Why a Madeira IBC Company is the New International Corporate Structure to Consider in Turkey
A Changing Focus Regarding International Tax Planning
International tax planning is becoming increasingly sophisticated, with considerations often far more complex than just seeking the ‘lowest’ rate of corporate tax.
Particularly in markets such as Europe, a location that facilitates cross-border trade and investment is becoming increasingly important for businesses aiming at globalisation and to remain competitive with their peers.
A number of previously popular structures have become difficult to use, especially in markets like the EU, due to non-compliance with OECD, BEPS and Pillar II requirements, which are changing the landscape of international tax planning.
The Madeira International Business Centre (MIBC): An Attractive Option for International Tax Planning
The Madeira International Business Centre (MIBC) has been around since the late 1980s and has seen a series of developments introduced which make it increasingly attractive for international tax planning.
- Madeira IBC companies, that satisfy the minimum substance criteria, benefit from a 5% corporate income tax rate for business conducted internationally.
MIBC, based in the Madeira Portuguese Island, has; a specific taxation regime for international services, an industrial free trade zone and a ship registry that is fully integrated into the Portuguese and European legal system, and is fully compliant with the requirements of the OECD, BEPS and other EU Directives.
Based in the Atlantic Ocean, Madeira is a one-and-a-half-hour flight from the Portuguese capital, Lisbon. The island has taken several active steps to ensure that the important topic of substance is addressed in terms of corporate structuring. Companies in Madeira have predefined substance rules, specifying the criteria needing to be met, to be fully compliant with the regime.
The substance criteria are defined as having at least one employee employed within the first six months of operation and a €75,000 investment in fixed assets, tangible or intangible, within the first two years of operation. Alternatively, there must be six full time employees. All employees need to be based/tax resident in the island of Madeira.
What Advantages Can an MIBC Offer to Turkish Tax Residents?
MIBC companies can be used as holding companies, however due to Controlled Foreign Company (CFC) implications in Turkey, this may not be the most tax efficient structure for a Turkish tax resident earning passive income.
Trading or operational companies in the MIBC therefore offer the greatest potential benefits.
The Double Tax Treaty between Turkey and Portugal presents a number of tax efficiencies, as detailed below:
- Madeira IBC companies, that satisfy the minimum substance criteria, benefit from a 5% corporate income tax rate for business conducted internationally and up to 14.7% for business conducted in the Portuguese national market, with the exclusion of financial service activities.
- Distributions such as dividends, capital gains, interest, royalties and services made to Turkish residents, single or corporate shareholders of the MIBC, will benefit from a FULL exemption from withholding tax in Portugal. This applies to all Portuguese non-residents if they are not resident in one of Portugal’s “blacklist” jurisdictions.
- In addition, Portuguese corporates will also be exempt, if holding a participation of at least 10% for 12 consecutive months.
- As a Madeira IBC is a full Portuguese company, it is regarded as an onshore company and is subject to Portuguese legislation. This means that the DTT between Portugal and Turkey is applicable. It only needs to be considered for inbound distributions to Turkish tax residents, as the outbound distributions from Portugal are not subject to tax according to the rules of the Madeira IBC.
- The DTT agreement provides for a 5% tax rate where dividends are paid to a company, other than a partnership, that directly holds at least 25% of the capital of the company paying the dividends, for a minimum two-year period before the dividends are paid; otherwise, the rate is 15%.
- A 10% tax rate applies to interest on loans, where the duration of the loan is a minimum of two years; otherwise, the rate is 15%.
How Easy Is It for Turkish Nationals to Move to Madeira?
The Digital Nomad Regime in Madeira makes it attractive for a non-EU employee from Turkey, or elsewhere, to relocate and benefit from the personal tax regime available. The non-habitual resident regime attracts a flat personal income tax rate of 20% with no ceiling.
Why is Madeira Regarded as a Favourable Place to Do Business?
Madeira is regarded as a favourable place to do business when compared to other European jurisdictions for a variety of reasons:
- Lower operational costs, namely set up fees, costs of employment (less than €15,000 for a full-time employee per annum, including National Insurance), registered office fees, local directors, and other costs associated with the set up and maintenance of a company.
- Simple structure: the structure is easy to administer when compared to other jurisdictions, making the running costs lower and providing fewer operational complexities.
- Madeira IBCs have been approved by the European Commission, due to the definition of Madeira as a less prosperous region and, on this basis, the European Commission has approved a lower tax rate in compensation for Madeira not receiving subsidies from the EU.
- This 5% tax rate is guaranteed until the end of 2027 with discussions currently ongoing with the EU for a further extension. The tax rate has been reviewed every few years since the 1980s.
- The ability to operate and do business in Madeira is straight forward, with a strong pool of talent in Madeira.
- Typically, Madeira people speak at least two languages, in almost all cases, including English.
- With a university situated on the island, students from the IT and other sectors can be employed at a significantly reduced cost, when compared to neighbouring EU jurisdictions.
- Incubation and R&D facilities exist in Madeira to assist start-up operations.
- European subsidies and grants may be applied, as Madeira forms part of the EU.
- When registering a company through the MIBC, an automatic VAT number is allocated to the company and no separate application needs to be made.
Summary
Madeira should be rightly considered as a ‘new’ essential in relation to corporate structuring, particularly for international business, and as an entry point into the EU market.
Whether it be establishing companies for IT applications, for trading, or other types of services, Madeira is a good fit for virtually all sectors (with the exception of financial services).
Madeira is fully considered to be part of Portugal. Similarly, Madeira companies are also regarded as Portuguese and required to comply with Portuguese laws and regulations. Madeira is therefore not listed as a blacklist jurisdiction.
Additional Information
If you would like additional information regarding Madeira companies, please contact the Dixcart office in Madeira: advice.portugal@dixcart.com.
