THE SERVICES AREA – MAIN CHARACTERISTICS

The aim of this short article is to give an introduction to Madeira for tax practitioners, specifically focusing the Services Sector.

In the seventies the idea developed to create an International Business Centre (IBC) in Madeira, with the first laws passed in the early eighties by the Portuguese Parliament. They were modified and significantly improved and perfected in the late eighties and early nineties. At all stages of this process, the approval of the EC, which was obtained initially for the setting up of the Centre, was also sought for the subsequent amendments to the laws.

This sets Madeira in the context of an EU fully approved IBC, benefiting from substantial financial and tax incentives. Madeira is fairly unique, as companies licensed to operate within the scope of the legislation enacted for this Centre, are Portuguese resident companies and are able to benefit from the application, not only of the Portuguese double tax treaties, but also of EU directives, such as the Parent/Subsidiary directive nº 90/435/CEE.

Thus Madeira is now an established and important international business centre, wholly within the European Union, consisting of a Free Trade Industrial Zone, an Offshore Financial Centre, a Shipping Register and a Services Centre.

The main sector used by International tax practitioners is the Services sector with over three thousand companies registered and licensed. Companies licensed to operate within this sector are typically used for:

  • holding investments
  • trading operations
  • accessing Portugal’s double tax treaty network
  • utilising the EU parent subsidiary directive
  • owning commercial and residential properties
  • holding intellectual property

Madeira companies are Portuguese companies for all purposes. Therefore they are automatically granted a VAT number and are subject to the legal regime established in the Portuguese Companies Code approved by the Decree Law number 262/86, of September 2nd, and subsequent amendments thereto.

The most common type of companies in Portugal are the Private Limited Liability Companies - "Limitada"- "Lda" - ("Sociedade por Quotas") and the Stock Corporations - "S.A." ("Sociedade Anónima").

Lda’s are widely used and have proved to be the best vehicle for Corporate Investments, due to their simple structure, when compared with Stock Corporations.

The Lda must have a minimum of two quotaholders and has a minimum paid up share capital requirement of 5,000 Euros (about USD 6,000). The capital, always denominated in Euros, is represented by registered quotas (no share certificates or other documents are issued) and the value of each quota can vary, but must not be less than 100 Euros. A quota is in effect a part ownership of the company, evidenced only by the registration certificate from the commercial registry, which can be accessed by any member of the public.

The "S.A." company has a minimum of five shareholders and a minimum capital requirement of 50,000 Euros (about USD 60,000). It has the advantage of being able to issue bearer shares but only when the capital is fully paid up; it is, however, subject to certain supervisory controls from which "Ldas" are exempt.

Stock corporations may issue most types of shares. Different types of ordinary shares are available with different voting rights and/or profit shares, (including redeemable preference shares). All the shares must have an equal value with a minimum of 1 cent of an Euro per share.

The minimum number of Directors for a "S. A." company, provided the share capital does not exceed 200,000 Euros, is one, although in practice a minimum of three are normally appointed. If the capital exceeds such an amount the minimum is three.

Neither a "Lda" nor a "S.A." has a maximum permitted number of Directors, although a "Sociedade Anonima" company must always have an odd number of Directors.

Technically there are no residential, nationality or professional qualification requirements to be a Director of a Portuguese company. However, companies domiciled in Madeira should have a locally constituted Board of Directors to ease compliance with the Decree Laws and fiscal requirements of the Portuguese companies and to provide substance. Foreign Directors must be registered in the local tax and social security offices.

Corporate Directors are not permitted in Portuguese "Limitada" companies, but "Sociedades Anonimas" can have a corporate director who must act through a nominated individual.

The office of Company Secretary has been introduced into Portuguese Law, in 1998. Only companies quoted in the stock exchange are obliged to appoint a Secretary. In all other cases, this is optional. The individual appointed Secretary of a company must have a University degree, preferentially in Law, and full knowledge of the Portuguese Companies Code.

Being a civil law jurisdiction, the names of the incorporators and of the directors of a Madeira company as well as other pertinent information concerning them is required to be publicly recorded. This information is included in the notarial incorporation deed and registered at the Commercial Registry of the Madeira Free Zone. It should be noted, however, that the names of the incorporators of a stock corporation (SA) are not subject to registration at the Commercial Registry.

Since August 1994, a Portuguese Decree Law permits a "unipersonal" company, "Lda" or "S.A.", with one single owner, but the expression "Sociedade Unipessoal" must be included in the company’s name and such companies may not own other unipersonal companies.

"S.A.s" can also be incorporated with one single owner, however the shares issued must be registered.

There is no stamp duty levied on either the authorised or issued share capital of a Portuguese company incorporated in Madeira nor on any subsequent capital increases. Madeira with its low licence fee is therefore a very attractive jurisdiction for international tax planning structures requiring a high paid up capital.

In common with all Portuguese companies, the Portuguese legislation requires that "Ldas" and "SAs" maintain formal books of accounts in the approved format and in the Portuguese language at the company's registered office.

The standard corporate income tax rate in Madeira/Portugal is currently 34% (IRC). However companies duly licensed to operate within the institutional scope of the Free Zone of Madeira enjoy a very attractive tax regime which includes the following most significant tax related advantages (provided all accounting obligations are met and the annual license is fully paid up on a regular basis):

  • no corporate tax on profits obtained outside Portuguese territory until and including 2011;
  • no capital gains taxes;
  • no tax on investment profits;
  • no withholding tax on profit distributions, interest or royalties paid;

- no stamp duty;
- no exchange controls;
- no local customs duties on imported goods;
- no gift or inheritance taxes; and

There are no specific tax advantages for individuals, either residents or non residents in Madeira, except non-residents who receive dividend income (but not salaries) gross, without withholding tax, from Madeira companies licensed to operate in the IBC. Resident individuals are subject to the same tax rules as in mainland Portugal.

The Portuguese Corporate Code expressly allows a Portuguese/Madeira company to move its registered office from Portugal to another country maintaining its corporate personality if the law of the recipient country so consents. Redomiciliations into Portugal/Madeira are also allowed, provided it is permitted by the law of the former jurisdiction.

These are the main rules and characteristics of companies that are licensed to operate within the services sector of the Madeira IBC. It is clear that much more could be said about this sector in greater detail and we, MMCL would be happy to discuss this and any other matter related to the IBC with any interested parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to iofch@mondaq.com