Recently, the regime for the Madeira International Business Center (MIBC) has been subject to a legislative authorization given to the Portuguese Government after the European Commission has approved, on 27 June 2007, an extension of the special taxation regime until 2020.
Therefore it is expectable to wait at anytime that above regime is gone be changed, regarding that legal authorization.
The extension was made under the State Aid Rules in the EC Treaty and will provide tax reductions worth € 300 millions to companies setting up in the MIBC, between the years 2007 and 2013.
The ZFM comprises an industrial free zone, an international services centre and an international shipping register.
In this context, the new regime will affect companies incorporated from 1 January 2007 until 31 December 2013.
These companies will be subject to a reduced corporate tax rate of 3%, between 2007 and 2009, 4% between 2010 and 2012 and 5% between 2013 and 2020.
At the same time, others tax benefits are proposed like as for instance withholding tax exemption on the distribution and payment of dividends, royalties and services payments, as well as on interest payments arising from loans contracted with non-resident entities to finance investments in the activities developed in MIBC.
To benefit of this legal scheme it is necessary to observe the specific criteria, based on the number of permanent jobs created and the turnover qualifying for the tax benefit will be limited by a ceiling placed on the taxable base per company, which ranges from €2 million (where less than three new jobs are created) to €150 million (where more than 100 new jobs are created).
These limits will be renegotiated in 2008 and may be further increased.
The companies involved will have to start business within a fixed time limit (six months in the case of international services and one year in the case of industrial or shipping activities), beyond which they will lose their licenses.
The admission to the MIBC is also restricted to the activities included in a list drawn up by the Portuguese authorities on the basis of the statistical classification of economic activities in the EU.
As under the previous scheme, authorized by the Commission on 11th December 2002, and stated in Decree-Law 163/2003, from 24 July, applicable to companies licensed to carry out business in MIBC, between 1 January 2003 and 31 December 2006, financial and insurance intermediary activities, financial and insurance auxiliary activities and "intra-group services" (co-ordination, accounting and distribution centres) are explicitly excluded.
In relation to the companies that carry out business in those activities, but with licenses issued before 1 January 2001, the regime of benefits maintains.
To holding companies, the regime will allow to benefit from the corporate income tax rate reduction on income from dividends, interest, capital gains and services from non – EU subsidiaries without the requirements of job’s creation.
In relation to EU subsidiaries, Portuguese Law establishes that EU sourced dividends should benefit from a full participation exemption under the EU Parent – Subsidiary Directive provided that the requirements are fulfilled.
In relation to the companies licensed to operate within MIBC before the year 2001, they will continue to benefit from a full exemption from corporate income tax until the end of 2011. As of 2012, such companies will fall under the new regime now approved by the EU and which shall be valid until the year 2020.
In conclusion, the main focus of these measures is to promote development of the investment and economic activity in Madeira, regarding the principles of cohesion in EU and the regional development in this outermost region.
And for that purposes the extension of the regime of MIBC is a wise decision, as since 1980, date of creation of this special regime.
My last article on the review Simmons & Simmons Jan. 2008