Madeira, an autonomous region of Portugal, has gained significant attention in recent years as a destination for international businesses and high-net-worth individuals seeking tax advantages and a favourable business environment. However, several misconceptions surround Madeira’s tax regime and its classification as a tax haven. In this comprehensive guide, we will debunk these myths and shed light on the tax benefits and substance requirements offered by Madeira for international businesses.
Understanding Madeira’s Tax Regime
Madeira’s International Business Centre (MIBC) is a legally defined structure that provides tax incentives approved by the European Union (EU) until at least the end of 2028. These incentives are primarily focused on promoting international activities and attracting foreign investment. It is crucial to note that Madeira companies are subject to the same rules, regulations, and reporting requirements as any other Portuguese company. They must maintain organized accounts and submit tax forms, VAT returns, and reports to the Bank of Portugal.
Debunking the Myth of Madeira as a Tax Haven
Contrary to popular belief, Madeira is not a tax haven. Madeira companies only enjoy tax benefits on their international activities, while any income generated from inland operations is taxed at the normal Portuguese corporate income tax rate. Madeira is not considered an offshore jurisdiction or a non-cooperative jurisdiction, as it is not included in any international blacklists. Madeira companies have access to all double tax treaties and European Directives signed by Portugal, and they are subject to EU initiatives on tax harmonization.
Substance Requirements for Madeira Companies
Madeira companies must meet specific substance requirements to qualify for the tax benefits offered by the MIBC. The law defines these requirements to ensure transparency, compliance, and economic substance. The substance requirements primarily revolve around job creation.
After incorporation, a Madeira company must hire at least six workers within the first six months of activity or invest €75,000 in tangible or intangible fixed assets during the first two years. Additionally, the company must have at least one employee on its payroll who will continuously pay Portuguese individual income tax and social security.
The Tax Benefits of Madeira’s International Business Centre
If MIBC companies fulfil their economic substance requirements, they are subject to the following:
- Reduced Corporate Income Tax Rate: Madeira companies benefit from a reduced corporate income tax rate of 5% on their active income derived from trading activities or the provision of services.
- Exemption from Withholding Tax: Madeira companies are exempt from withholding tax on dividend distributions, provided certain conditions are met. The participation exemption regime also applies to capital gains received by the company, the sale of subsidiaries, and the payment of capital gains to shareholders.
- Exemption from Withholding Tax on Interest, Service Fees, and Royalties: Madeira companies enjoy exemption from withholding tax on interest, service fees, and royalties paid to non-residents.
- Exemption from Stamp Duty and Property Taxes: Madeira companies are exempt from stamp duty, property tax, property transfer tax, and regional and municipal surcharges, subject to certain limitations.
- Application of Double Tax Treaties and Investment Protection Treaties: Madeira companies have access to the benefits provided by the double tax and investment protection treaties signed by Portugal.
Madeira’s Commitment to Compliance and EU Approval
All tax benefits granted to Madeira companies have been negotiated and pre-approved by the EU Commission. Madeira’s tax regime has been approved under the EU state aid rules, ensuring compliance with EU regulations that promote fair competition and prevent harmful tax practices. Madeira companies are subject to the same rights, obligations, and compliance requirements as any other Portuguese company, ensuring full compliance with Portuguese and EU law.
Madeira’s Integration into the EU and OECD
Madeira benefits from being a part of Portugal, an EU member state, and the OECD. Companies located in Madeira operate under a credible regime supported by the 28 EU member states. Madeira’s automatic VAT number allows companies direct access to the EU intra-community market. All EU directives apply to Madeira, providing a well-regulated and modern legal system that protects investors’ interests. Madeira offers a politically and socially stable environment, low operating costs compared to other European jurisdictions, and a high level of natural beauty.
Madeira’s Approval and Extension of the IV Regime
Madeira’s IV Regime, which provides tax benefits to companies in the MIBC, has been approved and extended by the EU Commission until December 31, 2027. This demonstrates the EU’s confidence in Madeira’s tax regime and its commitment to maintaining most tax benefits. The IV Regime also introduces additional dividend benefits, further enhancing Madeira’s attractiveness to international businesses.
Conclusion
Madeira is not a tax haven but offers a favourable tax regime for international businesses through its International Business Centre. The misconceptions surrounding Madeira’s tax benefits and its classification as a tax haven are debunked by understanding the substance requirements, compliance with EU regulations, and the pre-approval of tax benefits by the EU Commission. Madeira’s integration into the EU and OECD further reinforces its credibility and attractiveness for international businesses. By choosing Madeira, companies can benefit from a reduced corporate income tax rate, exemption from withholding tax, access to double tax treaties, and a stable and compliant business environment.
Miguel Pinto-Correia holds a Master Degree in International Economics and European Studies from ISEG – Lisbon School of Economics & Management and a Bachelor Degree in Economics from Nova School of Business and Economics. He is a permanent member of the Order of the Economists (Ordem dos Economistas)… Read more
