amount of operating expenditures with respect to the level of the CIGAs undertaken in a Free Zone.

“Qualifying Free Zone Persons” may opt to outsource their CIGAs to a Related or third party provided the following two requirements are met:

  1. The related or third party is a Free Zone person, and
  2. The Qualifying Free Zone Person has adequate supervision of the outsourced activity.Let’s Discuss Madeira Trusts

Let’s Discuss Madeira Trusts

Trusts in Madeira are regulated through omission. Decree-Law 352/88 and Decree Law 149/94 deal with the registration and management of offshore trusts, while Decree Law 264/90 concerns the government’s authorization of trust corporations and branches.

Portuguese residents cannot use Madeiran offshore trusts. The law prohibits a trust from holding immovable property situated in Portugal and from having either a settlor or a beneficiary who is a Portuguese resident.

All trust property must be based outside Portugal, and all trust income must be derived from non-Portuguese sources if the favorable taxation regime governing entities licensed to operate under the Free Trade Zone Legislation of Madeira is to apply.

If trust income arises in Portugal, it is taxable in the hands of the trustees as if the trustees were both legally and beneficially entitled to the income. The reasoning behind this principle is that Portuguese law does not recognize the concept of a trust, and so does not recognize the distinction between legal and beneficial ownership for the purposes of taxation.

By way of exception, income arising through investments made through companies licensed to operate under the Free Trade Zone Legislation of Madeira is not considered to have arisen within Portugal for tax purposes.

For Trusts in Madeira to be valid, they must satisfy the following criteria:

  • The trust must pass the three tests: the certainty of intention, the certainty of objects, and the certainty and identification of the beneficiaries;
  • The settlor, the trustees, the beneficiaries, and the assets settled by the trust must all be identified in the trust deed;
  • The trust period must be specified.
  • A power to accumulate income must be specified in the deed;
  • The trust deed must stipulate a foreign proper law governing the validity, interpretation, and administration of the settlement;
  • The trust deed must set out the trustees’ powers of investment, the rights and obligations of trustees, and the relationships between trustees and beneficiaries, including any personal liability arising.

Comments on EU Court’s View on Madeira Free Trade Zone State Aid Scheme

Following concerns during standard monitoring, the Commission opened an in-depth investigation into Regime III on 6 July 2019. It concluded on 4 December 2020 that the scheme breached EU State aid rules. Portugal was required to recover aid granted to 311 companies out of the 1,700 covered by Regime III, totaling approximately €1 billion (€833 million plus interest).

The Portuguese government appealed, claiming that Regime III did not constitute ‘State aid’ under EU law, did not affect trade, and did not distort competition between EU Member States. It further claimed that the Commission had failed to demonstrate that Regime III should be classified as ‘existing aid’ and was in breach of the principles of legal certainty and the protection of legitimate expectations.

The General Court dismissed Portugal’s claim that the disputed scheme did not constitute ‘State aid’ under EU law because the Commission only had to examine whether that aid would affect trade and distort competition. In the Court’s view, granting tax benefits to companies operating in the MFTZ could, in principle, distort competition. The selectivity criteria were also met because the disputed regime did represent a derogation from the reference framework of ordinary or ‘normal’ taxation and its objective.

The General Court also dismissed Portugal’s claim that Regime III should have been classified as ‘existing aid’ because the Free Zone was created before Portugal’s EU accession, and any subsequent amendments were minor and only made to comply with successive versions of the Commission’s guidelines on regional State aid.

It noted that, under EU State aid law, any change to an existing scheme that exceeded purely formal or administrative amendments qualified as ‘new aid.’ Regime III introduced substantial changes by amending constituent elements of the initial scheme – activities in scope, additional criteria, and updated thresholds – sufficient to represent ‘new aid’ for the purpose of EU law.

The Court further dismissed Portugal’s claim of breach of the principles of legal certainty and the protection of legitimate expectations. It noted that recovery was the logical consequence of finding that a State aid measure was unlawful and that the Commission was generally required to order the recovery of the aid. Nor could Member States justify a failure to comply with EU law obligations on the grounds of administrative or practical difficulties when implementing the recovery Decision.

The fact that the recovery of unlawful State Aid could lead to bankruptcy of the beneficiaries could not affect the compulsory nature of the recovery.

Let’s Explore the International Business Centre of Madeira

The International Business Center of Madeira (IBCM), also known as the Madeira International Business Centre (MIBC) and formerly the Madeira Free Trade Zone, is a collection of tax benefits authorized by Decree-Law 500/80 in 1980. It was legislated in 1986 and has been amended over the years by the Portuguese government to favor the Autonomous Region of Madeira. The objectives of the IBCM are to attract foreign investment to the region and to internationalize Portuguese companies by allowing them to benefit from one of the lowest corporate taxation rates in Europe and among the OECD member countries.

Since 1987, the MIBC has been managed and promoted by a private company, Sociedade de Desenvolvimento da Madeira S.A. (SDM). The Regional Government of Madeira currently holds 48.86% of the shares in SDM, while the other main shareholder, the Pestana Group, holds 51.14% of the shares. As of January 2020, the Vice-Presidency of the Madeira Regional Government announced its intention to acquire 51% of the shares of SDM.

The Portuguese government created the International Shipping Registry of Madeira, locally known as MAR or RIN-MAR, to develop its blue economy. It is strongly associated with the MIBC. As one of Europe’s largest ship and yacht registries, MAR accepts the registration of all types of commercial vehicles. In 2016, MAR had a total of 516 registered vessels. The registry provides benefits to shipping companies and ships, oil rigs, and yachts, including a mortgage system and access to European continental and island cabotage.

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