After successful negotiations with the European Union (EU), the extension of the Madeira International Business Centre (Madeira IBC) was finally approved in June 2007.
Following this decision, the Portuguese Government approved an amendment to the Fiscal Benefits Code in January 2008. The amendment was made to regulate the new fiscal regime applicable to entities obtaining a licence to operate within the scope of Madeira IBC between 1 January 2007 and 31 December 2013. This regime will be in force until 31 December 2020.
I. New Madeira Companies
Although already widely diffused, the following are the main characteristics of the new regime:
1) Tax rates
· 3% until 31 December 2009
· 4% between 2010 and 2012
· 5% between 2013 and 2020
2) Authorised activities
Industrial and commercial activities, maritime transport and other services are specifically authorised. However, licensed companies cannot carry out financial and insurance brokerage or activities designated as ‘intra group’ services: namely co-ordination, treasury and distribution centres.
As in the current regime, exemptions will only be applicable to income deriving from activities carried out with non-Portuguese resident entities or entities licensed to operate within the Madeira Free Trade Zone.
3) Conditions for admittance to the new regime
The reduced tax rates that the new Madeira companies are entitled to will be subject to a maximum limit of taxable income depending on the number of jobs created in accordance with the following scale:
· €2 million for 1to 2 jobs created
· €2.6 million for 3 to 5 jobs created
· €16 million for 6 to 30 jobs created
· €26 million for 31 to 50 jobs created
· €40 million for 51 to 100 jobs created
· €150 million for over 100 jobs created
Besides these limits, in order to benefit from this special regime, companies shall comply with one of the following requirements:
a)Creation of one to five jobs within the first six months of business, and investing a minimum of €75,000 in the purchase of fixed assets, tangible or intangible, within the first two years of activity.
b)Creation of six or more jobs within the first six months of business.
A crucial point for the success of the new regime is the definition of ‘job creation’. The regional authorities are receptive to considering, generically, that the existence of a job position is verified once the employee has been registered with the Portuguese Social Security, despite the fact that such an employee is a resident of Madeira/Portugal, provided that the employee is on the company payroll and contributes to the local social security. If this understanding, which is still under analysis, is accepted, the new regime may become considerably more attractive and competitive.
We trust that within the shipping industry, the requirement for creating jobs may be easily complied with by counting the crew members that operate the ships.
It should be noted that despite the content of the new approved regime, the Portuguese Government has reserved the right to renegotiate the respective conditions for admittance, including the maximum limits of taxable income and its relation to the number of jobs created, in order to make it more competitive. The European Commission has accepted it and the renegotiation will commence in 2008.
II. Companies Licensed until 2007
Companies licensed to operate within the scope of the Madeira IBC until the end of 2007 (including companies licensed until 31 December 2000) shall benefit from the new regime after 1 January 2012, and are, therefore, able to continue with their activity and benefit from the taxes referred to in 1) above, provided that the conditions for admission to the new regime in 2) and 3) are complied with.
III. Pure Holding Companies – SGPS
1) General features
One of the most interesting aspects of the new regime that has, surprisingly, often been overridden, is that of the pure holding companies (SGPS). The exclusive operation of SGPS is owning relevant stakes of other companies and managing these shareholdings.
In fact, in accordance with the new number 8 of Article 34(A) of the Tax Benefits Code, SGPS are taxed in accordance with the rates mentioned in 1) above, without being required to create jobs. Taking this into account, we consider it of utmost importance that the SGPS main guidelines are made known.
Portuguese law establishes that it is mandatory that shareholdings held by SGPS:
a)Represent more than 10 per cent of the share capital with voting rights of the participated company, except in the following cases:
whenever shareholdings representing less than 10 per cent of the share capital with voting rights corresponds to less than 30 per cent of the whole shareholdings held by the SGPS, as registered in the last approved balance;
if the price of acquisition of the relevant shareholding was equal to or higher than €5 million;
if the shareholdings have been acquired as a consequence of a merger or a spin-off; or
shareholdings are in companies with which the SGPS has a subordination agreement.
b)Shareholdings must be held for a minimum period of one year (and cannot be encumbered during such period) unless:
the transfer is made by way of exchange of shareholdings;
there is a reinvestment within six months from the date of the sale (in the case of participations whose sale price was equal to or higher than €5 million, the reinvestment can be made until the end of the second financial year following the sale); or
if the purchaser is a company controlled by the SGPS, as set forth in the Portuguese Companies Code.
3) Other activities
In addition, SGPS companies may render management and administration services to their subsidiaries as an ancillary activity. These service agreements must be in a written format and they must specify the fees due.
SGPS companies are not allowed to acquire or maintain real estate property, unless:
· they are required for their own premises;
· they are required for the establishment of their subsidiaries, in which case these immovable assets cannot represent more than 25 per cent of the net assets of the SGPS;
· they are acquired as a consequence of the enforcement of the company’s credits; or
· they are transferred to the SGPS as a result of the liquidation of a participating company.
SGPS companies are not authorised to grant loans, unless they are:
· granted to their controlled companies; or
· limited to the value of the shareholdings held, in accordance with the last approved balance sheet, in the following cases:
i) to companies in which the SGPS holds a stake of at least 10 per cent of the share capital with voting rights;
ii) to companies whose acquisition price was equal to or higher than €5 million;
iii) to companies whose shareholding results from a merger or spin-off.
In the cases of i) to iii), ‘Suprimentos’ (special shareholders’ loans foreseen in the Portuguese Companies Code granted for a minimum term of one year) may be granted with no restrictions whatsoever.
5) Statutory auditor
SGPS are required to appoint a statutory public accountant to audit their accounts.
6) Tax regime
a) Non-EU shareholdingsSGPS companies licensed to operate in the IBC after January 2007 are taxed at the following rates on dividends derived from non-EU shareholdings, including those located in jurisdictions deemed to be tax havens and blacklisted as such by Portugal:
· 3% in the years 2007 to 2009
· 4% in the years 2010 to 2012
· 5% in the years 2013 to 2020.
Capital gains obtained by SGPS are not subject to tax, provided they result from the sale of shareholdings held for a minimum period of one year, except in the following cases:
· shareholdings held in companies with special relations with the SGPS, as defined in the Portuguese Corporate Tax Code;
· shareholdings domiciled in a jurisdiction blacklisted by the Portuguese tax authorities;
· shareholdings held in Portuguese companies subject to a special tax regime.
In the above cases, capital gains shall only be exempt if the shareholdings are held for a minimum period of three years.
Furthermore, whenever the SGPS results from the change of a previous existing company to which the regime of capital gains referred to above was not applicable, it will only apply after a three-year period subsequent to the change.
b) European shareholdings
If the shareholdings, regardless of the amount or percentage they represent in the share capital of the subsidiaries are held in an EU company (which qualifies for the parent-subsidiary directive) for a period of at least one year, the dividends distributed to the SGPS are taxed at the standard Madeira corporate tax rate (20 per cent at present), with the possibility of a 100 per cent deduction of the dividend received. This would result in an effective tax rate of 0 per cent.
Capital gains are taxed in the same way as the non-European shareholdings as referred in a) above.
It is important to point out that interest and services income do not qualify for the tax reduction and shall be subject to the standard rate of 20 per cent.
a) Financial costs
Financial costs incurred by the SGPS for the acquisition of its shareholdings and the capital losses are generally not accounted for tax purposes.
b) Capital gain
There is no capital gain tax on the sale of the Madeira SGPS itself if the shareholders are not located in a blacklisted jurisdiction.
c) Withholding tax
There is no withholding tax on the dividend distribution made by a Madeira SGPS, regardless of the jurisdiction in which its shareholders are located.
d) Licence fee
SGPS licensed to operate in Madeira IBC are subject to an additional licence fee when their net profit exceeds €1 million, to be paid to Sociedade de Desenvolvimento da Madeira (SDM) (IBC Regulatory Authority) in September of the following year. This additional fee is calculated at the rate of 0.5 per cent over the surplus of €1 million of the net profit, but limited to a maximum cap of €30,000.
As noted, the regime of the Madeira IBC continues to be significantly competitive. It offers the lowest tax rate of the EU and is one of the lowest worldwide. In fact, companies operating here are not characterised as ‘offshore’ and are completely entitled to benefit from almost all double taxation treaties entered by Portugal, as well as from the EU directives applicable to tax matters. Furthermore, they are normally excluded from the so-called ‘blacklist’ of jurisdictions with low taxation that most states choose to disclose.
With many newcomer investors and with those already established beginning to adjust to the 2012-2020 period, 2009 will certainly be a turning point, bringing an era of expected prosperity to the IBC.