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6 Common Myths about the International Business Centre of Madeira
21 Mar 2024 . By Roberto Castro Mendonça - Tax Lawyer

6 Common Myths about the International Business Centre of Madeira

When it comes to the International Business Centre of Madeira, getting the facts straight is extremely important: it’s the foundation of informed decision-making and allows you to anticipate risks and build trust.

Throughout our 30 years assisting clients in Madeira, we have encountered several myths and inaccuracies that can lead to harmful misinformation.

The reason for this is simple: there have been different regimes and deadline extensions over the years, and sometimes, the players need help keeping pace with updating information.

This article has, therefore, one single (but ambitious) intent: debunking six current and common myths about the Madeira International Business Centre (“IBC”) special tax regime.

Have you never heard about the Madeira IBC? Get in touch with our team and learn more.

Myth 1 – The Madeira IBC tax regime has been cancelled or is closed for new entries.

There is no other way of saying it: this is 100% false. The regime has never been cancelled (in truth, it has been in place since the late 80s, with different versions), and new entries are always welcome.

As of January 2024, this is what you need to know:

  • The Madeira IBC regime allows for registrations of new companies at least until 31 December 2024, i.e., you are free to incorporate a new company or transfer an existing company to the Madeira IBC; and
  • The tax benefits of the regime are guaranteed until 31 December 2028.


Further deadline extensions are possible and even expected, as they are already allowed by the European Union (“EU”).

MYTH 2 - Madeira is an offshore jurisdiction.

Madeira is NOT an offshore, NOT a tax haven, NOT a tax shelter, NOT a non-cooperative jurisdiction - in case you find more synonyms, keep this in mind because the answer will be the same.

For fact-checking, you can see, for instance, that Madeira is not (and has never been) a part of the EU list of non-cooperative jurisdictions (available here) or any other list from the OECD or relevant international public or private institutions.

Tax jargon aside, the Madeira IBC tax regime provides lower taxes but with serious commitments to all the best practices, such as international cooperation, transparency and exchange of information. The reason is simple: non-compliance would result in the regime being challenged immediately by our EU peers.

In addition, the special tax regime of the Madeira IBC was originally approved under the State aid rules of the EU, which meant that every single tax incentive provided was negotiated with the EU Commission to ensure compliance with EU regulations that promote fair competition and prevent harmful tax practices. More recently, the Madeira IBC regime has been included in the General Block Exemption Regulation, which means that its application no longer depends on the approval of the EU Commission, as it no longer qualifies as state aid.

There is also one relevant layer at a national level: a Madeira IBC company has the same rights and obligations that fall under any other Portuguese company. Hence, full compliance with Portuguese law (and, consequently, EU law) is mandatory.

Myth 3 – Madeira companies do not need substance

Myth 3 could fall within Myth 2, but still, we are highlighting it to demonstrate the regime's commitment to transparency and the best international tax practices.

We could write a thesis on substance considerations and outline some well-known tax concepts you have read several times. Still, the bottom line is: in case you are looking for a jurisdiction to implement an artificial arrangement without any economic rationale, without creating value or having ties to the region (through, for instance, the hiring of one employee that is a tax resident of Madeira, regardless of being a Portuguese national or not), you should look elsewhere.

Believe us: for a small economy like ours, it’s hard to abdicate from a certain profile of investors that have a substantial value, but this is a commitment that Madeira has with the EU and that it is not negotiable.

The good news is that, to the extent you are willing to comply with the substance requirements, you have a unique set of tax benefits that includes the EU's lowest corporate income tax rate.

On a side note, we emphasise that due to the specific characteristics of Madeira’s local economy, putting in place adequate substance measures is less expensive than in other EU jurisdictions, without this representing any demise in their quality.

Myth 4 – Madeira companies cannot benefit from Tax Treaties or EU Conventions

Madeira, being a region of Portugal, has access to the tax treaties and agreements that Portugal has in place with other countries, inside or outside the EU.

Having said this, Madeira companies outside the IBC can benefit from the full network of tax treaties entered by Portugal. In contrast, companies in the Madeira IBC have only two key exceptions: the tax treaties with Brazil and the United States, which expressly exclude the Madeira IBC companies. Nevertheless, this effect can be completely offset, for instance, through the exemption from withholding tax provided by the IBC regime on the upstream of several types of income.

To understand this topic clearly, it should be noted that not all companies with head offices in Madeira are a part of the IBC: this regime is more specific (and beneficial) for companies with international activities – hence the need to have experienced partners such as NEWCO to navigate all the cross-border matters that will arise.

Simply put, companies of Madeira that are outside of the IBC pay corporate income tax at a rate of 14.7%, while companies within the IBC benefit from a corporate income tax rate of 5%.

Myth 5 – Madeira IBC companies are outside the VAT system

Madeira, being an autonomous region of Portugal, is part of the Portuguese Value Added Tax (“VAT”) system and follows the EU VAT rules, including rates, exemptions, and reporting requirements. In fact, a Madeira IBC company has the same reporting requirements (VAT or non-VAT related) as any other Portuguese company.

Immediately upon incorporation, a Madeira IBC company has a valid VAT number that can be used in every transaction. There is no need for a separate application.

MYTH 6 – Madeira IBC companies cannot have any activity in Portugal or Portuguese shareholders

The main benefits of the Madeira IBC regime are for companies with international activities. That’s a fact, and the reason is simple: the 5% corporate income tax rate only applies to profits derived (i) from operations carried out with non-Portuguese entities or (ii) from operations carried out with other companies registered in the Madeira IBC (this latter case is a bit unusual, though).

However, Madeira IBC companies are still allowed to conduct business in Mainland Portugal: they are, of course, completely free to have Portuguese clients.

The only difference is that the portion of profits arising from operations with Portuguese entities will be taxed at the standard corporate income tax rate of Madeira, i.e., 14.7% (considerably lower than the 21% applicable in Mainland Portugal), with the remaining part of eligible income still being taxed at the special 5% rate.

Moreover, Madeira IBC companies may have Portuguese shareholders, regardless of whether they are companies or individuals. Indeed, there is no restriction purely based on nationality, although tax residents of blacklisted jurisdictions (as specified in a Portuguese list available here) will have their benefits restricted.

Our final thoughts on the International Business Centre of Madeira

Debunking myths is always more complicated than creating and/or spreading them, but we gave our best shot and hope to have made clear that Madeira remains on the table for companies with an international outlook.

The Madeira IBC regime has its future guaranteed (at least) until the end of 2028. It will continue to play a fundamental role in the diversification and development of the local economy.

Are there any reasons to choose Madeira? Yes!

  • We have a strong network of infrastructures and a 5G network on the entire island;
  • We have a friendly community that welcomes expats, digital nomads and foreign investors;
  • We have a dedicated and dynamic local talent pool;
  • We have a combination of mild climate and diverse landscapes that allow for year-round practice of water sports, hiking and other outdoor activities;
  • We have low crime rates, high safety records and well-regarded public services;
  • We have the same time zone and more than 12 daily flights connecting Madeira to Lisbon/Porto (1h30m) - direct flights to other major EU capitals such as London, Madrid, Paris, Amsterdam or Berlin are also available.

Each project requires pre-analysis, proper structuring, and implementation, but we are here to assist every step of the way.

 

Did you find the above interesting and have any questions?