Besides the advantages common to the other centres, the MIBC offers the following specific advantages:

Means Of Access To The European Union (All Madeira Companies Have Immediate Access To VAT Registration.)

Madeira Island is part of the Portuguese territory and, therefore, it is fully integrated into the EU Companies which are established in Madeira benefit from free circulation of goods, services and benefits common to all EU companies.

The companies established in the Industrial Free Zone are free from customs duties on the importation of raw materials and any components of whatever origin and nature. In case the goods produced in the Free Zone are exported to Portugal or any other EU country, customs duties will be charged on entry of these territories, but they will only be levied on the incorporated raw materials coming from third countries (not belonging to the EU) and not on the value added in the Free Zone. The goods produced in the Free Zone and exported to any EU country are totally duty-free if the raw materials and the components have been supplied by an EU country.

The companies established in the Industrial Free Zone may profit from financial incentives provided by the EU to its less developed areas.

The companies established in the Industrial Free Zone may also profit from the following financial incentives granted by the Madeira Regional Government:

1. Participation of up to 50% in costs of personnel training.

2. Participation of up to 50% in costs when the use of special know-how results into electricity saving.

Means Of Investment Or Financing Projects In Third Countries Having A Treaty On Double Taxation With Portugal

Madeira Island is part of the Portuguese territory and, therefore it is not excluded from the territorial application of the treaties on double taxation signed between Portugal and third countries (in opposition with what happens with most offshore centres which, as a general rule, are excluded from the application of such treaties). This circumstance allows investors or finance companies domiciled in countries which do not have a treaty on double taxation with the countries where the beneficiaries are domiciled, to do it via Madeira Island, whenever Portugal has a treaty with these countries.

Two examples:

1. An American company (see endnote 1) which intends to invest directly in Brazil is subject to 25% withholding tax in Brazil on the distribution of profits. If the investment is done indirectly through the Madeira "offshore", it will only be subject to 15% withholding tax, and the distribution from Madeira to the United States is free from withholding tax.

2. An English bank1 which intends to issue a loan to Brazil is subject to 25% withholding tax in Brazil on interest paid. If it is done through a "branch" in Madeira, interest will be subject to a 15% withholding tax, and the distribution from Madeira to the United Kingdom is free from withholding tax.

Means Of Investing Or Financing In Continental Portugal

1. Direct Investments

Foreign investments made in Portugal through a "holding" in Madeira are fiscally more interesting than any other alternatives, as demonstrated in the following examples:

a) If the investment is made through a company domiciled in a country which does not have a treaty on double taxation with Portugal (as it is the case for most of the so-called "offshore" companies - Luxembourg, Uruguay, Cayman Islands, Gibraltar, Jersey, as well as countries such as the United States, Canada, Japan and The Netherlands), the distribution of profits by the Portuguese company (in mainland Portugal) is liable to a final 20% withholding tax;

b) If the investment is made through a company domiciled in a country which has a treaty on double taxation with Portugal (United Kingdom, Spain, Brazil, Germany, Austria, Belgium, Denmark, Finland, Italy, Norway and Switzerland), the distribution of profits by the Portuguese company (in the mainland) is liable to a final 15% or 10% withholding tax according to the cases (see endnote 2), and will become part of the taxable profits of the beneficiary abroad, although the tax, as a rule, is deducted as a "tax credit" of the tax due in the beneficiary's country;

c) If the investment is made through a company of the Free Trade Zone of Madeira, the distribution of profits is not liable to withholding tax (Art. 9 Decree-Law 215/89); it is exempt from corporation income tax in the Madeiran Company and there is no withholding tax whatsoever on the subsequent redistribution to its partners (Art. 41 of the Fiscal Incentives Statute).

2. Financing

a) Restrictions

The Free Trade Zone legislation limits the activity of free financing operations to Offshore Branches and declares that branches are not allowed "to obtain deposits, offer guaranties or realise any financial operation on behalf of residents within the national territory, by any means, except according to the legal terms and conditions set forth for operations with financing institutions settled in other exchange territory; this prohibition is not applicable to "the execution of any operations with foreign entities which operate, duly licensed, within the institutional scope of the Free Trade Zone of Madeira" (Art. 14 Decree-Law 163/86, Decree-Law 315/ 89).

b)Alternative operations

1) If an international financial operation is made between an entity (financial institution or not), domiciled in a country which does not have a treaty on double taxation with Portugal, and a company domiciled in Portugal (financial institution or not), the interest paid is liable to a final 20% withholding tax;

2) If this operation is made through an entity (financial institution or not) domiciled in a country having a treaty on double taxation with Portugal, the interest paid is liable to a final 10% or 15% withholding tax according to the cases, and they will become part of the taxable income of the beneficiary abroad, although, as a rule, the tax is deducted as a "tax credit" from the tax due to the beneficiary's country (see endnote 3);

3) An operation of tax planning may be made via a Madeiran company, in the following manner: instead of making directly the operations described in a) and b), the foreign financial institution makes a loan to a Madeiran company which, in turn, transfers it to a branch of a Portuguese bank abroad (not located inside the Free Trade Zone), which then repasses it to the final beneficiary in Portugal.

From the point of view of foreign exchange legislation, nothing prevents the Madeiran company from re-passing a loan to a branch of a Portuguese bank (outside Madeira), since this is an "offshore" operation with another exchange territory.

From the fiscal point of view, there is no withholding tax on the payment of interest to a branch of a Portuguese bank abroad (Art. 76 a) IRC), which will be liable to the Portuguese IRC only on the "premium" of the operation (difference between positive and negative interest). When interest is redistributed by this branch to a Madeiran company, there is no withholding tax, since this operation is exempted according to (Art. 9 Decree-Law 215/89). No taxes are levied on the profits of the Madeiran company resulting from interest, nor withholding tax on their redistribution to the financial institution (Art. 45 of the Fiscal Incentives Statute).

Consequences For Tax Planning Purposes

Two kinds of consequences result from the characteristics of companies based in the Free Trade Zone:

a) Consequences in Terms of Relations with Portugal

Foreign investments made in Portugal through a "holding" in Madeira are fiscally more interesting than the alternatives, as demonstrated in the following examples:

If the investment is made through a company domiciled in a country which does not have a treaty on double taxation with Portugal (as it is the case for most so-called "offshore" companies based in - Luxembourg, Uruguay, Cayman Islands, Gibraltar, Jersey, or in countries such as the United States, Canada, Japan and Holland), the distribution of profits by Portuguese companies (in mainland Portugal) is liable to a final 25% withholding tax;

If the investment is made through a company domiciled in a country which has a treaty on double taxation with Portugal (United Kingdom, Spain, Brazil, Germany, Austria, Belgium, Denmark, Finland, France, Italy, Norway and Switzerland), the distribution of the profits by the Portuguese company (on the mainland) is liable to a final withholding tax of 15% or 10%, depending on the case, and will become part of the taxable profits of the beneficiary abroad, although the tax, as a rule, is deducted as a "tax credit" of the tax due in the beneficiary's country.

However, if the investment is made through a company of the Free Trade Zone of Madeira, the distribution of profits by the Portuguese company (on the mainland) is not liable to the withholding tax (art. 9 D.L. no 215/89); it is exempt from corporation income tax of the Madeira Company and there is no withholding tax whatsoever on the subsquent distribution to its partners (art. 41 of the Fiscal Incentives Statute).

b) Consequences in Terms of Relations with Third Countries

The fact that the companies of the Free Trade Zone of Madeira are considered domiciled on Portuguese territory for the purpose of the application of the treaties against double taxation signed with Portugal, allows for tax savings in the relations with third countries which do not have a treaty with the country where the investor or the financial institution is domiciled but, on the other hand, have one with Portugal.

If a North-American, English, Swiss or Dutch company intends to make a direct investment in Brazil (see endnote 4) (countries with which it does not have a treaty on double taxation), the profits distributed by the Brazilian company will be liable to a final 25% withholding tax (being subsquently taxed in those countries, which may or may not be able to take advantage of the "tax credit").

However, if the investment were made indirectly through a Madeiran company, the profits would be liable to a 15% withholding tax (under the Brazilian-Portuguese treaty), they would be tax-free in so far as the profits from the Madeiran company were concerned, which would then be able to pay its partners without withholding tax;

However, if a North-American, English, Swiss or Dutch financing institution intends to make a loan to a Brazilian company* (countries with which Brazil does not have a treaty against double taxation), the interest paid by this company will be subject to a final 25% withholding tax (and subsequently taxed in those countries, which may or may not take advantage of the "tax credit").

However, if the loan were made indirectly through a Madeiran company, the interests would be liable to a 15% withholding tax (under the Brazilian-Portuguese treaty), and furthermore, they would be tax-free on the profits of the Madeiran company which would then be able to pay them to the investor without withholding tax.

Tax - Sparing Structure

a) Introduction

Companies authorised to operate in the Madeira Free Trade Zone are Portuguese companies with headquarters or effective management in Portuguese territory and thus, liable to the tax regime applicable to the legal entities resident in Portugal and not to the tax regime applicable to the residents abroad, to which are liable the so called "Offshore" companies.

The fact that the share capital is held exclusively by residents abroad does not remove from these companies the nature of Portuguese companies domiciled in Portugal for tax purposes.

Thus, being considered as Portuguese companies, domiciled in Portugal, the Madeiran companies are included, for all purposes in the treaties against double taxation signed by Portugal with third countries.

All these treaties define "Portugal" as the territory of the Portuguese Republic located in the European Portugal comprising the continental territory and the archipelagos of Azores and Madeira.

1. Simple and highly effective asset and project financing packages can be structured taking advantage of the favourable tax sparing provisions incorporated in some Portuguese tax treaties, specially the ones with Germany, Finland, Switzerland, Denmark and Italy. Those provisions allow the investors domiciled in such countries to deduct from its income tax the Portuguese withholding tax (15% treaty rate), due on interests, even in the case that such income is exempt.

As, according to Madeira legislation, income paid to residents abroad is tax exempt, the matching credit provision generates a significant benefit in the borrowing costs.

2. It is proposed that a major Bank incorporates or promotes the incorporation of a subsidiary in Madeira (the Madeira company). This company will be established in the Madeira Free Trade Zone and will act as a holding company for other companies established in the Madeira Free Trade Zone through which various assets and projects will be financed. These subsidiaries will be funded by debt from banks or private investors domiciled in tax sparing treaty countries. This will enable the Bank to obtain a competitive advantage in certain markets through the use of low cost funding from lenders capable of utilising the tax-sparing provisions in the treaties.

3.It is envisaged that the specific steps to establishing the Madeira companies will be as follows:

a) The bank will incorporate or promote the incorporation of a limited liability company domiciled in Madeira. This company will act as a holding company and will be responsible for the administration of all the Madeira group companies. It will not undertake any asset or project financing directly.

b) This company will incorporate further subsidiaries (Limitadas) resident in Madeira as and when they are required. It is likely that separate subsidiaries will need to be incorporated for each project in order to isolate the credit and structural risks inherent in the transactions.

Note that the bank will have to use another company of its group to hold at least one quota of the Madeira company and its subsidiaries since, according to Portuguese law, a LIMITADA must have at least two shareholders.

b) Project finance

It is envisaged that this structure would be used to finance industrial project of large corporations. It would involve a Madeiran subsidiary of this corporation investing in third countries.

The subsidiary will be funded by investors located in the tax sparing treaty countries, which could be banks, pension funds, investment funds, etc. For this purpose the Madeiran subsidiary will issue promissory notes fully guaranteed by the parent company. The income paid by the Madeiran company to the investors is not subject to withholding tax in Madeira and, due to the tax sparing provisions, the investor has the possibility to deduct from the tax levied in its own country, the amount of tax that was not paid in Madeira, as if it had been paid.

Financing

c) Cross Border Take Overs

It is envisaged that this structure would be used to finance cross border take overs and mergers. It would involve a subsidiary of the Madeira company acquiring directly the target company in a third country.

The subsidiary would be funded by banks located in the tax sparing treaty countries. Note that an additional advantage of this structure would occur if the target company is located in a country having a treaty with Portugal, since the future distribution of profits will enjoy a reduced withholding tax.

Investment

d) Credit or conditional sales

A Madeira company would purchase an asset which would be funded by debt from banks located in one or more of the Portuguese tax sparing treaty countries. The asset would then be sold to a tax lessor or special purpose company ("SPC"), located outside Portugal, under a credit or conditional sale arrangement. Under the credit or conditional sale agreement the consideration for the sale is payable in instalments. The transaction would be treated as an asset trading transaction in the accounts of the Madeira company. The profit accruing to the company would be calculated with reference to (a) the cost of the asset and (b) the total of the instalment due to be paid under the credit or conditional sale agreement.

All forms of assets could be subject to these transactions, including all fixed and movable assets, as well as financial assets (for example, bonds, shares and debentures).

The funding of the Madeira subsidiary is not subject to any previous authorisation or consent from the Portuguese authorities, namely the Bank of Portugal. The Madeiran companies enjoy complete freedom of exchange.

Please bear in mind that loans executed in Madeira, Portugal (Madeira) are subject to specific formalities, such as public deeds and, for this reason, it is recommended that the contracts are executed abroad.

6) Conventions Against Double Taxation signed by Portugal

COUNTRY        DIVIDENDS        INTEREST         ROYALTIES

GERMANY        15%              10% f)           10%
                                15% b)

AUSTRIA        15%              10% f)           10% a)
                                15% b)           15% b)

BRAZIL         15%              15%              10% c)
                                                 15% b)

SPAIN g)       10% a)           15%               5%
               15% b)

USA h)         10% a)           10%              10%
               15% b)

FINLAND        10% a)           15%              10%
               15% b)

FRANCE         15%              10% f)            5%
                                12% b)

IRELAND        15%              15%              10%

ITALY          15%              15%              12%

MOZAMBIQUE     15%              10%              10%

UK             10% a)           10%               5%
               15% b)

SWITZERLAND    10% a)           10%               5%
               15% b)

a)When the company controls 25% or more of the capital
b)In any other cases.
c)literary, artistic or scientific works, films...
d)When the company controls 50%, or more of the capital
e)For bonds issued in France after 1/1/65
f)When paid by bank entities.
g)Point 3 of the Protocol includes a "general anti-avoidance provision"
h)Article 15(6) excludes from the benefits of the convention "tax free zones"

7) New conventions ADT


PENDING

a) Signed But Not Ratified

Czech Republic
Hungary
Poland

b) Initialed

Greece
South Korea
Venezuela

c) In Course Of Negotiation

Canada
Denmark
India
Luxemburg
Malta
Netherlands
Pacuistan
Romenia
South Africa
Sweden
Tunisia

7) VAT registration

Madeira companies have automatic access to VAT registration, which allow Madeira companies to trade goods free of VAT within the EU

ENDNOTES:

1) No treaty on double taxation exists between the United States of America and Brazil, nor between the United Kingdom, and Brazil. However, there is a treaty on double taxation between Brazil and Portugal.

2) In case of the treaty between Portugal and the United Kingdom (Decree-Law 48.497/68), the profits are liable to a 10% tax, if the beneficiary is a company domiciled in the United Kingdom which has direct control of at least 25% of the assets of the company, in case it pays dividends and 15% tax in the other cases (Art. 10), which will be deducted from the tax paid in the United Kingdom (Art. 22).

3) In the specific case of the treaty between Portugal and the United Kingdom, the interest paid is liable to a 10% tax (Art. 11), which may be deducted as "tax credit" from the English tax (Art. 22).

4) The example is applicable to any country which does not have a treaty with the investor's country but does have one with Portugal, as may also be case of Czechoslovakia.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information please contact:

Christina Perriera
Madeira Fiducia Management LDA
Rua 31 de Janeiro No 81-A
5E -9050
Funchal
Madeira
Portugal

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