UK: New EU Corporation Tax Rate For MIBC State Aid Scheme

Last Updated: 22 March 2001
Article by Tim D. Wilkie


  • Limited And SGPS Companies ("IBC") - 1%; fixed rate until December 2011
  • Financial Services ("FSC") - 7.5%; fixed rate until December 2011
  • Manufacturing Zone Companies ("IFTZ") - 100% Corporation Tax exemption until December 2011
  • International Shipping Register ("MAR") - 100% Corporation Tax exemption until December 2011
  • SGPS 'Pure Holding' Companies Can Offset 100% Of Their Dividend Income against their taxable base
  • Companies Licensed Before The 1st January 2001 will retain their current tax exemptions until 31st December 2011

In 1987, the EU Commission authorised a Financial and Tax Aid scheme for the Free Zone of Madeira ("MIBC") under Article 92(3)(a) of the EC treaty. This was approved under State Aid N 204/86.

The MIBC comprises an Industrial Free Trade Zone ("IFTZ"); Financial Services Centre ("FSC"); International Business Centre ("IBC") and a Shipping Register ("MAR").

The Tax Aid provided for in the Financial and Tax Aid Scheme takes the form of direct tax exemptions 1 whereby companies establishing themselves in the MIBC, before the 31st December 2000, would be exempt from all direct taxes up to the 31st December 2011. The EU have said the partial exemption of taxes would be expected after 2011.

The scheme is regularly reviewed by the EU. The EU Commission extended the State Aid Scheme, on 2 reviews, for a period of 3 years and 5 years 2 .

In February 1998, the Commission wrote to the Portuguese Authorities requesting the Government to amend all their Regional Aid schemes (including the MIBC) to comply with the new EU legislation 3 which was to become effective on the 1st January 2000.

On the 29th December 2000, the Portuguese Parliament approved legislation 4 , which included the alteration of the tax rates to the MIBC in order to comply with the EU Regional Aid provisions.

The EU has subsequently been formally notified of this legislation and sources expect that EU approval could be confirmed by the end of March 2001.

New Corporation 'Direct' Tax Regime

Effective from the 1st January 2001, the following corporate tax rates apply to MIBC licensed companies.

International Services Companies - Limitada & Sociedades Anónimas

(Including but not limited to: International Trading; Management & Accounting services; Consulting; Trust Administration5 ; Investment and Property companies)

  1. There is no change to the zero rate for companies licensed before the 1st January 2001. This rate applies until the 31st December 2011;
  2. Companies licensed between the 1st January 2001 and the 31st December 2002 will have a fixed rate if 1% until the 31st December 2011;
  3. Companies licensed between the 1st January 2003 and the 31st December 2004 will have a fixed rate if 2% until the 31st December 2011; and
  4. Companies licensed between the 1st January 2005 and the 31st December 2006 will have a fixed rate if 3% until the 31st December 2011;

Pure Holding Companies - Sociedades Gestoras de Particações Sociais

(Special Holding Companies)

  1. The International Services Company tax rates, referred to above, apply to SGPS companies, but only in respect of dividends.
  2. 100% of the dividends received by MIBC Holding companies, under the EU Parent/Subsidiary Directive, can be used to offset the tax base.

Financial Services

(Banking; Insurance; Fund Management; Leasing; Factoring and Financial Services in general)

  1. There is no change to the zero rate for companies licensed before the 1st January 2001. This rate applies until the 31st December 2011;
  2. Companies licensed between the 1st January 2001 and the 31st December 2002 will have a fixed rate of 7.5% until the 31st December 2011;
  3. Companies licensed between the 1st January 2003 and the 31st December 2004 will have a fixed rate of 10% until the 31st December 2011; and
  4. Companies licensed between the 1st January 2005 and the 31st December 2006 will have a fixed rate of 12.5% until the 31st December 2011.


  1. (International Shipping & Yacht Register 6 )
  2. There is no change to the zero rate corporate tax. This rate expires with the scheme on the 31st December 2011;
  3. Crew members and their respective employers will still retain the right not to pay Social Security taxes; and
  4. Other tax exemptions continue to apply such as no CGT on the sale of fixed assets and exemption from transfer, gift and inheritance tax on share transfers.

Industrial Free Trade Zone

There is no change to the zero rate corporation tax. This rate expires on the 31st December 2011.

Indirect Tax

The 12% VAT Rate Remains Unchanged.

The Treaty of Accession 7 admitting Portugal to the European Union provides, under Taxation, for the Government of the Portuguese Republic to apply, to Madeira and the Azores Islands, reduced VAT rates in comparison to those on the Portuguese mainland.

This was agreed by way of the addition of a further Article provision 8 to the Sixth Directive.

The Portuguese Government subsequently enacted the legislation for Madeira to have a Standard VAT rate of 12% in their Value Added Tax Code; Law Nº.91/96, of the 12th July 1996

At their meeting on Friday, 19th January 2001, ECOFIN approved a Directive amending the Sixth Directive. This Directive provides an agreement to prevent a growing divergence, which could lead to structural imbalances and distortions of competition in the Community. It was agreed, by the Member States, that they would make every effort not to widen the current gap of 10% points above the current lowest standard rate (maintain the current gap of 15% - 25%).

This amendment to the Sixth Directive does not affect the Treaty of Accession' agreement for Madeira's VAT rates.

Tax Reform Bill

On the 29 December 2000, The Portuguese National Assembly approved the Tax Reform Bill (Number: G/2000). Some parts, referred to below, have a direct affect on MIBC licensed companies.

Corporation Tax

1.1. Dividend Income From EU Subsidaries - Elimination Of Double Taxation

Portuguese MIBC licensed companies, who have an interest in 25%+ of the issued share of companies registered in Portugal and/or in other European Union Member country, and comply with the principles of the EU "Parent/Subsidiaries Directive", can utilise 100% of this dividend income to reduce their Corporation Tax base.

1.2 Dividends Distributed To EU Parent Companies

Dividends distributed by an MIBC licensed company to its Parent Corporation who has its Registered Office in another European Union country, and qualifies under the EU "Parent/Subsidiaries Directive", will be exempt from taxation.

This applies to cases in which the MIBC Licensed Company has been owned by the parent for at least two years and/or, failing that, since the date of incorporation of the European Parent Company. It also applies where the interest in the MIBC company is held for a period of two consecutive years after the distribution of the dividends

1.3 Capital Gains "Roll-Over" Relief.

Under previous legislation, MIBC 'SGPS' companies could, by reinvesting the proceeds from the sale of assets, achieve a capital gains taxation relief on the sale of their shareholdings for an undetermined period of time.

The Tax Reform Bill has closed this 'loophole' effective from the 1st January 2001. Holding Companies will then be subject to Capital Gains Tax on any capital gains, payable over a period of 5 years for the date of the capital gain, at per annum rate equivalent to 20% of the gain. The Tax is payable in the year in which the gain in made; i.e. when the shares were sold.

Measures Against Tax Evasion And Fraud

2.1 Capital Gains Made By Non-Resident Companies

Parent, Associated or Subsidaries of MIBC licensed companies who operate in any jurisdiction which is on the Portuguese Ministry of Finance "Black List" of tax havens or low tax jurisdictions, will no longer be exempt from Corporation Tax on any capital gains derived from the sale of shares or other securities.

Non-resident Portuguese/MIBC companies who sell their interest in shares and/or shareholdings in MIBC companies will no longer be exempt from Corporation Tax on the capital gains derived from the sale of such shareholdings

2.2 Bank Secrecy Legislation - Amendments

The Tax Reform Bill has enacted legislation amending the current criteria on Disclosure of Client's Financial Information under the Bank Secrecy Laws. The Tax Authorities are no longer required to obtain a Court Order requesting taxpayer's information, from banking, credit and finance institution(s), when: -

  1. The taxpayer is subject to the requirements to maintain formal accounts, and/or benefits from a special tax regime and/or receives tax benefits. The taxpayer has the right to Appeal against the Tax Authorities ruling. It should be noted that although an Appeal may have been started and not determined, the requirement by the banking institution to provide information to the Tax Authorities does not cease pending determination by the Court of the Appeal;
  2. There is evidence that supports the Tax Authorities doubts about the truthfulness and probity of the tax return filed by the taxpayer or has circumstantial evidence of a tax crime. Under these circumstances, the taxpayer has the right to Appeal against the Tax Authorities' decision to obtain banking information. In this case, the Appeal has a 'suspensive' effect (meaning that until the Appeal is determined by the Courts, the Tax Authorities are prohibited from using any information obtained from the Banking institution as it would be judged to have been obtained under the terms of the current Breach the Bank Secrecy legislation).
  3. It is established that, by virtue of a transaction having taken place, there is a consequential reporting obligation by the bank, credit and/or financing institution(s) to provide information to the Portuguese Tax Authorities.

The obligation takes effect when transfers, on behalf of clients, are made which: -

  1. Are not limited to Portuguese national boundaries, and/or;
  2. Do not refer to know or documented commercial transactions, and/or;
  3. Are transactions that are currently not the subject of other reporting obligations.

Access by Portuguese Tax Authorities to banking and financial information, obtained under the Breach of Bank Secrecy Laws, is subject to strict protocols:

  1. Decisions to obtain information are solely within the exclusive competence and jurisdiction of the Director General of the Portuguese Directorate-General of Taxes and/or the Portuguese Directorate-General of Customs;
  2. The Tax Authorities must notify the taxpayer of their intention to issue formal request to the bank, credit and financial institution(s) for information regarding their accounts and transactions;
  3. The Tax Authorities are required to supply to the taxpayer all the information they have in their possession, which they have regarded as evidence why they should seek to breach the bank secrecy legislation; regardless of the possibility that by providing such information it may prejudice the Tax Authorities position and risk an appeal being lodged;
  4. The taxpayer concerned must be given the right to reply prior to a decision being put into effect; and
  5. The Breach of Bank Secrecy conditions can be automatically extended to any entities that are in the control of the taxpayer, but the Tax Authorities must seek a prior judicial order in respect of these entities.

The Breach of Bank Secrecy Legislation covers a much wider spectrum of circumstances than the ones, which Government was willing to make public during the consultation period. The procedures laid down do not offer, in many circumstances, the guarantees of strict judicial control, which were in place before the revised legislation.

Considering the lack of transparency of the investigations, which lead to the Breach of Bank Secrecy for tax inspection purposes, the revised legislation is viewed with concern by Portuguese tax lawyers.

2.3 Non-Residency - New Qualification Rules

Portugal has been concerned that its tax residents have been illegally using Madeira companies. Article 41 of the Tax Reform Bill made major changes to the non-residency status of an MIBC company to stop these abuses.

Clause "H" of Article 41 states that MIBC (International Services Companies) can have the tax benefits if the business undertaken is not within Portugal. Paras 14 to 17 of the amended Article 41 have revised the definition and qualification of the non-resident status.

In effect, MIBC International Services Companies are now deemed on-shore in Portugal, and subject to the full rate of Portuguese Tax, unless they can prove that the transactions have taken place with non-residents of Portugal.

In order to benefit from the MIBC Tax benefits, the company must provide a certificate of non-residency for each transaction/invoice/client or contract. The onus of proof is on the MIBC Company.

The non-residency certificate must be obtained within 3 months of the transaction/contract/invoice taking place and must be valid for a period not exceeding 3 years.

Articles Of Association - 'Objects'

Certain MIBC licensed companies have recently experienced problems with the Tax Authorities regarding the Tax Benefits attributable to their operations. The Tax Authorities have indicated that income derived from activities, which are not provided for in the 'Objects' of the company, may not be eligible to the tax benefits.

It is important that all companies review their 'Objects' clauses and amend them without delay. An example of this may be a service company which loans funds to a parent; this may be considered as a financial transaction for which a Service Company would not be licensed - such activities can only be undertaken by licensed Financial Services companies.


Madeira is not an offshore tax haven and, as a Full Member of the EU, does not seek to promote or operate any harmful tax practises.

In the Treaty of Accession, a Joint Declaration 10 was agreed regarding the economic and social development of the Autonomous Region of Madeira.

The Joint Declaration sought to improve the living and working conditions of Madeira and the harmonious development of the Madeira economy by reducing the variation between the different regions. Madeira has a number of handicaps, not least its geographical location in relation to mainland Europe, their physical geographical features, the infrastructure deficiency and delays in economic progression.

Madeira currently has a GDP per capita of 45% below the EU average.

The EU continues to support Madeira's economic and social handicaps with substantial investment. Improvements have been made in the roads, airport, port and telecomm infrastructure. As part of this financial commitment, the EU recently provided, through the EUREGIS and Cohesion funding, the financing structure for the new £300 million rebuilding of the airport which can now handle Boeing 747's and 3.5 million passengers a year.

The MIBC tax rates are designed to promote the partnership between the EU and Portugal to attract investing commercial companies to Madeira. It is not designed to facilitate the 'offshore brass plaque' nominee companies. The EU State Aid Directorate expressed their concern 11 that this may be happening to Madeira and sought ways to stop this. The EU estimated that the total aid that had been granted, to the FSC and IBC sectors, amounted to 1000 Million+, through tax exemptions, in 1997. These exemptions had been granted to 4,000 licensed companies who employ only 1,000 people.

When considering utilising the MIBC scheme, investors should view their involvement as contributing to the socio economic benefit of Madeira. Investors should also be mindful of the OECD Permanent Establishment rules and the increasing requirement of tax authorities to show 'substance'.

On the 12th February 2001, the OECD also published, for consultation, their conclusions and recommendations on the taxation of e-commerce. This included the view of the OECD, regarding the critical issue of Permanent Establishment, and the proposed amendments to Article 5.

However, Portugal (and therefore Madeira) and Spain disagree, as they do not consider that a physical presence is a requirement for a Permanent Establishment in the context of e-commerce. Portugal and Spain view that it is possible for a company carrying out trade through a web site in a jurisdiction (such as Portugal and Spain) to be treated as having a Permanent Establishment in that jurisdiction and therefore liable to taxation in that jurisdiction.

Portugal is waiting for the OECD TAG report.

Notwithstanding these comments, Madeira continues to be well placed to attract and support both assembly plants and the service industries. With the lowest VAT rate in Europe at 12%, Madeira is a good location for the telecomms sector and the registration/importation into Europe of ships and yachts. E-commerce, and in particular D-Commerce companies (with the implications of the draft and amended EU Directive for VAT on Digital Goods & Services), should include Madeira' MIBC as a jurisdiction when reviewing their fiscal and European operating strategy.

Madeira is the only EU Napoleonic law jurisdiction, which recognises Trusts and these Trusts have the ability to determine the legal system under which that Trust is determined.

Whilst the EU have not formally responded to the new tax rates, readers should be aware that under the Portuguese Constitution (Article 103)...."nobody can be forced to pay taxes of a retrospective nature". Article 12 (1) of the Portugal's General Tax Law states that tax law is only applicable to the future and it is not possible to legislate for retrospective taxes.


  1. State Aid C37/2000 (ex NN 60/200); ex E 19/94; ex E 13/91 and N 204/86 published in the EU Official Journal C 301 of the 21st October 2000
  2. E 13/91 and E 19/94
  3. Point 1 of the guidelines on Regional Aid - OJ C 74,10.3.1998 with modifications which are published in the EU Official Journal C 258 of the 9th September 2000
  4. Law № 30-F/2000
  5. Madeira is one of the few jurisdictions, outside the Anglo-Saxon legal jurisdictions, to recognise the establishment of Trusts. Under the laws governing the MIBC, the Settlor of the Trust determines which country's law shall govern the Trust.
  6. Classification Societies include: Lloyd's Register of Shipping (LRS); Det Norske Veritas (DNV); American Bureau of Shipping (ABS); Rinave Portuguesa (RINAVE); Bureau Veritas (BV); Registro Italiano Navale (RINA); Germanischer Lloyd (GL) and Nippon Kaiji Kyokai (NKK).
  7. Signed on the 12th June 1985 - published in the Official Journal of the European Union; L 302 Volume 28 of the 15th November 1985.
  8. A new sub Para 6 was added to the existing Article 1 of the Sixth Council Directive 77/388/EEC of the 17th May 1977; European official Journal L 145 13, 6. 1977
  9. Decree 49/VIII which was approved by the Portuguese Parliament on the 21st December 2000 and came into effect on the 1st January 2001
  10. OJ L 302 Volume 28 15th November 1985 page 479.
  11. OJ C 301/4 of the 21 October 2000 - text of a letter dated the 17th July 2000 to the Portuguese Government.

The intention of this Briefing Paper is to provide background general information about recent and possible future developments and matters that may be pertinent to the reader. This Briefing Paper is not intended to provide any advice and should not be relied or acted upon without the appropriate professional advice, which should always be sought.

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