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The network of double-taxation agreements entered into by Portugal continues to expand, giving companies operating in this country and, in particular, at the International Business Centre of Madeira, enhanced fiscal security in their operations with certain international markets.
Indeed, Portugal has recently entered into such agreements with Bahrain, Ethiopia, San Marino and Vietnam. In total, Portugal has thus far signed 79 double-taxation agreements, 73 of which are already in force.
See the updated list of DTAs on our website.
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The recording of our webinar Why Madeira is now available.
In this webinar dedicated to the International Business Centre of Madeira, our Managing Partner Frederico Gouveia e Silva explained the advantages of the jurisdiction for international investments, from a tax, operational and institutional perspective.
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New webinar: Why Madeira
18th of May at 3 pm
Is there still room for preferential tax regimes, like the one approved by the European Union for Madeira, in an era of globalization ruled by concepts such as BEPs, transparency and automatic exchange of Information?
The world of international tax planning has changed a lot since we held our first webinar dedicated to the International Business Centre of Madeira (IBC), in 2013. But the pillars at the foundation of this preferential tax regime, which remain still today the basis for its competitiveness, are as relevant as ever: efficiency, transparency and credibility. These principles have guided the development of the IBC since it was created and they are one of the reasons why investors are increasingly choosing Madeira as a basis for their international operations.
In our forthcoming webinar dedicated to the International Business Centre of Madeira, our Managing Partner Frederico Gouveia e Silva will explain the advantages of the jurisdiction for international investments, from a tax, operational and institutional perspective.
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Law 15/2017 was published in Portugal, prohibiting the issuance of bearer securities and creating a transitory regime for converting them into nominative shares for the amounts that existed at the date they came into effect.
Under this law, as of 4 May 2017, when it came into effect, all shares issued must be nominative and issuance of bearer shares shall not be permitted. Bearer securities shall be converted into nominative shares within a period of six months as of this date, it shall also be prohibited to transfer bearer securities, and the right to participate in the distribution of income associated with bearer securities shall be suspended.
Conversion of bearer securities into nominal securities will be the object of government regulation within the next 120 days.
You can access the entire text of the legislation here (in Portuguese).
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Yesterday, the Government Gazette published Presidential Decree no. 15/2017 which ratifies the Agreement between the Portuguese Republic and the government of the British Virgin Islands regarding exchange of information for tax purposes, signed in London on 5 October 2010 and approved via Assembly of the Republic Resolution no. 25/2017 on 6 January 2017.
Today, the Government Gazette also published Presidential Decree no. 17/2017, ratifying the Agreement between the Portuguese Republic and Guernsey regarding exchange of information on tax matters, signed in London on 9 July 2010 and approved via Assembly of the Republic Resolution no. 27/2017, on 6 January 2017.
For a long time, Portugal, the British Virgin Islands and Guernsey have been attempting to prevent financial and other crimes, particularly focussing on the financing of terrorism. On 21 February 2002, Guernsey politically agreed to adopt the principles of the Organization for Economic Cooperation and Development as regards effective exchange of information. On 2 April of the same year, the British Virgin Islands formally made a political commitment in writing regarding OECD principles on transparency and exchange of information, and subsequently actively participated in the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes.
It is therefore the common will of these territories to intensify and facilitate the terms and conditions that regulate the exchange of information for taxation purposes. The complete list of agreements can be consulted here.
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Portugal signs a new double taxation convention and two new agreements on the exchange of tax-related information
Double taxation convention between Portugal and the Principality of Andorra.
Under Presidential Decree 12/2017, published today in the Diário da República (Official Portuguese Gazette), the convention to avoid double taxation and guard against income tax evasion, entered into by the Portuguese Republic and the Principality of Andorra has been ratified. The convention was signed in New York on 27 September 2015 and approved by Parliamentary Resolution 22/2017, on 22 December 2016.
The main aim of this convention is to eliminate double international taxation in respect of the different categories of income earned by residents of both countries, and to guard against tax evasion. A more stable and transparent tax framework has been created for investors and other taxpayers in both countries. This has had a positive impact on the trade of goods and services, cash flows, technology transfers and the circulation of people between Portugal and Andorra.
Agreements on the exchange of tax-related information:
Portugal / Belize: Under Presidential Decree 13/2017, published today in the Diário da República (Official Portuguese Gazette), the agreement entered into by the Portuguese Republic and Belize on the exchange of tax-related information has been ratified. The agreement was signed in London on 22 October 2010 and approved by Parliamentary Resolution 23/2017, on 6 January 2017.
Portugal / Turks and Caicos Islands: Under Presidential Decree 10/2017, published today in the Diário da República (Official Portuguese Gazette), the agreement entered into by the Portuguese Republic and the Turks and Caicos Islands on the exchange of tax-related information has been ratified. The agreement was signed in London on 21 December 2010 and approved by Parliamentary Resolution 20/2017, on 6 January 2017.
These agreements are the result of a mutual desire by the territories in question to intensify and facilitate the terms and conditions regulating the exchange of tax-related information.
Check the full list of agreements here.
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The double taxation agreement between Malta and Mexico came into effect on 1 January 2015 and provides interesting conditions for the optimisation of investments in this market.
The treaty follows the same lines as the majority of such agreements entered into nowadays, incorporating the basic elements of the OECD’s Model Convention on Income and on Capital. However, like other treaties entered into with Mexico and as established in the United Nations Model Convention, it includes some provisions that grant the source State more rights to tax income that is generated there (as is the case with dividends, interest, royalties and capital gains), as well as a broad concept of permanent establishment.
The residence criterion established by the Convention is that of domicile, residence, place of management or any other criterion of a similar nature applicable in light of the legislation of the relevant contracting State.
The rule used to settle cases involving companies is the alternative provision set forth in paragraph 24.1. of the comments on Article 4 of the OECD’s Model Convention. This establishes that any disputes in determining residence are to be resolved by an amicable procedure to reach a mutual agreement, taking into account the place of effective management, the place of incorporation or any other factors deemed to be relevant.
In addition to the criterion used in Article 4 of the Model Convention, it is established that an association of individuals can only be considered resident for the purposes of this Convention if the income obtained is subject to tax as income of a resident of the State in question, whether as the association’s income or as the income of the individual members.
The convention entered into between Malta and Mexico includes a broad definition of permanent establishment, which encompasses service provision (including consultancy) by a company through its employees or other type of personnel contracted by the foreign company, whenever the duration of the activities in the other country exceeds 183 days in each 12-month period.
Under the convention, profits earned from the exploitation of ships or aircraft in international traffic will only be taxed in the State of residence of the company that earned the profits in question.
The definition of the concept of “international transport” is similar to that established in other agreements signed by Mexico. Under the wording of the Convention, the profits earned by a resident of a contracting State that are obtained from the exploitation of ships or aircraft in international traffic can only be subject to taxation in that State. The concept of profits includes earnings from the exploitation of ships or aircraft (on a full-time or per journey basis) as well as bareboat ship or aircraft charters when they are being operated in international traffic by the charterer and the profits are obtained by a resident of one of the contracting States, and whose business is the exploitation of ships or aircraft in international traffic.
Under this treaty, the profits derived from the use or hire of containers in international traffic (including tugs, barges and equipment related to the transport of containers) will also be treated as “international transport” whenever said use or charter is an inherent part of the exploitation of ships or aircraft in international traffic.
Normally, when Mexican companies distribute dividends to their non-resident shareholders, a withholding tax of 10% is applicable.
In Malta, dividends are not generally subject to withholding tax when the shareholders are not resident in Malta.
The Convention under analysis provides that dividends paid by a company that is resident in a contracting State to a resident of another contracting State will be taxed in the latter. The concept of dividends includes income from shares, jouissance shares or jouissance rights, mining shares, founders’ shares or other rights, with the exception of credits that allow participation in profits, as well as income subject to the same tax regime as income from shares under the laws of the State in which the company distributing the dividends is resident.
Taking this rule into account, and bearing in mind its very comprehensive and flexible Participation Exemption regime, Malta may be an excellent option in which to set up a holding that has investments in Mexico.
Under this Convention, interest earned in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, this interest may also be taxed in the Contracting State where it was earned and in accordance with that State’s legislation. However, if the effective beneficiary of the interest is a resident of the other Contracting State, the tax thus applicable may not exceed:
– 5% of the gross sum of the interest paid by a banking institution;
– 10% of the gross sum of the interest in all other cases.
In Mexico, the payment of interest to residents in another country is usually subject to the general withholding tax of 30%. In some cases, special taxes apply, such as 4.9% on interest paid to (or by) registered financial institutions, or 40% on payments made to tax havens, with a few exceptions.
In Malta, no withholding tax is payable on interest paid to residents in another country.
Royalties and Technical Assistance:
In Mexico, royalties paid to residents in another country are generally subject to a withholding tax of 25%. Furthermore, the use or fruition of brands and patents is subject to a withholding tax of 30%, while payment to some tax havens can involve a withholding tax of 40%. Under this treaty, a reduced tax of 10% applies to the payment of royalties to residents in Malta.
Technical assistance is not included in the definition of royalties described in this convention so, in principle, payments deriving from this type of service will be exempt in the source State, if they are considered business income, except in cases where there is a permanent establishment in that State.
Many double taxation agreements give the source State the right to tax capital gains obtained from the sale of shares in resident companies.
However, the double taxation agreement between Mexico and Malta provides for the right to tax to be shared with the source State in cases where the stake is at least 25% and has been held for at least 12 months, as well as when more than 50% of the gains obtained from the disposal of the shares derive from property assets located in the source State.
Gains obtained from the disposal of moveable goods which belong to the assets of a permanent establishment that a company from one Contracting State has in the other Contracting State, or moveable goods assigned to a fixed facility that a resident in a Contracting State has at its disposal in the other Contracting State for the purpose of exercising an independent profession, including gains derived from the disposal of said permanent establishment (either in isolation or as part of the company as a whole) or said fixed facility, may be taxed in that other State.
It is also established that gains deriving from the disposal of ships or aircraft used in international traffic, or of moveable goods assigned to the exploitation of said ships or aircraft, can only be taxed in the Contracting State in which the company’s effective place of management is located.
Limitation of benefits and anti-abuse rules
As a rule, Mexico includes anti-abuse provisions and limits on the granting of benefits in the treaties it enters into. This is done to protect its interests and safeguard against improper use of the conventions.
Thus, the treaty with Malta establishes that in order to qualify for benefits the income must be “subject to tax”. In cases where the income benefits from partial or total exemption, based on some special regime or administrative practices on the part of either of the States, the benefits provided for in the convention will be denied. To this end, a special regime is deemed to exist when the two Contracting States have so determined by mutual agreement.
The convention entered into between Mexico and Malta also includes another provision to guard against base erosion. Thus, if such income is paid under the scope of a transaction or series of transactions structured in such a way that the recipient of the income who is entitled to the benefits provided by the treaty receives such dividends and pays at least 50% of them, directly or indirectly, to another person who is not resident in the Contracting State in question and who, consequently, would not normally be entitled to the benefits or to benefits equivalent to those provided for in the convention, the articles relating to interest and royalties will not apply.
With modern legislation that protects the interests of investors, and an Administration and regulatory bodies that are not only rigorous and competent but also highly sensitive to business issues, Malta has become the ideal jurisdiction in which to develop businesses in international markets, including countries such as Mexico.
Download our Brochure Why Malta and learn more about the advantages of investing in Mexico through this jurisdiction.
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The New Year has brought few relevant changes in terms of taxes in Portugal, which is good news for the stability of the tax regime, stability being something that investors crave so much.
Below are some of the changes introduced within the scope of the 2017 Budget that could impact the companies of the International Business Centre of Madeira:
- Special payment on account: The limit was formerly €1,000 and now it has been reduced to €850;
- Urgent binding information: The maximum period for responding to a request for urgent binding information has been reduced from 90 to 75 days.
- Countries, territories or regions with regimes that are clearly more favourable: now also included on the list of countries, territories or regions with regimes that are clearly more favourable are those that, even though they are not included in the list published by the Portuguese government, do not have a tax identical or similar to a corporate income tax, or if it exists, the applicable rate is less than 60% of the corporate income tax rate in force in Portugal, whenever cumulatively speaking the tax codes and legislation expressly stipulate this and there are special relations between people and entities that reside in those places and the residents of Portuguese territory.
This rule is not applicable to EU Member States or members of the European Economic Area (provided that there is formal administrative cooperation on taxation equivalent to that which is in place within the European Union).
Also in this regard, the Isle of Man, Jersey and Uruguay were removed from the list of countries, territories or regions with a clearly more favourable regime, as of 1 January 2017.
- Updating of the IAS amounts and the Guaranteed Minimum Monthly Income: the indexation amount of social welfare (IAS) payments in 2017 is now €421.32. As such, the amount of the Guaranteed Minimum Monthly Income was adjusted and in Madeira it will be €568.14;
- Independent taxation rates: Representation costs, daily allowances and travel allowances for use of the worker’s own car will now be subject to independent taxation, regardless of whether or not these costs are deductible from corporate taxes;
- Tax losses: The rule determining that deductible tax losses must be calculated over a longer period of time has been eliminated. This change ensues from the reduction in the carry over period for tax losses, dropping from 12 to 5 years, which will apply to losses generated as of 1 January 2017. In order to prevent more recent losses from expiring, losses whose carry over period will expire first may be deducted first;
- SAF-T (PT) file: All corporate taxpayers that perform a commercial, industrial or agricultural activity with a stable head office or establishment in Portuguese territory shall be obliged to have the capacity to export SAF-T (PT) files. This obligation was previously only in place for those with computerized organised accounts;
- Conventional remuneration of shareholder capital: All companies residing in Portuguese territory may now deduct from their taxable profit the amount resulting from the annual application of a 7% rate on entries of up to 2 million euros, when establishing a company or increasing shareholder capital; for this purpose, both cash entries and the conversion of advances or loans to shareholders are taken into account. The deduction is made when calculating taxable profit for the taxation period when the aforementioned entries are made, and during the next five taxation periods;
- Extinction of benefits from periodic taxes: access to permanent or temporary tax benefits by taxpayers depends on the lack of tax debts. In the case of periodic taxes, this fact should be ascertained not only at the end of the year or taxation period when the taxation event took place, but also when the tax pertaining to the benefit is paid;
- Exemption from pledging guarantees: Requests for exemption from pledging guarantees in the case of irreparable losses to the taxpayer or in the case of a manifest lack of economic resources can only be refused by the Tax Authorities if there is strong evidence that the lack or inexistence of goods is due to wrongful actions committed by the interested party;
- Communication of invoice information SAF-T (PT): The deadline for reporting invoice information has been changed to the 20th day of the month that follows the month in which the invoice was issued (previously it was the 25th day).
NEWCO will be pleased to answer any questions regarding these developments or to provide clarifications regarding the impact that these changes may have on the companies of the International Business Centre of Madeira.
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On November 3 Decree-Law nr. 67/2016 was published, approving the Special Program for Reducing Government debt (Portuguese acronym PERES), which allows extraordinary settlement of debts to the Tax and Customs Authority and/or to the Social Security institute that have not been paid within their regular time limit – until May 31, 2016 for tax debts and until December 31, 2015 for Social Security debts.
According to the legislation approved by the Cabinet and announced by the government, taxpayers (individual and corporate) who are in default may pay the amount they owe in full until the 20th of December, thus benefiting from a complete pardon of interest owed and court costs, or they can agree to an installment payment plan with a maximum duration of 11 years (150 installments) with interest and without requiring pledging of a guarantee.
Those who wish to partake in this extraordinary settlement of debts to the Taxation Authority (tax debts) or to the Social Security Institute (social security debts) must do so electronically on the respective online portals up until 20 December 2016.
This new framework for extraordinary settlement has a new characteristic, namely that it is directed at taxpayers who wish to settle their situation even though they lack the financial capacity to pay their debts all at once. The government’s goal by doing this is to create a situation whereby companies who owe money to the state can still remain economically viable, while also helping families whose available income does not allow them to pay off accumulated debt.
NEWCO is at your disposal to answer any questions you may have regarding this program.
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