The Madeira (Portugal) Free Trade Zone – What Tax Benefits Does It Offer And Substance Requirements
The Madeira archipelago is part of Portugal and is located in the Atlantic Ocean, 978 km southwest of Lisbon.
During the past decade, Portugal has taken several steps to enhance its attractiveness to international business and high net worth individuals. Partially thanks to the Non-Habitual Residents tax programme implemented in 2009 and the Golden Visa residency programme introduced in 2012, Portugal has become one of the main ‘start up’ centres in the world and the preferred choice for the relocation of companies and highly qualified professionals and their families.
In addition, Portugal offers the advantages available through the ‘Madeira International Business Centre’(MIBC) which was approved by the European Union (EU) when Portugal formally joined the EU in 1986.
What is the Madeira International Business Centre?
The MIBC enjoys a series of incentives, predominantly of a tax nature, which have been approved by the EU until at least the end of 2027. These incentives are very attractive for appropriate international companies.
Created more than 30 years ago, the legal framework of the MIBC continues to be an efficient and clearly defined structure regarding transparency, compliance and economic substance.
The MIBC Tax Regime
Businesses registered in the MIBC benefit from the following tax advantages:
- A reduced corporate income tax rate of 5% is applicable to active income (such as income resulting from trading activities or provision of services, etc.).
- Under Portugal’s Participation Exemption Method, Madeira companies are exempt from withholding tax on the distribution of dividends, if certain conditions are met.
- The participation exemption regime is also applicable to:
- capital gains received by the MIBC entity (a minimum of 10% ownership, held for 12 months, is required), and
- the sale of its subsidiaries, and
- the payment of capital gains to the shareholders, by the sale of the MIBC company.
- Exemption from withholding tax on interest, service fees and royalties paid to non-residents.
- Exemption from stamp duty, property tax, property transfer tax, and regional and municipal surcharges (subject to an 80% limitation per tax, transaction, or period).
- Application of the double taxation treaties signed by Portugal.
- Application of the investment protection treaties signed by Portugal.
Why the Madeira International Business Centre?
- Madeira is part of Portugal and therefore benefits from the advantages of being a Member State of the European Union and also of the OECD.
Companies located in Madeira operate under a credible regime, supported by the 28 EU Member States. Madeira is not considered to be a tax haven, and is therefore not included in any international black lists.
- Madeira companies are automatically given a VAT number, allowing them direct access to the EU intra-Community market;
- All EU Directives are applicable to Madeira, guaranteeing a well-regulated and modern legal system that protects investors´ interests;
- A highly skilled work force is available in Portugal and in Madeira;
- Portugal is a politically and socially stable country;
- Portugal, and Madeira, offer low operating costs compared to other European jurisdictions;
- Madeira is a region offering individuals; security, quality of life, a mild climate and a high level of natural beauty.
Companies in the MIBC: Key Conditions
Companies wishing to establish themselves in the MIBC need to meet a number of conditions, including:
- The MIBC company must apply for a Government Licence.
- The reduced corporate income tax rate on income (5%) is applicable when the income is derived from an international activity, i.e. outside Portugal, or, when in Portugal, the business relationship is with another MIBC company.
- The capital gains tax exemption (applicable to the sale of shares in the MIBC company) is not applicable to shareholders who are considered tax resident in Portugal or within a ‘tax haven’ (as defined by Portugal).
- Exemption from Real Estate Transfer Tax (IMT) and Municipal Property Tax (IMI) for properties exclusively used for the company’s business.
The International Topic of Substance
Companies with offices in different jurisdictions are increasingly being asked to meet substance requirements.
An important features of the Madeira International Business Centre regime is that the law clearly defines appropriate substance requirements that must be met for the company to obtain the relevant tax benefits. These substance requirements essentially relate to the creation of jobs.
MIBC companies need to comply with well-defined and detailed substance requirements, currently one of the few countries in the world with this precise approach. Clients can therefore be confident that they have appropriate levels of substance in place, to match the activity of the company registered in Madeira.
This is verified in two different ways, at different times:
1.After the incorporation of the company (one-off requirement):
i. within the first 6 months of activity, the company must hire at least 6 workers, OR;
ii. during the first 2 years of activity, the MIBC company must invest €75,000 in the acquisition of tangible or intangible fixed assets.
2. On an ongoing basis, the company must have at least one employee on its payroll, paying Portuguese individual income tax and social security. This employee can be the Director or a Board Member of the MIBC company.
The corporate tax rate of 5% applies to a company’s taxable income. There is an upper limit of income which can enjoy this favourable tax rate, based on the number of jobs that have been created in Madeira by the company.
These figures are detailed below:
|Job Creation||Minimum Investment||Maximum of Taxable Income Reduced Tax Rate Applies to|
|1 – 2||€75,000||€2.73 million|
|3 – 5||€75,000||€3.55 million|
|6 – 30||N/A||€21.87 million|
|31 – 50||N/A||€35.54 million|
|51 – 100||N/A||€54.68 million|
The total benefits granted to companies licensed to operate in the Madeira International Business Centre are, however, capped at one of the following amounts:
- 15.1% of the annual turnover; OR
- 20.1% of the annual earnings before interest, tax and amortisation; OR
- 30.1% of the annual labour costs.
How can Dixcart Help?
- The Dixcart office in Madeira can provide a complete range of services related to the incorporation of a company in the MIBC and its day-to-day obligations, including: accounting, legal, human resources, tax compliance and IT.
- Dixcart has a strong network of contacts in the professional and commercial sectors, both on the island of Madeira and mainland Portugal, and can introduce appropriate businesses to relevant individuals.
- Dixcart experts can assist entrepreneurs and their families in relocating to Portugal and/or Madeira and obtaining the necessary residence permits.
If you require further information regarding the MIBC and/or if you would like information regarding the types of company and tax frameworks available in Portugal, please speak to your usual Dixcart contact, or to Catarina Sardinha at the Dixcart office in Portugal: firstname.lastname@example.org.