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Madeira’s General Corporate Tax
Madeira’s Regional Budget for 2021 has been approved by the Representative of the Republic to the Autonomous Region of Madeira. Under the new budget, the general corporate income tax rate (CIT) is 14,7%. This means that Madeira has a more attractive CIT than major European economic power houses such as: Austria (25%), Germany (aprox. 25%), France (30%), Italy (27,9%), Luxembourg (25%), Netherlands (25%), etc…
This new 14,7% CIT, combined with Madeira’s internet infrastructure, full EU law compliance and friendly expat environment, makes the island the perfect location to conduct international business in Portugal and Europe. Furthermore, special incentives such a the Madeira International Business Center (a reduced 5% CIT) and a 10-year tax holiday for expats looking into to relocate to the island, can be also available, provided that several conditions are met by the investors.
Madeira International Business Center (MIBC)
The Assembly of the Republic has received, and is set to discuss, a bill from the Government of the Republic which will extend the deadline for the application of new company licenses until December 31st, 2021.
MCS and its multi-disciplinary team, with more than 20 years of expertise, is read to assist you in incorporating your business on the island. Feel free to contact us. Continue reading
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Madeira is a Portuguese archipelago in the Atlantic Ocean, situated 625 miles (1 000 km) from Mainland Portugal and 545 miles (900 km) from North Africa. It consists of four islands: Madeira, Porto Santo, Desertas and Selvagens. Madeira and Porto Santo are the only inhabited islands, while the Desertas and Selvagens islands are uninhabited natural. Madeira’s unique forest has been declared a World Heritage Sites by UNESCO.
Madeira Island is the biggest and most important island of the archipelago with an area of 741 km2. Due to its subtropical climate and landscapes, it is known worldwide as an all year round tourist destination, thanks not only to its culture, but also spring-like climate.
Although it is an integral part of Portugal and subsequently of the European Union, where all laws applicable on the mainland also apply, Madeira is an Autonomous Region with its own government and parliament.
The population numbers approximately 267 785 inhabitants and its capital is the city of Funchal. Madeira’s Cristiano Ronaldo International Airport serves several daily flights to Lisbon and other major European cities. The official currency is the Euro and it is a civil law jurisdiction. A considerable part of the younger population is fluent in English.
Madeira’s economy is based on tourism, wine production and the International Business Centre of Madeira (MIBC). Created at the beginning of the eighties, the MIBC has proved to be a success and currently represents around 21% of the Regional Gross Domestic Product. This highly advantageous tax regime, for corporations and individuals, in addition to competitive operating costs, makes Madeira an attractive centre for international investment.
Under the MIBC scheme international services activities benefit from a reduced corporate rate (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. There are no restrictions, nevertheless, on the development of business activities with Portuguese companies which will be taxed at the general corporate tax rate in Madeira, currently 20%.
Further to the above, Madeira offers incredible internet speeds, when compared to mainland Europe. This is because 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 any kind of contention and using diversity in the access to international 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.
Madeira also offers low operational costs when in comparison with other European countries. In fact, the cost of human resources and the price of several goods and services are very competitive when directly compared with other European locations, allowing companies to face considerably lower costs when establishing operations in Madeira.
In addition to the above, a superb work-life balance is available to those wishing to make Madeira their home. This unique European island life-style sought by many is the reason for Madeira’s success.
If you are considering investing in Madeira, our team has more than 20 years of experience in assisting international investors and expats to make the right move. For more information please visit our website or contact us.
Source: SDM – Sociedade de Desenvolvimento da Madeira Continue reading
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Portugal has effectively transposed the European Corporate Tax Avoidance Directive which introduces rules to prevent tax avoidance by companies and thus to address the issue of aggressive tax planning in the EU’s single market. Madeira, being an outermost region of the EU is subject said directive.
The directive applies to all taxpayers that are subject to company tax in one or more EU country, including permanent establishments in one or more EU countries of entities resident for tax purposes in a non-EU country.
The directive lays down anti-tax-avoidance rules in 4 specific fields to combat BEPS, while amending Directive (EU) 2017/952 (which only covered hybrid mismatches within the EU):
- Interest limitation rules: where multinational companies artificially erode their tax base by paying inflated interest payments to affiliated companies in low-tax jurisdictions. The directive aims to dissuade companies from this practice by limiting the amount of interest that a taxpayer has the right to deduct in a tax period. The maximum amount of deductible interest is set at a maximum of 30% of the taxpayer’s earnings before interest, tax, depreciation (a measure of how much of an asset’s value has been used up at a given point in time) and amortisation (spreading payments over multiple periods).
- Exit taxation rules: where taxpayers try to reduce their tax liability by transferring its tax residence and/or its assets to a low-tax jurisdiction, solely for the purposes for aggressive tax planning. Exit taxation rules aims to prevent the erosion of the tax base in the EU country of origin when high-value assets are transferred with ownership unchanged, outside the tax jurisdiction of that country. The directive gives taxpayers the option of deferring the payment of the amount of tax over 5 years and settling through staggered payments, but only if the transfer takes place within the EU.
- General anti-abuse rule: this rule aims to cover gaps that may exist in a country’s specific anti-abuse rules against tax avoidance, and allows tax authorities the power to deny taxpayers the benefit of abusive tax arrangements. The general anti-abuse clause of the directive applies to arrangements that are not genuine to the extent that they are not put into place for valid commercial reasons that reflect economic reality.
- Controlled foreign company (CFC) rules: in order to reduce their overall tax liability, corporate groups are able to shift profits to controlled subsidiaries in low-tax jurisdictions. CFC rules re-attribute the income of a low-taxed controlled foreign subsidiary to its more highly taxed parent company. As a result of this, the parent company is charged to tax on this income in its country of residence.
Rules on hybrid mismatches: where corporate taxpayers take advantage of disparities between national tax systems in order to reduce their overall tax liability, for instance through double deduction (i.e. deduction on both sides of the border) or a deduction of the income on one side of the border without its inclusion on the other side. To neutralise the effects of hybrid mismatch arrangements, the directive lays down rules whereby 1 of the 2 jurisdictions in a mismatch should deny the deduction of a payment leading to such an outcome.
For more information on how the Directive might affect your MIBC company or investments in Portugal, or fore detailed information on the transposition mechanism, please do not hesitate to contact us. Continue reading
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Participation exemption is, under Portuguese law, a tax exemption applicable to dividends received from a subsidiary and any possible capital gains ensuing from the sale of that participation.
Under the participation exemption regime companies can do business and invest worldwide in a tax efficient manner and even benefit from Portugal’s lowest corporate tax rate under the Madeira International Taxation Regime, should they pursue other economic activities apart of that of a pure holding company.
This post of ours focus on the participation exemption regime from a Portuguese holding company standpoint, nevertheless should the Portuguese company a subsidiary, rather than a parent company, the same regime still applies, under conditions foreseen in EU law and the parents’ company home country.
Under the Portuguese participation exemption regime is applicable to the following types of income/transactions:
- Profits and reserves distributed to Portuguese companies by their subsidiaries shall not contribute to their taxable profit. Provided that these derive from:
- The taxpayer directly, or directly and indirectly, holds at least 10% of the share capital or voting rights in the subsidiary.
- The shares are held for a consecutive period of at least one year or maintained for that period.
- The taxpayer is not covered by the tax transparency regime.
- The subsidiary is subject to and not exempt from corporate income tax, an income tax mentioned in Article 2 of the Council Directive 2011/96/EU, or a tax similar to corporate income tax with a legal rate that is not lower than 60% of the standard corporate income tax rate.
- Capital losses or gains occurring due to the transfer of shares in these companies at a cost in any form, and regardless of the percentage of the share transferred, shall not contribute to their taxable profit. Provided that the following requirements are met at the date of transaction:
- The shares are held for a consecutive period of at least one year.
- The taxpayer directly, or directly and indirectly, holds at least 10% of the share capital or voting rights in the entity from which the shares are transferred.
- The taxpayer is not covered by the tax transparency regime (i.e. imputation of profits to individual or corporate shareholders, regardless of effective distribution).
- The entity from which shares are transferred is not resident in a tax haven.
- The assets of the entity from which shares are transferred are not directly or indirectly comprised of more than 50% of real estate located in Portugal and acquired on or after 1 January 2014 (except real estate allocated to an agricultural, industrial, or commercial activity that does not consist of buying and selling real estate).
- Profits, reserves, capital gains and loses realized by a Portuguese permanent establishment may also benefit from the participation exemption regime provided that said Portuguese permanent establishment is of:
- An European Union resident entity, which complies with the requirements foreseen in Article 2 of the Council Directive 2011/96/EU.
- A European Economic Area resident entity, subject to tax cooperation obligations similar to the ones established within the European Union, provided that the entity complies with requirements that are comparable to those foreseen in Article 2 of the Council Directive 2011/96/EU.
- An entity resident in a state with which Portugal has concluded a double tax treaty (except if resident in a tax haven) that foresees exchange of information and is subject to and not exempt in its state of residence from an income tax similar to the Portuguese Corporate Income Tax, which legal rate is not lower than 60% of the standard Portuguese corporate income rate.
As previously mentioned, profits, reserves, and capital gains or loses deriving from such jurisdictions cannot benefit from the Portuguese participation exemption regime.
Last, but certainly not least, tax credit for economic and legal double taxation are available to companies, in the cases foreseen in the law, when said company does not qualify for the participation exemption regime.
NOTE – list of current tax havens: American Samoa, Liechtenstein, Andorra , Maldives, Anguilla, Marshall Islands, Antigua and Barbuda, Mauritius, Aruba, Monaco, Ascension Island, Monserrat, Bahamas, Nauru, Bahrain, Netherlands Antilles, Barbados, Northern Mariana Islands, Belize, Niue Island, Bermuda, Norfolk Island, Bolivia, Other Pacific Islands, British Virgin Islands, Palau, Brunei, Panama, Cayman Islands, Pitcairn Island, Channel Islands, Porto Rico, Christmas Island, Qatar, Cocos (Keeling), Queshm Island, Iran, Cook Islands, Saint Helena, Costa Rica, Saint Kitts and Nevis, Djibouti, Saint Lucia, Dominica, Saint Pierre and Miquelon, Falkland Islands, Samoa, Fiji, San Marino, French Polynesia, Seychelles, Gambia, Solomon Islands, Gibraltar, St Vicente and the Grenadines, Grenada, Sultanate of Oman, Guam, Svalbard, Guyana, Eswatini, Honduras, Tokelau, SAR Hong Kong (China), Trinidad and Tobago, Jamaica, Tristan da Cunha, Jordan, Turks and Caicos Islands, Kingdom of Tonga, Tuvalu, Kiribati, United Arab Emirates, Kuwait, Virgin Islands of the United States, Labuan, Vanuatu, Lebanon, Yemen, Liberia.
This article is intends to be an introduction to the Portuguese participation regime, specific professional advice should be hire in order to analyse its application to one’s specific circumstances.
MCS and its team have more than 20 years of experience in assisting international investors and expats in Portugal and in the Autonomous Regions of Madeira. For more information on our services please do not hesitate to contact us. Continue reading
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Portugal, and more specifically Madeira, offers unique conditions conditions for investors to locate not only their holding company, but also their commercial and trading company. Keep reading our article to find out why.
Cost and Quality of Living
Portugal ranks in the Top 30 Cheapest Countries in Europe (Numbeo), surpassing Spain, Malta, Greece, and France. Add this to the special tax regime available to new residents and businesses and your savings will increase even more.
Add that to the fact that Portugal ranks 1st in the World in the Quality of Life for Expatriates and is the 2nd best country in the World in leisure activities, you will rapidly understand why people have been relocating to Portugal in the last couple of years.
Furthermore, in the latest Global Peace Index, published by the Institute for Economics and Peace, Portugal ranks on the Top 3 Peaceful Countries in the World. In this index, Portugal ranks above Switzerland, Canada and Switzerland.
On the other hand, international Living ranks Portugal in the Top 10 Best Countries to Retire in the world and Investopedia ranks it 2nd best country to retire in Europe. Unlike Spain, Portugal has never suffered any terrorist attack to date.
If you are looking for the city with the best quality of life, and where you can enjoy a cosmopolitan and yet calm island life, then Funchal is the place to be. The Portuguese consumer association has ranked Funchal as the second-best city to live in Portugal.
Political Stability and Legal System
Portugal has a strong tradition of political stability, with power alternating between the two main center parties since 1974. Given its constitutional system, premier-presidentialism, it is not unusual for these center parties to form coalition with other minor parties in recent years.
The Autonomous Region of Madeira possesses its own political and administrative statute and has its own government. The branches of Government are the regional executive (Governo Regional) and the legislative assembly (Assembleia Regional). The assembly is elected by universal suffrage. Power in Madeira has been exercised by the same party since 1976.
The Portuguese Law system is part of the civil law legal systems, based on Roman Law. Since the 20th century there has been a major influence from German civil law, a shift from the French influence of the previous century. Since 1986 European Union Law became the major driving force on corporate law, administrative law and civil procedure.
Portuguese Law has influenced the legal systems of Angola, Brazil, Cape Verde, Guinea-Bissau, Mozambique, São Tomé and Príncipe, Timor-Leste, the State of Goa (India) and the Special Administrative Region of Macau (China).
Portugal is the only country in Top 6 Most Powerful Passport Index (Visa-Free Score of 185 countries) to have the most cost-efficient Residency and Citizenship by Investment in Europe.
According to the Cato Institute’s Human Freedom Index, Portugal ranked among the Top 20 Countries, surpassing France, Spain and Greece pertaining economic and personal freedoms.
As for religious, bio-ethical, family and gender freedoms, Portugal ranks in the world Top 3 in the World Index of Moral Freedom, surpassing all the G20 countries in these fields. Portugal is also among ILGA-Europe’s Rainbow Index Top 10 European countries in respect to LGBTQI equality, surpassing countries like, the United Kingdom, Norway, Sweden, Germany, France and the Netherlands.
Qualified Workforce and Low Operational Costs
Portugal has a vast network of prestigious private schools and state-run Universities scattered across the country (including Madeira), to which those residing in Madeira can apply.
Universities in Portugal rank among the Top 500 in the international Shanghai Ranking and have European renowned colleges in the engineering, economics and medicine, such as: Instituto Superior Técnico and Aveiro University (both with audited courses by the European Network for Accreditation of Engineering Education (EUR-ACE Accreditation Program)); Nova School of Business and Economics and Católica Lisbon School of Business and Economics (both certified by the Association to Advance Collegiate Schools of Business International Accreditation, EQUIS – EFMD Quality Improvement System Accreditation; and the Association of MBAs Accreditation), with the first being a Member of CEMS Global Alliance in Management Education.
The Portuguese labor force is also known for its language skills, being ranked 7th in in World by the IMD World talent report).
Operational costs in Portugal, from a human resources and managing services perspective, are the lowest in Western Europe.
Holding Companies in Portugal
Under Portuguese law a pure holding company (SGPS – Sociedades Gestoras de Participações Sociais), has the sole contractual purpose of managing stakes in other companies as an indirect form of economic activity, the taxation for this structure is the same as that of any other commercial company.
Nevertheless, any commercial company with a broad business purpose that includes the possibility of holding stakes in other companies can benefit from the mechanisms stipulated in Portuguese and European tax law for eliminating double taxation on the ensuing income, as long as certain requirements have are met. As such, investors may hold stakes in addition to the undertaking of their commercial activity, through a single company.
General Overview of the Taxation of Holding Companies in Portugal
Taxation of Holdings in Madeira (Portugal)
Apart from the considerable tax benefits granted under the Portuguese tax law, described below, Portuguese holding companies resident in the Autonomous Region of Madeira and duly licensed to operate within the International Business Center of Madeira will also benefit from the following tax advantages:
- The corporate income tax rate is 5%
- No withholding tax on royalties, services or interest paid to third parties
- Exemption from withholding tax in the distribution of dividends to shareholders
- Exemption from withholding tax upon payment of interest and other forms of remuneration through increases, allowances or advances to shareholders
- An 80% reduction in stamp duty, Real Estate Transfer Tax (IMT) and Municipal Property Tax (IMI), regional and municipal surcharges and taxes, and notary and registration fees.
- Reduction in the special payment on account and autonomous taxation in proportion to the applicable corporate income tax rate (in this case, a 76.2% reduction).
- Commercial or trading activities performed by the Madeira company shall be taxed in accordance with the income tax rate applicable to companies licensed within the scope of MIBC, i.e. 5%.
Conditions for Participation Exemptions
- The Portuguese company holds, directly or indirectly, and continuously, for the 12 months that precede the distribution or transfer, a participation that is no less than 10% of the shareholder capital or the voting rights of the entity that distributes the profits/reserves or whose participation has been transferred (in the case of distribution of profits, if the participation has been held for less time, it must be maintained throughout the time necessary to complete the 12 months);
- The participated company is subject to and not exempt from corporate income tax (in the case of Portuguese companies), any tax referred to in the Parent-Subsidiary Directive (companies resident in the EU) or a tax of an identical or similar nature to that of corporate income tax, provided that the rate applicable to said entity is not less than 60% of the corporate income tax rate (other cases);
- The participated company is not resident in a tax haven;
- The distributed profits/reserves do not correspond to costs deductible by the entity that distributed it;
- The participated company is not subject to a tax transparency regime.
There is also the possibility of making use of the unilateral tax credit for international double taxation.
If participation exemption requirements are not met, there is the possibility of considering only half (50%) of the capital gains generated if such capital gains are reinvested. This possibility is subject to certain conditions
Conditions for the Taxation of Interests
European Directive 2003/49/EC, allows for the payment of interest and royalties between companies in the EU to be exempt from taxation, provided that the following requirements are met:
- Both companies meet the criteria of one of the corporate forms stipulated in the Directive Annex;
- Both are subject to income tax;
- The direct capital relationship between both companies is 25%, or if both are directly held in 25% by a third party fulfilling the two above-mentioned requirements, if in both cases the stake has been held for at least two years;
- The company to which the interest or royalty payments are made is the beneficial owner of such income, which shall be deemed to be the case when it earns the income for its own account and not as an intermediary, and where a permanent establishment is deemed to be the beneficial owner, the credit, right or use of information from which the income derives is effectively related to the activity carried out through its intermediary and constitutes taxable income for the purpose of determining the profit attributable to it in the Member State in which it is situated.
Portuguese, and companies duly licensed to operate within the International Business Center of Madeira, companies fulfill the first two requirements. If the third and fourth ones are also met, it shall be possible for entities resident in another EU Member State to pay interest or royalties to Portuguese companies without paying withholding tax in the State of origin and vice-versa.
Conditions of the Taxation of Dividends
Dividends distributed by a Portuguese company to its shareholders who are natural persons shall be taxed in accordance with the Personal Income Tax Code (28%) unless they are not resident in Portugal and the company is licensed to operate within the scope of the International Business Center of Madeira or a double taxation treaty is applied.
Profit or dividends distributed by a Portuguese company to shareholders that are legal persons, are exempt, provided that they:
- Are residents either in Portugal, in the EU, in the European Economic Area (provided that administrative cooperation is guaranteed with respect to taxation in terms equivalent to those established in the EU); or in jurisdiction with which Portugal has signed a currently valid agreement for avoiding double taxation and allowing for exchange of information.
- Are subject to and not exempt from Corporate Income Tax (Portuguese companies), a tax mentioned in the Parent-Subsidiary Directive (companies resident in the EU) or a tax that is identical or similar to Corporate Income Tax, provided that the rate applicable to the entity is not less than 60% of the corporate income tax rate (other cases).
- Hold, directly or indirectly, a participation that is no less than 10% of the shareholder capital or the voting rights of the Portuguese company.
- Hold a participation in the Portuguese company in a manner that has been uninterrupted during the 12 months prior to the distribution date.
Taxation of Capital Gains
Capital gains earned by non-residents of Portugal from the sale of a shareholding in a Portuguese company shall not be taxed if the company’s main assets do not include real estate in Portugal. This exemption shall not apply to shareholders residing in tax havens.
Our team at MCS, with more than 20 years of experience in the sector, is able to assist you in setting up and managing a company within the MIBC or Portugal. For more information click here. Continue reading
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Portugal and its national merchant navy have recently been the subject of very positive analyzes by both the Organization for Economic Cooperation and Development (OECD) and the United Nations (UN). The reason: the International Ship Registry of Madeira (MAR)
In the case of the OECD, the country has been highlighted by the steady growth of its fleet since 2013, due to the work done under the MAR. The compliments to the Portuguese flag came from an OECD study in which Portugal is named one of the few flag states in Europe that have had constant success in growing their fleet over the last few years.
As for the United Nations, the most recent data confirm Portugal’s entry in the top 15 of the world records due to MAR.
In regards to the EU, it is confirmed that the International Register of Madeira Ships is the 3rd behind Malta and Cyprus, as the United Kingdom and Greece bring together several registers.
In recent years, in various international forums and agencies, the quality and growth of the Portuguese-flagged merchant navy has been widely recognized, based on analyzes that have the denominator of the International Register of Madeira Ships, and which unquestionably place the country among the most respected and competitive in the world in this sector.
This was the case for the International Chamber of Shipping (ICS) reports on the performance of ship registrations, placing Portugal at the level of the best in the world, and for other reports issued by international bodies and entities such as the Memorandum Committee (MOU) of Paris and the American Coast Guard Qualship Index.
It should be noted that the exponential growth of the MAR has provided Portugal with a quality fleet, having contributed decisively to the country and, consequently, also to Europe, having more weight in the large international maritime forums, namely in the International Maritime Organization (IMO), where the major issues related to the sea and maritime transport are discussed and decided.
The most recent data show that the Madeira International Ship Registry continues to show a positive upward trend. Since the end of 2018, over a period of six months, MAR has seen an increase of 27 more commercial vessels. With a total of 653 vessels registered on 30 June, MAR maintains its top position among European international registrations, both in number of vessels and in tonnage.
Source: SDM Continue reading
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Trusts in Madeira are regulated through omission. Decree Law 352/88 & Decree Law 149/94 deal with the registration and management of offshore trusts whereas Decree Law 264/90 concerns authorization by government of trust corporations and branches.
Portuguese residents cannot use Madeiran offshore trusts. The law forbids a trust to hold immovable property situated in Portugal and to have either a settlor or a beneficiary who is a Portuguese resident.
All trust property must be based outside Portugal and all trust income must be derived from non-Portuguese sources if the favorable taxation regime governing entities licensed to operate under the Free Trade Zone Legislation of Madeira is to apply.
Where trust income arises in Portugal, it is taxable in the hands of the trustees as if the trustees were both legally and beneficially entitled to the income. The reasoning behind this principle is that Portuguese law does not recognize the concept of a trust and so does not recognize the distinction between legal and beneficial ownership for the purposes of taxation.
By way of exception income arising through investments made through companies licensed to operate under the Free Trade Zone Legislation of Madeira is not considered to have arisen within Portugal for tax purposes.
For a Madeira trust to be valid it must satisfy the following criteria:
- The trust must pass the three tests of certainty of intention, certainty of objects and certainty and identification of the beneficiaries;
- The settlor, the trustees, the beneficiaries and the assets settled by the trust must all be identified in the trust deed;
- The trust period must be specified.
- A power to accumulate income must be specified in the deed;
- The trust deed must stipulate a foreign proper law governing the validity, interpretation and administration of the settlement;
- The trust deed must set out the trustees powers of investment, the rights and obligations of trustees and the relationships between trustees and beneficiaries including any personal liability arising.
Trusts that are created in or transferred to Madeira may emigrate without prior authorization by exchanging the law governing the trust with the law of the foreign jurisdiction to which the trust is going to migrate.
Change of Proper Law
The settlor must expressly designate the law (other than Portuguese) that will regulate the Trust at the time of incorporation. Furthermore the trust deed can reserve the right to change the proper law governing the validity, interpretation & administration of the trust at any future point in time.
Creation of a Madeira Trust
A Madeira offshore trust is brought into existence by the execution of a notarial trust deed in front of a public notary. Provisions protecting
Pursuant to European Directive 2015/849, all beneficial owners of the trust must be reported to the control-accessed Central Registry of Beneficial Owners. Under this EU Directive the trust’s beneficial owners are: the settlor(s), the trustee(s), the curator (if applicable), the beneficiaries of the trust and any other individual that controls (in)directly the trust. Continue reading
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If you have moved to Madeira Island or are planning to relocate, you already know that it is a beautiful place to live and with a lot of choices to what you can do.
Nevertheless such move does require careful planning, since the island can offer many tax advantages too. The following considerations can help you avoid costly mistakes and therefore will allow you to make the most of tax-efficient opportunities in Madeira.
Taking up residency in Madeira (or Portugal for that matter), means that you are liable to taxation on your worldwide income, including capital gains, and reporting of non-Portuguese bank accounts to the Portuguese Tax and Customs Authority.
Portuguese tax residency kicks in if you spend more than 183 days in Portugal, or if your have real estate property, either rented or purchase, that can be occupied by you at any time in those same 183 days.
Careful attention must be paid to these rules, especially if you are considering real estate property purchase since before purchase you will need to be correctly registered with the Portuguese Tax and Customs Authority in order to avoid any costly mistakes.
Non-Habitual Resident Status
New residents, those who did not qualify in the 5 years previously to their arrival as residents for tax purposes in Portugal, can enjoy a a 10-year tax holiday period through acquiring non-habitual resident (NHR) status.
If you aim to take up employment in Portugal, a 20% income flat tax rate may apply to those professions deemed as ‘high value-added’. Fore more information on the NHR status please click here.
Investors and Entrepreneurs
Those wishing not to immediately retire can either relocate their international services company or incorporate a new one within the Madeira International Business Centre (MIBC).The MIBC is a unique set of tax benefits targeted to international services companies, international consultants and those within IT sector can be summed up as:
- 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 full exemption from withholding tax on dividend remittances from the Madeira companies.
- Full access to the participation exemption regime;
- Exemption on capital gains payments to shareholders not resident in black listed jurisdictions;
- No withholding tax on the worldwide payment of interest, royalties and services.
Restructuring your Income
One cannot assume what was tax-efficient back in their previous jurisdiction is the same in Portugal. UK ISAs, for example, are taxable for Portuguese residents (even those with NHR status).
A full analysis of your income structure must be carried in order to make sure you are suitably diversified and everything is set up in the best way for your new circumstances.
MCS as a locally-based adviser who understands the Portuguese tax regime is best placed to recommend tax-efficient solutions regarding your relocation. Continue reading
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|Investing in Madeira remains an attractive solution for those looking to operate in Portugal and abroad.|
The International Business Center of Madeira (MIBC, also known as Madeira Free Trade Zone) remains attractive for foreign and Portuguese investors, representing the single Portuguese fiscal incentive created to directly support the internationalization of worldwide companies.
Duly licensed companies benefit from one of the lowest corporate income tax (CIT) rates in the EU, 5%, to which 0% withholding tax on interest, capital gains, services, royalties and dividends is added (provided that certain requirements are met).
The MIBC is a real European incentive for the internationalization of exporting companies or international services providers.
Most service providers can benefit from the MIBC, including those engaged in trading, e-business and telecommunications, consultancy and marketing services, as well as intellectual property management, real estate project development or holding-related services.
Another important feature of the MIBC related benefits is that once the licensing process is done, the tax benefits become immediately effective. Unlike European funds there is no waiting period between the approval of the incentive and its implementation.
The MIBC is a tax benefit scheme granted under the Portuguese Tax Benefits Statute and duly approved by the European Commission.
Since the MIBC is governed by Portuguese and European Law, it offers the required legal certainty to its investors. All companies duly licensed to operate within the MIBC comply with all legal requirements to operate in Portugal, and therefore in the EU.
Given the above, all e-commerce directives have been duly transposed into Portuguese law, including those relating to electronic billing, digital signatures and data protection.
Such facts make it clear that, in addition to being a completely transparent tax incentive, the MIBC also allows a for an effective tax saving that can be used in the internationalization of the licensed company.
In addition to all the above-mentioned benefits, companies that are duly licensed in the MIBC may cumulatively apply for European funding under the Madeira 14-20 program and other financial instruments available to companies based in the Autonomous Region of Madeira.
Last, but not least, Madeira has all kinds of high quality support services, such as a broad network of information technology companies, consulting firms, financial services and administrative support, thus making operational costs low when compared to other European markets.
Our team at MCS, with more than 20 years of experience in the sector, is able to assist in the incorporation of your company within the MIBC or Portugal. For more information click here, for information our services click here. Continue reading
Definition of Tax Residency
Generally, a taxpayer is considered to be a tax resident in Portugal if he remains more than 183 days. This counting refers to any period of 12 months beginning or ending in the year in question.
One is also resident if he/she owns housing that supposes the intention to maintain it and to occupy like habitual residence.
In the event of a conflict in the definition of the tax residence, the taxpayer must take into account the criteria for its definition in the Double Taxation Agreement signed between Portugal and the country of residence.
Consequently, for a taxpayer who is a tax resident in Portugal, the Personal Income Tax, IRS, will be levied on his or her worldwide income. The IRS tax rate can go up to 48%.
On the other hand if a taxpayer is not a tax resident in Portugal, the IRS tax is levied only on income obtained in Portugal, provided that they are not subject a withholding tax.
As such, a resident taxpayer in Portugal is required to file the IRS Form 3 reporting his/her worldwide.
A non-resident taxpayer will only have to file a declaration in the case of obtaining rental income Portuguese source.
Tax Residency and CRS
The Portuguese Tax Code requires all taxpayers who work and/or reside abroad to communicate the change of their tax address to the Tax and Customs Authority (“AT”) within 60 days.
However, a large part of expat communities abroad fail to do so. This leads them to incorrectly report their income earned in both countries.
This issue has become more “serious” if we take into account that banks now collect and report information on bank account balances held by non-resident (for tax purposes) clients to the tax authorities.
The opposite also happens: foreign banks will report the accounts held by taxpayers resident in their national territory to their respective tax authorities, who will then communicate this information to the tax authorities of the country of origin.
This exchange of information stems from the implementation of the Common Reporting Standards (“CRS”), created by the OECD and of which Portugal and 92 other countries are involved.
Among the 93 jurisdictions, offshores like the Cayman Islands, the British Virgin Islands, Channel Islands are also included.
These commons reporting standards aim to combat tax evasion and money laundering and can have an impact on the tax residency status of thousands of expats.
CRSs can then risk expats’ income to be taxed in their country of origin and in their country of residence, if tax residence status are not up to date in all jurisdictions.
It is therefore extremely important that expats update their tax residence status with the competent tax authorities.
Our team at MCS, with more than 20 years of experience in the sector, is able to assist you pertaining taxation matters in Madeira and in Portgual. For more information our services click here. Continue reading