Economic Substance in the Madeira International Business Centre: A 2026 Guide

At a glance

Economic substance in Madeira is now the decisive test for any company relying on the Madeira International Business Centre (MIBC), also known by its Portuguese name Centro Internacional de Negócios da Madeira (CINM) and operating within the Madeira Free Trade Industrial Zone (Zona Franca da Madeira, ZFM). Holding a licence and meeting formal minimums is no longer enough. To keep the reduced 5% corporate income tax (IRC) rate, a company must show real jobs based in Madeira, activity genuinely carried out in the region through an adequate business structure, and documentation capable of proving all of this years later to the Portuguese Tax and Customs Authority (AT) and, where relevant, to the European Commission. This article sets out, in practical and generally applicable terms, what substance the law requires today and what is at stake if it is missing.

Over recent years the Madeira International Business Centre has been under unusually close scrutiny from the European Commission, the AT and its regional counterpart for Madeira (AT-RAM). The conclusion that emerges from that scrutiny is straightforward: a licence and a set of formal minimums do not, by themselves, secure the benefit. What secures it is genuine economic substance in Madeira.

The analysis below systematises the substance requirements that apply to MIBC-licensed companies by reference to the Tax Benefits Statute (Estatuto dos Benefícios Fiscais, EBF), in particular Article 36.º-A; the complementary legislation, notably Law no. 21/2021, which gave content to the concept of income “generated in the Autonomous Region of Madeira” (RAM); the European Commission’s State aid decisions on the ZFM, in particular Decision (EU) 2022/1414; and recent arbitration case law, including CAAD Case no. 1385/2024-T, which addresses the role and the limits of Commission decisions and administrative soft law.

The legal framework of the MIBC regime

The tax regime of the MIBC is set out essentially in the Tax Benefits Statute, approved by Decree-Law no. 215/89, in Articles 36.º and 36.º-A. Article 36.º-A governs the regime applicable to entities licensed in the Madeira Free Trade Zone from 1 January 2015 onward, which is the cohort that matters for most companies operating today.

In summary, Article 36.º-A provides that entities licensed to operate in the ZFM between 1 January 2015 and 31 December 2026 may benefit from a 5% IRC rate, applicable until 31 December 2033, on income derived from industrial activities, maritime and air transport, or other internationally oriented services, provided they fall within the institutional scope of the ZFM and meet the article’s specific requirements. The benefit is conditional on eligibility requirements concerning job creation and minimum investment, and it is capped by annual ceilings (plafonds) keyed to indicators of regional activity such as value added, labour costs and turnover generated in the RAM.

At regional-constitutional level, the Political and Administrative Statute of the Autonomous Region of Madeira expressly recognises the MIBC as an instrument of regional development and refers its legal and tax regime to the EBF and other applicable legislation.

A State aid regime, not an ordinary tax incentive

In European Union terms, the MIBC is a regional-purpose State aid scheme authorised by the European Commission. That authorisation is conditional, and the conditions bear directly on substance: the type of eligible activities, the creation of genuine employment in the region, and the real location of economic activity in Madeira.

In Decision (EU) 2022/1414, concerning aid scheme SA.21259 applied in favour of the ZFM (Regime III), the Commission stressed that the purpose of the regime is to support the development of the Madeiran economy, which presupposes jobs that are created and actually performed in the region, alongside relevant material investment. It is against this backdrop that the Portuguese legislator, through amendments to the EBF, reinforced the requirements of economic and territorial substance in Article 36.º-A.

Minimum substance: jobs and investment

Article 36.º-A(2) of the EBF requires entities licensed in the ZFM that wish to benefit from the regime to begin their activity within six months (international services) or one year (industrial or transport activities), and to satisfy one of the following eligibility requirements:

• creation of one to five jobs in the first six months of activity, together with a minimum investment of EUR 75,000 in tangible or intangible fixed assets in the first two years of activity; or
• creation of six or more jobs in the first six months of activity.

In practice and on the established interpretation, those jobs should be filled by workers who are tax-resident in the Autonomous Region of Madeira, regardless of nationality, and assigned to the activity of the licensed company. Two consequences follow. The company cannot replace these requirements by fully outsourcing the work to other group entities or to third parties abroad. And the EUR 75,000 investment must correspond to assets assigned to the ZFM activity, located and used within the scope of the regime and subject to retention and non-transfer conditions.

Caps on income taxed at 5%

The regime is not unlimited. Application of the 5% rate is subject to annual ceilings on taxable income, tiered according to the number of jobs maintained in each financial year. The substance (employment) and the benefit (the 5% rate) are therefore directly correlated: more jobs support higher ceilings.

The figures above should be confirmed against the current consolidated text of Article 36.º-A of the EBF before reliance, as the tiers and amounts are set by statute and move with legislative change.

The central material test: activity actually carried out in Madeira

The amendment introduced by Law no. 21/2021 gave particular weight to Article 36.º-A(17) of the EBF, which gives content to the notion of income “generated in the RAM”. The provision establishes that, for the purposes of the ceilings, income, gains, costs and losses are treated as generated, borne or realised in the Autonomous Region of Madeira where they are attributable to the activity carried out by the licensed entity through an adequate business structure located in the RAM.

This formulation has two structural consequences. First, only the result that corresponds to activity actually carried out in Madeira, by an adequate business structure of the licensed company (people, means and organisation), is eligible for the 5% rate. Second, the mere existence of a top company in Madeira that invoices services while the substantive execution is performed by other group entities or third parties abroad does not meet the test.

Put simply, the regime follows substance. If the people who do the work and the means that support it are not in Madeira, the corresponding income is not income “of” Madeira for the purposes of the 5% rate.

Authorised activities and exclusions: the “head office” problem

The MIBC regime permits a wide range of activities, including industry (NACE Rev. 2 Section C); electricity, gas, water and waste (Sections D and E); wholesale trade (Section G, Divisions 45 and 46); transport and communications (Section H); and real estate, rental, various service activities, technical consultancy, research and development, and professional, scientific and technical activities (Sections L, M, N and K), provided they fall within the headings expressly authorised.

There are, however, express exclusions from the benefit. They reach entities whose principal activity is NACE 70.10 (activities of head offices) or NACE 70.22 (business and management consultancy), as well as financial-sector entities (NACE Section K), subject to specific exceptions, and entities in difficulty or subject to orders for the recovery of unlawful aid.

These exclusions are designed precisely to keep out purely intra-group or top-management structures whose contribution to local economic development is limited or hard to demonstrate. In practice, an MIBC company that confines itself to coordinating, invoicing and managing third-party projects, without performing the essential part of the activity in Madeira, runs a serious risk of falling within the excluded activities. Substance cannot be only “management” and “coordination”. There must be genuine operational activity consistent with the corporate object and the authorised activity codes.

The European Commission’s position: employment and letterbox companies

In Decision (EU) 2022/1414 the Commission examined the application of the ZFM regime (Regime III) and concluded that Portugal had applied the regime too broadly, allowing companies to benefit from IRC reductions without the jobs and the real activity being effectively located in Madeira. The Commission read the job-creation criterion in the light of the OECD recommendations and the work of the Code of Conduct Group, so as to exclude letterbox companies, that is, structures that exist only formally to collect tax benefits, without real economic substance in the region.

Portugal argued in the proceedings that Article 36.º of the EBF required only job creation, without expressly stating that the jobs had to be created in Madeira, and that the aim was to exclude letterbox companies through a substantial-activity test. The Commission’s interpretation was more demanding as to the physical location of the jobs and the activity.

The decision also ordered the recovery of aid considered unlawful and incompatible, requiring Portugal to recalculate the tax due by several beneficiary entities, with interest accruing until actual recovery. This recovery context has fed into arbitration and litigation, and it is essential to understanding the current high-risk environment around structures that lack sufficient substance.

Recent arbitration: the limits of soft law and the reinforcement of substance

Although the MIBC is a State aid regime, it is not the Commission that rewrites the EBF. The core of the substance test flows from domestic law, interpreted consistently with EU law.

The CAAD arbitration award in Case no. 1385/2024-T, although it concerns the Investment Support Tax Regime (RFAI) rather than the MIBC directly, is relevant for two reasons. It holds that administrative circulars (Ofícios-Circulados) and European Commission decisions do not, by themselves, constitute sufficient legal grounds to support tax assessments: the normative basis must be found in the applicable national law. At the same time, it recognises that the concept of “job creation” in regional-purpose incentive schemes should be read in the light of the Commission’s guidelines and the General Block Exemption Regulation, including the requirement of a “net increase in employment” measured in annual work units.

Transposed to the MIBC, this means that Article 36.º-A of the EBF, in the wording aligned with the Commission’s requirements, together with the complementary legislation, defines the substance requirements. Administrative practice and soft law (including Commission decisions) condition the interpretation, but cannot create new requirements not provided for in the law.

The arbitration case law on the MIBC and on aid recovery (for example CAAD Case no. 873/2024-T) also shows that incorrect application of the regime, such as benefits granted without real employment or activity in the RAM, leads to additional IRC assessments and compensatory interest, framed as the domestic implementation of the Commission’s recovery decision, and that there is a concrete risk that beneficiary companies may have to repay part or all of the benefit, with a potentially significant impact on their financial position.

What “substance” actually means in the MIBC

Reading the letter of the law together with the European context, four pillars of economic substance can be identified.

People: relevant jobs aligned with the activity. Meeting the minimum headcount in the abstract is not enough. The jobs must be real, paid and stable, under appropriate employment contracts; the workers should be tax-resident in the RAM; and the functions performed must be coherent with the corporate object and with the services or activities the licensed company invoices. A company supplying engineering, operations or international logistics services cannot confine itself to hiring one or two managers and an administrator in Madeira while all the technical execution is performed by teams abroad. A company claiming to carry out research and development or sophisticated technical services should have a qualified team in Madeira, of a size and profile matching the volume and complexity of its projects.

Functions: where the activity is actually performed. In the light of Article 36.º-A(17), the crucial point is where the income-generating activity actually takes place. The day-to-day activity (planning, execution, control) should take place in Madeira. Occasional travel abroad (missions, inspections, client meetings) is, in principle, admissible, but the habitual base of work must be the RAM. The company should not operate merely as a contractual or invoicing hub with operational substance located in another country. On audit, the AT and AT-RAM will tend to look at the habitual place of work stated in contracts, attendance and working-time records, the nature and duration of travel abroad, and documentary proof that technical instructions and decisions are issued from Madeira.

Means: an adequate business structure. The concept of an “adequate business structure located in the RAM” implies that the company has, in Madeira, human, material and organisational means proportionate to the activity. As a rule this includes appropriate physical premises (offices or production facilities); the necessary equipment and systems (hardware, software, instruments, vehicles); relevant intangible assets (licences, know-how, intellectual property rights) assigned to the activity and located or used within the ZFM; and an internal organisation (organisation chart, reporting lines, procedures) demonstrating that operational and technical management is performed in Madeira.

Governance: effective direction in Madeira. Substance is not only operational; it is also decisional. The regime places considerable weight on the place of effective management being in the RAM, on the company having a management body that is mainly resident in Madeira, and on board meetings and relevant strategic decisions taking place habitually in the region. Resident directors are a determinative indicator of tax residence and substance, in line with the “place of effective management” criteria of the OECD Model (the place of board meetings, day-to-day management, and the location of records and accounts).

Documenting substance, not just having it

In tax matters the burden of proof falls largely on the taxpayer. For MIBC companies, good practice includes the organised retention of employment contracts and job descriptions for RAM-resident workers, aligned with the licensed activity; organisation charts and internal rules showing that the key functions (management, technical, operational) are located in Madeira; working-time records by project (timesheets) evidencing hours worked in Madeira and any periods of travel; project and operational documentation (reports, minutes, instructions, emails, drawings, calculations, technical opinions) demonstrating that the decisive contribution comes from the Madeira team; travel records (mission orders, tickets, expenses) showing that trips abroad are occasional and instrumental; and documentation of the investment in fixed assets (acquisition contracts, location, accounting records) and its assignment to the ZFM activity.

The law does not set an exhaustive catalogue, but these elements are frequently decisive in audits, both for the substance test and for assessing the compatibility of the aid with EU law.

The risks of insufficient substance

The absence, or insufficiency, of substance in the MIBC can translate into several lines of risk.

The first is correction of IRC and loss of the 5% benefit: reclassification of income initially taxed at 5% to the standard IRC rate applicable in the RAM, with retroactive effect, and additional assessments plus compensatory interest. The second is recovery of unlawful State aid: domestic implementation of Commission decisions such as Decision (EU) 2022/1414, recovering the benefits unduly granted together with interest calculated under the European regulation, with the potential for significant financial impact and prolonged litigation. The third is administrative-offence and reputational liability: possible fines and penalties under the General Regime of Tax Infringements (RGIT) if the AT considers that the taxpayer filed returns that do not reflect reality, alongside reputational risk for the taxpayer and for other participants (directors, advisers, statutory auditors).

In a setting where the ZFM and the MIBC have been the subject of in-depth analysis by the Commission and the AT, the room for aggressive readings of the substance test is now very narrow.

Good practice in designing MIBC structures

For companies seeking to use the MIBC sustainably, several strategic lines are now clear. Begin with substance, not with the benefit: design the structure around the real functions you intend to perform in Madeira (the type of services, the value chain, the markets), rather than around the objective of fitting within a 5% benefit. Size the RAM team appropriately, with a headcount and profile compatible with turnover and the complexity of the activity, and avoid configurations in which Madeira holds only “direction” while the bulk of execution happens elsewhere. Ensure that contracts reflect reality, aligning object, place of performance, technical responsibilities and pricing with the actual operation in Madeira, and avoid retroactive re-papering of contracts to rewrite the past, a practice liable to be characterised as simulation or artificiality for tax purposes. Design the “substance file” from the outset, defining what documentation will be produced and kept to demonstrate continued compliance (employment, investment, structure) and implementing internal reporting tools that make future proof easier. And monitor the European State aid framework, following Commission decisions and national and EU case law on the ZFM and other regional regimes, and adjusting the structure as compatibility criteria evolve.

Where MCS can assist

The MIBC regime remains a highly competitive instrument within the European framework: a 5% IRC rate until 2033, combined with a strategic location and single-market access. That competitiveness is now inseparable from a rigorous economic-substance test, and the message for groups intending to use the MIBC is unambiguous: there is no durable benefit without genuine substance in Madeira.

Madeira Corporate Services may assist, subject to a case-by-case review, with the legal analysis of a contemplated structure, including the review of relevant documentation, contractual arrangements, internal organisation and operational footprint, for the purpose of assessing whether the structure appears aligned with the applicable substance requirements.

This assistance may include identifying potential risk areas, advising on the documentation to be maintained, and supporting the preparation of a substance file evidencing the company’s activity in Madeira before the Portuguese Tax Authority and, where relevant, in the context of EU State aid scrutiny.

However, the primary responsibility for meeting and evidencing the substance requirements rests with the company itself. The company is best placed to know, describe and substantiate its own business model, decision-making processes, employees, assets, premises, contracts, commercial rationale and day-to-day operations. Madeira Corporate Services’ role is therefore advisory and analytical; it does not replace the company’s obligation to ensure that its actual operations correspond to the structure implemented.

Where properly designed, implemented and documented, the MIBC may constitute an important element of international tax competitiveness, provided it remains within the boundaries of legitimate tax planning and does not amount to incompatible State aid.

Frequently asked questions

Is an MIBC licence enough to qualify for the 5% IRC rate? No. The licence is the starting point. The reduced rate depends on meeting the job-creation and investment requirements of Article 36.º-A of the EBF and, critically, on the income corresponding to activity actually carried out in Madeira through an adequate business structure.

Do the jobs have to be located in Madeira specifically? The European Commission’s reading in Decision (EU) 2022/1414 is demanding on the physical location of jobs and activity in the region, and on the established interpretation the relevant workers should be tax-resident in the RAM. Nationality is not the test; tax residence and assignment to the licensed activity are.

Can the work be outsourced to other group companies abroad? Full outsourcing of the substantive execution abroad does not satisfy the test. The income attributable to work performed outside Madeira is not treated as generated in the RAM for the purposes of the 5% rate.

What happens if substance is found to be insufficient on audit? The possible consequences include reclassification of income to the standard IRC rate with additional assessments and interest, recovery of State aid under the Commission’s decisions, and administrative-offence and reputational exposure.

Are pure head-office or management-consultancy companies eligible? Entities whose principal activity is the activity of head offices (NACE 70.10) or business and management consultancy (NACE 70.22) are expressly excluded, as are financial-sector entities subject to specific exceptions. Substance must be genuine operational activity, not only management and coordination.

This article is provided for general information purposes only and does not constitute legal, tax or accounting advice, nor does it create a client relationship. It addresses the economic-substance requirements of the Madeira International Business Centre in general terms and does not account for the specific circumstances of any company or transaction. The Madeira International Business Centre operates as a regional-purpose State aid regime authorised by the European Commission, and its conditions, ceilings and eligible activities are set by statute and by European decisions that may change. Tax rates, taxable-income ceilings and statutory references reflect the position understood at the date of preparation and should be confirmed against the current consolidated legislation and the applicable European decisions before any action is taken. Professional advice should be sought on any specific situation. Madeira Corporate Services accepts no liability for any action taken or not taken in reliance on this article.

Ambrósio Jardim

Ambrosio Jardim has, since 1998, worked mainly in the areas of commercial law (corporate, mergers and acquisitions, joint ventures, restructuring and planning), national and international tax law and real estate…. Read more