Extension of Madeira’s Tax Regime until the Year 2020

After several months of negotiation between the European Commission (EC) and the Portuguese Authorities, represented not only by the government but also by Sociedade de Desenvolvimento da Madeira (SDM), the EC has announced, on June 27, 2007, the extension of Madeira’s preferential tax regime until the year 2020.

This announcement, although expected, has brought a new impulse to the already vivid and entrepreneuring International Business Centre of Madeira (IBCM). In fact, the IBCM, since its implementation in the early 80s, has been in constant development. Its regime has been suffering several mutations, from a pure tax exemption into a low-tax regime, in order to accommodate new economic realities and therefore benefiting all economic agents involved.

The recent decision to extend the preferential regime was adopted in accordance with EC Treaty state aid rules, and is designed to continue promoting the regional development of the island of Madeira. The aim is to enable companies established in this region to overcome the natural structural handicaps and take advantage of all other human, economic, and geographic resources the island has to offer.

In this sense, authorities have recognised that the IBCM has been an excellent tool for Madeira’s development.

New Regime

According to the new regime, companies licensed between 1 January, 2007, and 31 December, 2013, to carry on business within the scope of the Madeira International Business Centre will now benefit from reduced income tax rates.

The income tax rates recently established will range from 3 per cent for the years 2007-2009 and 4 per cent for the years 2010-2012, to 5 per cent for the years 2013-2020.

However, it is relevant to specify that access to this new scheme will be restricted to companies which meet specific eligibility criteria regarding substance issues. These requirements had already been introduced in the 2003-2006 regime, and have engaged the IBCM into a new economy perspective.

In fact, bearing in mind the purpose of the preferential regime, the EC has established that tax benefits will be limited by ceilings placed on the company’s taxable income, which will vary in accordance with the jobs created by the company.

The presented taxable income ceilings will range from €2 million (where less than three new jobs are created) to €150 million (where more than 100 new jobs are created), as follows:

• €2 million – creation of 1 to 2 employees;
• €2.6 million – creation of 3 to 5 employees;
• €16 million – creation of 6 to 30 employees;
• €26 million – creation of 31 to 50 employees;
• €40 million – creation of 51 to 100 employees;
• €150 million – creation of more than 100 employees.

Although the referred plafonds were already decided through the negotiations established by the EC, and were also referred to in the proposal of law already presented by the Portuguese government, we may expect some amendments to the regime in the near future. Namely, it is possible that an enlargement of the amounts presented is implemented, since some of the Portuguese Authorities have already shown interest in revising them with the EC.

In any case, the issue of a pure identification of “job” in this context is still debatable. Since the concept is not defined, it has been argued that part-time employment and remunerated company directorship can be eligible, as long as liable to social security and to personal income tax as dependent work. In any case, in an era of globalisation and modernisation of economy worldwide, it is fundamental to consider a flexible approach to the definition.

As under the previous regime, admission is also restricted to certain activities included in a list drawn up by the Portuguese authorities and based on the statistical classification of the European Union Economic Activities. Therefore, financial and insurance intermediary activities, financial and insurance auxiliary activities, and “intra-group services” (coordination, accounting, and distribution centres) remain explicitly excluded.

With regard to financial activities, since this exclusion was only inserted in the 2003-2006 regime, it is now safe to confirm that after 2011 there will be no further financial services in the IBCM. Regarding industrial activities, the law proposal presented by the Portuguese government establishes an extra tax benefit, since it enables these companies to enjoy of a 50 per cent tax deduction on the tax due, as long as two of the following conditions are met:

•   Contribution to the modernisation of the regional economy, namely through the technological innovation of products and manufacturing processes or business models;
•   Contribution to the diversification of the regional economy, namely through the implementation of new added-value activities;
•   Promotion of the hiring of highly qualified employees.
•   Contribution to the improvement of environmental conditions;
•   Creation of, at least, 15 jobs which must be maintained for a minimum period of 5 years.

Also, as in the regime established for licences issued from January 2003 to December 2006, the beginning of the respective activity is also an issue. According to the new situation, the companies applying for this regime must start business within six months in the case of international services, and one year in the case of industrial or shipping activities.

As regards companies licensed to operate within the IBCM before the year 2001, these companies will continue to benefit from total exemption on corporate tax on income derived from their licensed activities within the IBCM until the end of 2011.

However, as expected, as of 2012, the referred companies will have to comply with the new requirements established in the regime now approved by the EC, which shall be valid until the year 2020. 

For many viewers, the new regime is an excellent achievement by Portuguese authorities as respects the regime established for licences issued until the end of 2006. In fact, extension was achieved with no significant increase of the applicable tax rates (in the old regime we had a rate of 1 per cent in 2003-2004, 2 per cent in 2005- 2006, and 3 per cent in 2007-2011), and with the establishment of higher plafonds (in the old regime we had plafonds of €1.5 million (where less than three new jobs were created) to €125 million (where more than 100 new jobs were created).

Also, it is important to stress that other major exemptions will be maintained. First, exemptions will continue to apply to dividends and interests paid to non-resident shareholders.

In addition, non-residents should continue to be exempt from tax on royalties and also interests received from loans, bonds and advances of capital granted to IBCM companies. Finally, stamp duty and, in general terms, capital gains exemptions, shall also, in principal, remain in force in the same terms for companies subject to this new regime.

All the referred reductions and exemptions are obviously subject to some requirements and specifications. This results, not only from the applicability of the special rules issued by the new IBCM regime, but also from the fact that these companies are subject to general Portuguese law. Therefore, a careful analysis and tax guidance on each specific situation is required and should improve tax efficiency of the regime.

Conclusion

The extension of the IBCM under the above referred conditions has been a great achievement for the Portuguese Government and Madeira Authorities. It has enabled them to continue assuring investment in Madeira by following the European trend and engaging on a new path for Madeira companies.

Taking into consideration all of the above, the IBCM remains undoubtedly an attractive option for a business action stage.

On one hand, this business centre provides for the security of operating within the European Union territory, since full transparency requirements are in force. On the other hand, it presents a variety of sectors - industrial-free zone, international services, and international shipping register - that assures potential growth and diversity to both companies and investors alike.