INTRODUCTION
Initially thought of as industrial tax free zones, the Madeira and the Santa Maria (Azores) Tax Free Zones have considerably enlarged their scope, to become today true tax shelters for international business.
The areas of activity covered by the Portuguese Tax free Zones include the following:
- An industrial zone,
- An off-shore financial centre,
- An international services centre,
- A ship registration centre.
Furthermore, legislation has also been approved to allow the incorporation and registration of trusts in the Madeira Tax Free Zone.
Despite the similarity of regimes applicable to each of these two Tax Free Zones (Madeira and Santa Maria-Azores), only the Madeira Free Zone has resulted in a successful operation. Conversely, we shall dedicate this article to the tax benefits, which exist in the Madeira Free Zone.
THE TAX REGIME OF THE MADEIRA FREE ZONE
The basic principle of the Madeira Tax Free Zone is that no taxes are levied in as much as the transactions carried out from, or through, the Free Zone are not carried out with residents of, or are not located in, the Portuguese territory (including the Portuguese permanent establishments of non-residents).
Tax benefits have been granted to the Madeira Free Zone until December 31, 2011, and can be divided into the following categories:
(a) Tax benefits granted to companies or entities incorporated or established inside the Free Zone,
(b) Tax benefits granted to the shareholders or partners of companies or entities incorporated or established inside the Free Zone,
(c) Tax benefits granted to third parties, as a result of their entering into transactions with companies or entities incorporated or established inside the Free Zone,
(d) Tax benefits granted to employees of companies or entities incorporated or established inside the Free Zone.
TAX BENEFITS GRANTED TO COMPANIES OR ENTITIES INCORPORATED OR ESTABLISHED INSIDE THE FREE ZONE,
The most important of such tax benefits resides in a full exemption from corporate or individual income tax until December 31, 2011.
Such tax exemption is granted if the activities exercised by such companies or entities are of an industrial nature, and provided further that such activities are exercised in accordance with the licenses issued by the proper authorities. In this particular case, the tax exemption includes income derived from the Portuguese territory or transactions executed with residents of such territory.
The said tax exemption also covers income derived from activities of a different nature, provided such activities are carried out with persons which are not resident in the Portuguese territory.
An income tax exemption is also granted to other types of companies or entities, exercising their respective activities in or through the Madeira Tax Free Zone, provided such income does not derive from the Portuguese territory, or from transactions executed with residents of that territory.
The following is a list of such companies or entities:
(a) Maritime companies (namely those which are dedicated to the transportation of passengers or goods by sea),
(b) Credit institutions and other financial companies,
(c) Investment funds management companies,
(d) Insurance companies,
(e) Pension funds management companies,
(f) Holding companies.
With respect to holding companies, it should further be noted that the income tax exemption does not apply, when the participations are held in companies, which are resident of a European Union member State. However, in such cases, elimination of economic double taxation in Madeira (in accordance with the general provisions of the CIRC) will allow the (nearly) full mitigation of the tax due.
TAX BENEFITS GRANTED TO THE SHAREHOLDERS OR PARTNERS OF COMPANIES OR ENTITIES INCORPORATED OR ESTABLISHED INSIDE THE FREE ZONE.
Shareholders or partners of companies or entities mentioned above, under paragraphs (a) and (f), as well as those who participate in the capital of locally incorporated industrial companies, are - until December 31, 2011, exempted from any withholding taxes on the profits or on the interest paid by such companies or entities.
Naturally, the tax exemption will not operate if such shareholders are resident in the Portuguese territory (save if the paying company is an industrial company or a maritime company).
TAX BENEFITS GRANTED TO THIRD PARTIES, AS A RESULT OF THEIR ENTERING INTO TRANSACTIONS WITH COMPANIES OR ENTITIES INCORPORATED OR ESTABLISHED INSIDE THE FREE ZONE
In certain cases, article 41 of the EBF grants a tax exemption to income earned by third parties, in connection with the Madeira Tax Free Zone. Such is the case of:
(a) Interest earned by Portuguese non-residents in connection with loans provided to companies or entities, which are incorporated or established in the Madeira Free Zone, provided that the proceeds of such loans are aimed at investments carried out in the Free Zone,
(b) Royalties earned by Portuguese non-residents in connection with the assignment of rights or the provision of know-how, provided that such assigned rights or know-how is aimed at an activity, which is exercised in the Free Zone,
(c) Income earned by Portuguese non-residents in connection with operations carried out with credit institutions incorporated or established in the Free Zone, provided such operations are aimed at the financing of balance-sheet liabilities of the permanent establishments of such credit institutions in the Free Zone,
(d) Income earned by Portuguese non-residents in connection with services provided to trusts incorporated in the Madeira Free Zone.
TAX BENEFITS GRANTED TO EMPLOYEES OF COMPANIES OR ENTITIES INCORPORATED OR ESTABLISHED INSIDE THE FREE ZONE.
Income paid to employees of ships, which are registered in the Madeira Free Zone, is exempted from tax.
ADDITIONAL NOTES
Stamp Duties
Documents, contracts and other acts drafted or executed in connection with an activity exercised in the Madeira Tax free Zone, or by a company or entity incorporated or established therein, are exempted from stamp duties.
Source Income
In order to determine whether or not a certain income is connected with the Portuguese territory, it is important to take note of the provisions of the CIRS and of the CIRC in respect thereof. In connection herewith, kindly revert to our previous article on the Taxation of Non-Residents (concept of Source Income).
Residency
In order to determine whether or not a given person is resident in the Portuguese territory, it is important to take note of the provisions of the CIRS and of the CIRC in respect thereof. In connection herewith, kindly revert to our previous articles, respectively, on the Taxation of Resident Individuals in Portugal (concept of residency) and on the Taxation of Resident Corporate Entities (concept of residency).
A Tax Planning Tool
Despite an ever growing competition, Madeira is still, in some types of transactions, a good tax planning tool. Such is the example of:
(a) European companies taking advantage of the Parent-Subsidiary Directive (as Madeira holding companies can benefit from the application of such Directive),
(b) Companies taking advantage of the (tax sparing, capital gains) provisions of some of the Double Tax Treaties executed by Portugal (as, in most cases, Madeira resident companies can benefit from the application of such Treaties),
(c) Multinational companies taking advantage of the tax exemptions of Madeira, in order to allow the financing of their restructuring operations.
Please note that the contents of this Article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstance.
For further information, contact Miguel Teixeira de Abreu, Abreu, Cardigos & partners, Lisbon, Portugal.