Following a period of uncertainty, 2013 brought some much needed hope for Madeira, Jorge Veiga França looks at recent developments that are bring hope for continuing success in Madeira's IBC.
The second half of 2013 has brought new hopes and encouraging perspectives regarding the future of Madeira’s International Business Centre (IBC) with the EU approval of a 36.7 per cent increase of the ceilings applicable to the taxable income of its licensed entities in accordance with the number of jobs created, a measure effective as of January 1st,, 2013.
This is undoubtedly good news as the new law nº 83/2013 of December 9th now means that the IBC reduced corporate income tax (CIT) rate of five per cent applies to a €205.5 million taxable income when licensed companies create over 100 new jobs, but still provides an attractive ceiling of €2.73 million taxable income when the company creates at least one job locally. Furthermore, in between such ceilings a comfortable €21.87 million taxable income to which the five per cent CIT fully applies when a minimum of six jobs have been created by the IBC Company!
For the first time after the subprime and the subsequent international financial & economic crisis that struck our world and deeply affected Portugal leading the country to desperately call for the Troika’s rescue, by mid 2013 a nice soft breeze seems to have finally blown from Brussels and the community of EU member states towards Madeira and its International Business Centre.
Promising words and principles like solidarity and subsidiarity, once considered by EU decision makers as fundamental to the functioning of the European Union, for a longtime seemed forgotten in regard to citizens from the EU’s outermost regions such as Madeira, having given way to others such as austerity in the EU leading countries vocabulary, finally arise again.
These above mentioned increases to the tax ceilings were welcomed by the islanders as long waited news for two main reasons:
Firstly, because this was long expected as part of Madeira’s required aspirations to increase conditions to more fairly compete with better prepared EU state members, eg, the Netherlands, Luxembourg, Malta or Cyprus that recently benefited from the austerity measures imposed on Portugal and Madeira’s IBC as a consequence of our creditors’ compulsory policy rescue demands embodied, namely, through the enactment of Portugal’s National Budget Law for 2012;
Last but not least, because this amendment approved by the European Commission has clearly shown to the world that our EU partners are still committed to provide this ultra-peripheral small insular EU economy with more efficient means to substantially grow on a consistent and dignifying way, as such competing for the management of international operations in various sectors of activity, thus achieving its own determined development goals within a reasonable time limit.
At the same time another relevant Portuguese legal measure is currently in the limelight: The approval in December 2013 by the Portuguese parliament of an extraordinary reform of corporate income tax (CIT) as a result of an unusual but very appreciated extended agreement attained by the three major parties represented therein, the two parties of the coalition that has governed Portugal since 2011 and the socialists, the leading party of the opposition.
This extensive CIT reform that entered into force January 1st, 2014, has been largely approved with more than 85 per cent of the votes of the MPs and is intended to bring in an outstanding contribution to the country’s economic recovery along with a great deal of competitiveness to Portugal in the international arena, an indispensable measure to rightly place the country at a level playing field amongst the community of nations where it belongs.
The way this reform has been achieved grants stability on a time frame to the legal measure that now came into force, as such avoiding the past experience of continuously witnessing a systematic going forwards and backwards on the Portuguese tax laws, every time there has been a major change in the governing arch.
Madeira and its International Business Centre as part of Portugal, thus of the Portuguese legal order, welcomed the changes introduced with this tax reform in terms of CIT and that they are of full application within the IBC scope, therefore, also further enhancing the competitiveness of the Centre on an international scale.
Amongst such appraised new measures, the following are noteworthy:
Whenever the Portuguese parent company holds a minimum participation of five per cent at its foreign subsidiary for at least two years, as long as such subsidiary is subject to tax and is not domiciled/resident in a country making part of the Portuguese black-list, a participation exemption applies to both dividends and capital gains received by such parent company.
A CIT exemption also applies in Portugal to income derived from foreign branches of Portuguese companies, as long as alike the aforesaid subsidiaries, such branches are not located in a tax haven.
Shareholding companies resident/domiciled in the EU and the EEA that are subject to tax and hold at least a five per cent shareholding in a Portuguese company for a minimum period of two years, are exempt from WHT on dividends paid by the Portuguese company. Likewise, such exemption also applies to dividends paid by Portuguese companies to corporate shareholders holding a similar minimum participation for a similar minimum period located in countries having Double Taxation Agreements in force with Portugal, which foresee exchange of information with Portugal.
The temporary disposal and or use of patents, industrial designs and models as well as of other industrial property rights entitle a CIT exemption in Portugal, applicable to 50 per cent of its derived income, provided it originates from R&D activities performed by the Portuguese company and may not be granted to a tax haven company. Considering the application of this tax benefit to an IBC licensed company, within the ambit of Madeira’s IBC it represents in practice a CIT of 2.5 per cent instead of five per cent, subject to the fulfillment of the inherent conditions of such reduced tax rate.
In view of the above, an auspicious future is set apart this year and forthcoming ones to Portugal and its International Business Centre in Madeira and the current pace of new adhesions registered within the scope of the IBC in the last two months of 2013, ie, 40 new licences on a total achieved of over 145 throughout the whole year, just proves it.
Long live Madeira’s IBC, Madeira, its islanders and all those who invest on it, thus contributing to its future development and welfare!
Jorge Veiga França, Partner, NewCo, Madeira