Madeira “Offshore” Incorporation

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Madeira “Offshore” Incorporation

by | Thursday, 11 January 2024 | Corporate Income Tax, Investment

Offshore Company Formation in Portugal

Madeira offshore incorporation (Portugal) has never been more straightforward. Still, before jumping into it, we provide five tips to help you better understand Portugal’s most tax-efficient jurisdiction.

The Madeira International Business Center (MIBC) is Portugal’s answer to attracting foreign direct investment in the services sector. Under the MIBC, the Autonomous Region of Madeira and Portugal grant the lowest corporate tax rate in the European Union and one of the lowest corporate tax rates worldwide.

With the advantage of operating within the European Union, MIBC dully licensed companies are not characterized as “offshore” and are entitled to benefit from all Double Taxation Treaties (“DTT”) signed by Portugal, as well as from the EU Directives applicable to tax matters. Therefore, one cannot say that it is possible to proceed with offshore company formation in the tax-aggressive sense that one is used to it.

Offshore incorporation in a de facto and de jure onshore Tax System

Madeira, an autonomous political territory of Portugal, has been granted, since the 80s, a low tax system to promote its island economy. Contrary to popular belief, not all low tax systems are synonymous with offshore or tax havens.

Since Portugal acceded to the EU, the MIBC system has been subject to several revisions and approvals from the European Commission, as such regime is considered State Aid by EU Law and jurisprudence and is thus subject to the Regional Aid Guidelines issued by the European Commission.

As such, the MIBC fiscal regime is fully integrated and regulated under EU and Portuguese law, and such regulation means that:

  • There is a full implementation of EU law regarding business activities admitted to the MIBC;
  • Complete application of norms arising from the Treaties signed by Portugal or by international organizations to which Portugal is a member, especially OECD, FATF7, ILO and IMO, apply to the regime;
  • All business activities within MIBC are subject to the same rules and proceedings regarding customs, tax and financial activities regarding control, inspection and supervision. Consequently, the regime has “onshore” characteristics since terms and conditions are identical to those of Madeira and the Portuguese mainland;
  • Additional measures exist regarding the improvement of the rules applied to the MIBC;
  • Complete access to double taxation agreements signed by Portugal and
  • Relationships with resident entities without fiscal benefits are allowed.

Portuguese investors can use MIBC to internationalize or develop their activities. Profit, whether the investor is foreign or national, will be taxed at a regular rate (14,7%) if income derives from activities with residents in Portuguese territory, and a reduced tax rate (5%) will be applied if income derives from activities with non-residents.

Know that tax benefits are only for certain activities

All companies duly licensed to operate within the MIBC are entitled to benefit from the following tax benefits:

  • A reduced corporate income tax rate of 5% applicable to profits derived from operations exclusively carried out with non-resident entities or with other companies operating within the ambit of the MIBC;
  • Non-resident, single and corporate shareholders of MIBC companies will benefit from a total exemption from withholding tax on dividend remittances from the Madeira companies provided that they are not residents in jurisdictions included in Portugal’s “blacklist”.
  • Portuguese corporate shareholders will also be exempt if holding a participation of at least 10% for 12 consecutive months;
  • Full access to the participation exemption regime;
  • Exemption on capital gains payments to shareholders not resident in tax haven jurisdictions;
  • No withholding tax on the worldwide payment of interest, royalties and services;
  • Documents, contracts and other operations requiring public registration carried out by MIBC companies will benefit from an 80% exemption on the stamp (capital) duty, provided that other parties involved are not residents of Portuguese territory or are also companies operating within the legal framework of the MIBC;
  • Companies licensed in the MIBC will also benefit from an exemption of 80% applicable to municipal property tax and property transfer tax, regional and municipal surtax, and any other local taxes.

Within the MIBC, unlike other jurisdictions that offer offshore company formation, companies are allowed a limited number of economic activities.

Most types of international service activities will be allowed, such as international trading, e-business and telecommunications, management services, consulting services, as well as the ownership of intellectual property, the development of real estate investments or the holding of participations through the incorporation of an SGPS – the Portuguese pure holding company. On the other hand, pure financial services such as banking, insurance, and brokerage activities provided to third entities do not qualify for the available tax benefits.

For the moment, companies performing the following activities involving virtual assets may operate under an MIBC license (provided they also obtain a license from the Portuguese Central Bank):

  • Exchange services between virtual assets and fiat money or between one or more virtual assets;
  • Virtual asset transfer services;
  • Services of safekeeping, or safekeeping and administration of virtual assets or instruments that enable the control, ownership, storage or transfer of such assets, including private encrypted keys.

Economic substance requirements always need to be met

Unlike offshore company formation in other jurisdictions, companies within the MIBC can only qualify for tax reductions. Companies incorporated in Madeira’s IBC have to comply with one of the following pre-established requirements:

  • Creation of one to five full-time job post(s) (the job posts must be filled in by residents, for tax purposes, in Madeira, regardless of their nationality) in the first six months of operation and undertake a minimum investment of €75.000 in the acquisition of fixed assets, tangible or intangible, in the first two years of operation; or
  • Creation of six or more full-time job posts (the job posts must be filled in by residents, for tax purposes, in Madeira Island, regardless of their nationality) in the first six months of operation.

On the other hand, the reduced corporate tax rates are applicable up to a ceiling placed upon the annual taxable income, which varies according to the number of employees.

Further to the above, under MIBC rules, companies must also have an appropriate economic structure. However, it must be noted that MIBC rules do not define this concept. It is understood that the company must be endowed with adequate substance for developing its economic activity, namely in terms of risks, assets and functions appropriate to the activity to be acquired by the company itself.

In an international context, the appropriate economic structure is continuously assessed case-by-case. To do so, several factors must be taken into account, such as the history of the business itself, the type of entity created, whether the business partners are related parties or not, the materiality of the company, the access or eligibility criteria to the tax regime and the control mechanisms adopted by the investor’s home country, etc.

Notwithstanding the above, the following must always be considered when assessing appropriate economic structure: the reason for the financial operation, the company’s management and an effective seat, and the types of beneficial owners.

MCS can provide further advice on the above so your business has the appropriate economic structure.

Make the most of the IT infrastructure

Madeira benefits from a Submarine Cable Station hosted in the “Madeira Datacenter”, operating several international optical submarine cables, allowing interconnectivity with national and international SDH networks and providing, as such, significant advantages in terms of quality, cost, bandwidth and scalability.

Another available infrastructure is the Internet Gateway provided by Marconi Internet Direct (MID). This MID offers international Internet access without contention and uses diversity to access global backbones. The IP platform has its international connectivity distributed by 3 PoPs (London, Amsterdam and Paris), peering connections with hundreds of major international ISPs and IP transits to Europe and the USA.

The above infrastructures make Madeira a European Region with enviable internet speed.

This article is provided for general information purposes only and is not intended to be, nor should it be construed as legal or professional advice.

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