Location

Madeira is situated in the Atlantic Ocean to the south-west of mainland Europe, about 1,000km from Lisbon, Portugal and 700km west of the coast of Africa, within easy reach of the major Atlantic shipping routes. The archipelago in which Madeira is situated comprises of two main islands: Madeira, where the capital of the archipelago, Funchal, is situated and Porto Santo, a resort island. There are also two uninhabited island groups established as protected nature reserves, the Desertas and the Selvagens. Madeira, the largest island within the archipelago, has the greatest population. It has approximately 272,000 inhabitants, half of whom live in Funchal.

Madeira is an autonomous region within Portugal and therefore a full member of the European Community. The island has limited self–government and is a civil law jurisdiction, therefore concepts such as trusts and trust law are not widely recognised. However, trusts have been specially accommodated in the Free Trade Zone legislation. Madeira's main sources of income are derived from its tourism, wine industry and agricultural products. To diversify the economy of the island, priority was given to the development of Madeira as an international business centre. The Free Trade Zone arrangements in Madeira have been established with the support of the European Union.

Infrastructure and communications

Madeira is within three hours' flying time from most European cities and only one and half-hours from Lisbon. A modern digital communications system is in place and the highway system and airport have recently been expanded.

The Industrial Free Trade Zone at Caniçal has deep water port facilities for handling container and bulk traffic and the main port at Funchal is a regular calling point for cruise liners.

Portuguese is the official language but as Madeira is a tourist centre, English is also widely spoken.

Legislation

The Free Trade Zone legislation adopted in Madeira has been approved by the Portuguese central government in Lisbon and by the European Union in Brussels. The tax benefits apply to industrial and manufacturing activities within the physical geographical area of the Free Trade Zone of Madeira as well as to international service and trading activities organised through entities which are duly licensed, and managed from either Madeira or elsewhere in the world.

The main tax benefits offered by Madeira

The main tax benefits are as follows:

  • no corporation tax;no capital gains tax;
  • no property transfer tax;
  • no investment income tax;
  • no stamp duty;
  • no withholding taxes; and
  • no death or inheritance taxes.

Trading Within The EU

All Portuguese companies and therefore, companies registered under the Free Trade Zone legislation of Madeira, are automatically given a VAT number on incorporation. Under the provisions of the Free Trade Zone legislation, they are exempt from taxation, but as a result of the registration of the company in Portugal and the provision of a VAT number, they are able to confirm a VAT number for trading purposes within the EU and enjoy the cash flow advantages this brings.

Company Structures

Companies formed and registered in Madeira are subject to the legislation applicable to Portuguese companies. Companies registered in Madeira's Free Trade Zone are Portuguese companies to all intents and purposes, the only difference being that they benefit from numerous tax incentives which apply only to companies licensed to operate in the Free Trade Zone of Madeira.

Most of the company structures in the Free Trade Zone are organised under one of the two main types of companies i.e. private limited liability companies (Limitadas or Ldas), and the stock corporation (Sociedade Anónima or SAs). There is also a type of company which may only carry out the activities of a holding company (Sociedade Gestora de Participações Sociais or SGPS), and these may have either a Limitada or a Sociedade Anónima share capital structure.

Pure Holding Companies

Holding companies in Madeira's Free Trade Zone may be registered as Portuguese Pure Holding Companies (known as SGPS). Such companies may deduct 95% of taxable income before the normal tax charge is applied, where the shareholding is larger than 10% and is held for longer than one year. In the case where the SGPS type company holds 25% or more of the shares in a company incorporated in an EU member country for more than two years, then in terms of the EU Parent/Subsidiary directive, any dividends may be received in Madeira free from any withholding taxes. The company is then subject to tax at the normal corporate tax rate of 32 % on 5% of its taxable income. This results in an effective tax rate of 1.6%. Dividends received from non-European companies are not subject to holding company taxes.

Company formation procedures

The company formation process usually takes four to six weeks to complete.

Directorships

Directors of tax exempt Portuguese companies may be based anywhere in the world. Management and control of these companies do not have to be exercised from within Madeira itself to take advantage of the tax exemptions. All that is required is for the company to have local legal representation in Madeira, although from a tax planning point of view, it is generally advisable that companies be managed and controlled from Madeira.

Shareholding

The holding of quotas in a private limited liability company (Lda) is evidenced through registration at the Commercial Registry Offices. The company registration certificate sets out details of the holders of the quotas. Share certificates are not issued. For confidentiality reasons, many quota holders own these quotas through nominee arrangements.

Redomiciliation

There are no restrictions on the redomiciliation of companies either into or out of Madeira, as long as the other jurisdiction permits this. There are, however, various regulations and procedures to be complied with to enable a company to redomicile to Madeira.

Accounting and audit requirements

All companies have to prepare annual financial statements and accounting records in accordance with the Portuguese accounting regulations. Companies have the same filing requirements and regulations as ordinary Portuguese companies.

Public limited companies (Sociadades Anónimas) are required to appoint statutory auditors or have an audit board which has to include a statutory auditor as a member. In certain cases private companies may also be required to appoint a statutory auditor.

Licence Fee Arrears

If a company is in arrears with its annual licence fee for longer than six months, the government, after publication in the government Gazette, may cancel the licence. In this case, the company automatically loses all the fiscal benefits applicable in terms of the legislation of the Free Trade Zone of Madeira, and becomes liable to normal Portuguese tax.

The Trade Free Zone

The Free Trade Zone of Madeira comprises four distinct areas, as follows:

Industrial zone. The exemptions cover the physical production and movement of goods which are exclusively undertaken in the designated area of Caniçal in Madeira. The key advantage for companies involved in manufacturing activities is that goods produced in the Free Trade Zone and shipped into EU member countries are free from all customs duties if the raw materials and components originated within the EU.

Financial institutions. Most Portuguese banks and a number of international banks have branches or subsidiaries in Madeira.

International services and trading. Most companies incorporated and licensed in the Free Trade Zone are registered as international service and trading companies in order to take advantage of the tax exemptions which are available until the year 2011.

Shipping and yachts. An international shipping registry has been established in Madeira to enable vessels to be registered under the Portuguese flag and to operate within the Free Trade Zone legislation without any obligation to Portuguese taxation or restrictions in respect of exchange control regulations.

Ships registered in MAR (Madeira's International Shipping Register), are allowed to operate between Portuguese and EU ports.

Pleasure yachts purchased through a company registered in Madeira (either owning the yacht or through a broker) and therefore in receipt of a VAT invoice, will be in possession of a valid "passport" to remain in EU waters. The current VAT rate is only 12% and this may provide a considerable saving to yacht owners wishing for their yachts to remain in EU waters and who previously were not in possession of a VAT paid receipt.

Double Tax Treaties

Portugal has entered into a number of double taxation treaties. Generally, these treaties do not have limitation of benefits clauses (the treaty with the US and to a certain extent the treaty with Spain are exceptions) and allow for companies registered and licensed in Madeira's Free Trade Zone and their shareholders to benefit from the provisions of the treaties entered into by Portugal.

A number of these treaties, especially the older ones, have tax sparing clauses. These treaties include those with Austria, Finland, Norway and the UK.

Recently, a number of new treaties have been signed, namely with Luxembourg, The Netherlands, Cape Verde, China, India, Hungary and Macau.

Money Laundering Provisions

As Portugal is a member country of the EU, it has implemented the directives dealing with money laundering. The legal provisions include crimes and offences committed outside Portugal. The persons required to report money laundering or suspected money laundering crimes include persons dealing in high value negotiable items. There is proposed legislation to compel the legal as well as other professions to report suspected money laundering. These proposals are under debate and have not been implemented as yet.

Conclusion

The Madeira Free Trade Zone offers particular advantages for trading within the European Union as companies are automatically registered for VAT purposes. Companies licensed in Madeira are also able to take advantage of the Portuguese Double Taxation network. The numerous benefits and advantages available in Madeira, the high level of regulation and approval by the European Union all combine to make Madeira a jurisdiction that should be seriously considered by international investors when planning their international strategies.