EC approves Madeira international business centre

Francisco Cunha, Filipe Romão.

2007 Tax Analysts, n.º 3

The European Commission on June 27 announced the approval, under the EC Treaty’s state aid rules, of a new scheme that provides tax reductions of €300 million until 2020 for companies setting up in Madeira’s International Business Centre (IBCM) between 2007 and 2013. (For the announcement, see Doc 2007-15343 or 2007 WTD 125-16.)

The commission also approved regulations meant to extend the existing tax benefits for companies that hold licenses issued through the end of 2000. (Those companies currently benefit from a 0 percent corporate income tax (CIT) until the end of 2011, as well as other tax benefits.)

New Rules

The new regime closely resembles the one approved in the past for companies licensed during the 2003-2006 period, specifically regarding the required eligibility criteria.

Under the new scheme, companies licensed in the IBCM that intend to carry on business in Madeira between January 1, 2007, and December 31, 2013, will benefit from reduced CIT rates of 3 percent for 2007-2009, 4 percent for 2010-2012, and 5 percent for 2013-2020.

Access to the regime will be restricted to companies that meet specific eligibility criteria based on the number of permanent jobs created. Accordingly, CIT benefits will be limited by thresholds placed on each company’s taxable base, with the thresholds ranging from €2 million (when one to three new jobs are created) to €150 million (if more than 100 new jobs are created).

Companies seeking to benefit from the regime 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).

Further, as was the case with the previous 2003- 2006 regime, admission to the IBCM will be restricted to a number of activities included in a list drawn up by the Portuguese tax authorities on the basis of a statistical classification of economic activities in the European Union. For those purposes, financial and insurance intermediary activities, financial and insurance auxiliary activities, and ‘‘intragroup services’’ (coordination, accounting, and distribution centers) are explicitly excluded from the scope of the IBCM.

Although the amendments have not yet been approved by the parliament, they are expected to pass as part of Portugal’s 2008 Annual Budget Law. Further, the Madeira regional government reportedly is already accepting requests for licenses.

After much debate about the tax regime that will apply after 2011 for companies currently operating under licenses granted before the end of 2000, the European Commission has also determined that the CIT benefits will be extended for those companies.

Therefore, after 2011, those companies will fall under the new regime, with their CIT benefits scheduled to last until 2020. Although the terms of the transition are not yet completely clear, it appears that in 2012, the affected companies will be required to meet all the eligibility criteria for the new regime.

Some Considerations

 The European Commission’s approval of the new scheme allows the IBCM to again offer an attractive tax framework for international business agents seeking to invest in Madeira.

However, the terms of the new scheme should be carefully implemented by the Portuguese parliament, and business investors in general should be thoroughly informed of the conditions for tax benefits.

For example, the fact that the regime for companies licensed between 2007 and 2013 resembles, in essence, the one previously approved for 2003-2006 could leave business investors in a somewhat dubious position, mostly because the possibility of a reduced CIT rate (as attractive as it may sound) usually is overcome by the bureaucracy involved in creating jobs and the consequent need to limit the CIT benefits. Those considerations were, in fact, among the reasons why the 2003-2006 regime was not very successful.

Regarding that issue, and considering that the administrator of the IBCM (a private company, Sociedade de Desenvolvimento da Madeira) is renegotiating the terms and conditions of the current regime with the European Commission, further developments likely will occur, and new conditions (or, at least, some amendments to the current conditions) may still be approved by the European Commission (such as an increase in the thresholds for the limitation of the CIT benefits).

For companies licensed before the end of 2000, the Portuguese parliament also will have to solve several issues concerning the transition between taxbeneficial regimes regarding other tax benefits that currently apply for IBCM companies.

In fact, the Portuguese Statute of Fiscal Benefits contains a stamp tax exemption for those companies, and the exemption does not appear to have a time limit (as is the case with the CIT exemption). Further, apparently no time limit has been set for an exemption from withholding tax on payments of interest (excluding payments of interest to parent companies), royalties, or service fees by IBCM companies to non-Portuguese companies, or for the Portuguese property tax exemption currently in force for such companies. It is up to the parliament to determine whether those tax benefits should be revoked (as of 2011 or 2020).

Experience shows that these factors are all quite relevant to investors deciding whether to invest in a given country. As such, they should not be left to the sole consideration of administrative rulings issued by the Portuguese tax authorities.

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