rpba - madeira free zone - 29.10.2014
TRANSCRIPT
Overview
• Introduction
• The Critical Issues
• Taxation of MFZ Companies
• Madeira’s Practical Structures
2
Introduction
• Main Taxes
• Business Climate in Madeira
• Value Added Tax
• Personal Income Tax
• Corporate Income Tax
3
How to spell Madeira (frequent client answers)
• Madiera - NO
• Maderia - NO
• Madieria - NO
• Maidera - NO
• Maideira - NO
• Maideria - NO
• Madeira - YES
4
Main Taxes in Portugal
5
Value Added Tax (VAT) Imposto sobre o Valor Acrescentado
Personal Income Tax (PIT)Imposto sobre o Rendimento das Pessoas
Singulares
Corporate Income Tax (CIT)Imposto sobre o Rendimento das Pessoas
Colectivas
Social Security (SS) Segurança Social
Stamp Tax (ST) Imposto do Selo
Property Transfer Tax (PTT)Imposto Municipal sobre as Transmissões
Onerosas de Imóveis
Property Ownership Tax (POT) Imposto Municipal sobre Imóveis
Gift and Inheritance Tax (GIT)Currently Stamp Tax (individuals) or
Corporate Income Tax (corporate entities)
Main Benefits of the MFZ
i. Low CIT and PIT taxation on foreign source income derived from activities
carried out in the institutional scope of the MFZ by entities settled therein – tax
rate of 5% applicable between 2013 and 2020.
ii. CIT and PIT exemption on royalties and service fees paid by entities settled in
the MFZ to non-residents.
iii. CIT and PIT exemption on interested paid to non-residents by entities settled
in the MFZ on loans contracted to finance the investments and regular
activities of such entities.
iv. Stamp Tax exemption for operations in the MFZ.
v. POT exemption on the real estate directly used to carry out the activity of the
entities licensed to operate within the institutional scope of the MFZ.
vi. PTT and Stamp Tax exemption on the acquisition. real estate for their setting
up by entities in the MFZ and of participations in those entities6
Main Features of the Portuguese CIT
i. 100% dividend exclusion applicable to dividends from Portuguese, EU/EEA and Third
State subsidiaries.
ii. Underlying tax credit for non-exempt dividends.
iii. 100% exclusion for capital gains on shares and related equity instruments on
Portuguese, EU/EEA and Third State subsidiaries.
iv. 50% exclusion for capital gains on most fixed assets (excluding shares) via rollover relief.
v. 50% exclusion of certain industrial property (“IP”) income.
vi. Exemption method available for foreign permanent establishment (“PE”) income.
vii. Exemption for capital gains on Portuguese shares by Portuguese, EU/EEA and Third
State parent companies.
viii. Exemption for dividends distributed by Portuguese companies to Portuguese, EU/EEA
and Third State parent companies.
All these general features may be enjoyed by MFZ entities in addition to the specific benefits
applicable therein.
7
Business Climate in Madeira
• Strong Political Stability.
• Excellent Climate (16ºC winter - 22ºC summer, on average).
• Full EU Membership (including freedom from Exchange Controls,
access to the Parent-Subsidiary Directive, the Banking and
Insurance Directives and the EU shipping cabotage).
• Double Tax Treaty Access (with limitations in the cases of USA,
Brazil, Canada, Spain, Ukraine).
• Waived from the EU Code of Conduct and the OECD Harmful Tax
Competition assessments, and not blacklisted by the FATF, the FSF,
the OECD and many countries.
• Limited Tax Holiday and access to EU and Portuguese subsidies.
8
Value Added Tax
9
Mainland Portugal:Madeira (even outside
the MFZ):
Ordinary 23% Ordinary 22%
Reduced I 6% Reduced I 5%
Reduced II 13% Reduced II 12%
Personal Income Tax (2014)
10
Minimum rate (for income up to Euro 7.000) 14,5%
Marginal rate (for income over Euro 40.000
up to Euro 80.000)45%
Marginal rate (for income over Euro 80.000
up to 250.000)
50,5%
Marginal rate (for income over Euro 250.000)53%
Corporate Income Tax
11
Mainland Portugal and Madeira,
outside MFZ:
CIT rate 23%
Municipal surcharge (Maximum
1,5% on taxable income)
1,5%
26,5%
State/Regional surcharge on income
from €1.500.000 up to €7.500.0003%
State/Regional surcharge on income
from €7.500.000 up to €35.000.000 5%
State/Regional surcharge on income
above €35.000.000 7%
MFZ:
• Activity:
- Industrial / Shipping / Services: 5% (2013-2020).
- Financial: no licenses issued since 1 January, 2001;
currently outside of the institutional scope.
• No Municipal surcharge on exempt income;
income taxable at the reduced 5% and at the
standard CIT rates is liable to Municipal surcharge
at a rate of up to 1,5% depending on the
municipality.
• No State/Regional surcharge on exempt income;
income taxable at the reduced 5% rate and at the
standard rate may be liable to State/Regional
surcharge at the same rates in force in Mainland
Portugal and Madeira outside MFZ - but this is
doubtful.
MFZ 5% rate - requirements
• Activity requirement: start of activity within 6 months (international services) or one
year (industrial or shipping) from the date of the license.
• Eligibility requirement: (i) 1-5 jobs in the first six months of activity + minimum
investment to be performed in the first two years of activity or (ii) 6 jobs in the first
six months of activity.
12
Job creationMinimum Investment in
assets
Taxable income enjoying the
reduced rate as from 2013
1 - 2 € 75,000 € 2.73 million
3 - 5 € 75,000 € 3.55 million
6 - 30 - € 21.87 million
31 - 50 - € 35.54 million
51 - 100 - € 54.68 million
over 100 - € 205.5 million
The job creation requirement
• Permanent, uncertain-term and fixed-term contracts;
• Contracts under the service commission regime;
• Part-time contracts;
• Tele-working;
• Intermittent employment, even for several employers, provided that all of
them are under the MFZ regime;
• Appointment of members of the statutory bodies from companies under the
MFZ regime, provided that the relationship is comparable to an employment;
• Occasional employment contract / hiring-out of labour, provided that the
company under the MFZ regime bears the wages costs, in such a way that
the relationship is comparable to an employment;
• Others relationships comparable to an employment for Personal Income Tax
and Social Security purposes;13
A job for this purpose is an employment contract
according to the Portuguese Labour Law, including:
The € 75,000 minimum investment requirement
• Applicable only in the case of creation of less than 6 jobs in the
first six months of activity.
• In the acquisition of fixed assets, whether tangible or intangible
(according to an Opinion of the Regional Director of Finance in
Madeira, as per the Portuguese Accounting Normalization System
(SNC), all assets included in the class “Investments”, including
financial investments, qualify as fixed assets, but we prefer a
narrower and safer criterion, excluding the latter).
• To be performed in the first two years of activity.
• Assets do not have to be located in Madeira.
14
General CIT rates
15
• The general CIT rate of 23% is applicable to:
- income derived from Portuguese source (except MFZ); or
- income above the referred limits of taxable income enjoying the reduced
rate.
• A reduced rate of 17% is applicable to entities legally
certified as SMEs, up to € 15.000.
The critical issues• International developments on tax harmonization.
• Substance and effective management requirements for licensed entities.
• Scope of activities of Pure and other Holdings.
• Scope of activities of service companies (non-credit and non-financial).
• Special tax on undocumented / entertainment and motor / tax haven expenses.
• Special payment on account (PEC) of CIT.
• State / Regional surcharge.
• Transfer pricing regulations.
• Restriction on the deductibility of financing costs.
• Due diligence matters.16
• MFZ has been waived from the EU Code of Conduct analysis (which enables the
enforcement of the Netherlands Double Tax Treaty, for instance).
• MFZ has been waived from OECD harmful tax competition analysis.
• The MFZ regime has changed substantially starting from January 1, 2012, but not due to
IMF/ECB/European Commission scrutiny.
• The European Commission, by decision of 2 July 2013, has approved the amendment of
the State Aid regime currently in force (N 421/2006, as approved by Commission
decision of 27 June 2007), allowing for an increase of the taxable income eligible for the
reduced CIT rate.
• The European Commission, by decision of 8 May 2014, has authorized the extension of
the regime for entries taking place until 31 December 2014 (previously new entries into
the regime were barred from 30 June 2014 onwards). This extension has been
transposed into Portuguese domestic law on September 30 and between 1 July 2014
and the latter date new entries into the regime were nevertheless accepted by the entity
managing the Free Zone and by Tax Authorities in Madeira.
• A new State Aid regime (regime IV), applicable to entities registered after 1 January
2015, is already being negotiated with the European Commission.
17
International developments on tax harmonization
• E-business (Internet service and content providers), telecommunications
and holding of participations are mobile activities that may be easily tax
driven to the MFZ but loosing tax revenue countries will try to challenge
these migrations.
• The 2007-2020 EU State Aid regimes for MFZ companies and their
realistic and sensible interpretation by the Regional Administration.
• The branch and the trust as relatively unexplored alternatives to
substance and effective management requirements.
18
Substance and effective management requirements for licensed entities
• A popular myth: holding companies not incorporated as Sociedades
Gestoras de Participações Sociais (SGPS) must be mixed (holding and
operating) companies.
• The legal permission of own portfolio management for commercial
companies vs. the prohibition of exclusive holding activity by non-SGPS
companies.
• Contradiction between social object and factual object is not the same
as double social object / partial exercise of a double social object.
• The mixed, impure and atypical holding companies.
19
Scope of activities of Pure and Other Holdings
• Credit Institutions and the receiving of deposits for their own account,
towards the Public.
• Credit Institutions and Financial Companies and the professional
exercise of listed activities.
• Non-Public (bonds, commercial paper, shareholders loans, labour loans,
payments in advance or outstanding, treasury operations within group
companies, vouchers or cards). The case of the specific and isolated
party to a contract outside the group. The legal permission of own
portfolio management. The Sociedades Gestoras de Património.
• Cash pooling and passive investment. The Sociedades de Simples
Administração de Bens.
20
Scope of activities of service companies (non-credit and non-financial)
• The special tax is a replacement of potential PIT / CIT avoided by the beneficiary of the expenses.
• The scope of the MFZ benefits does not encompass this situation.
• The rates are as follows:
- Costs with passenger and mixed passenger and cargo vehicles - 10% / 27,5% / 35%, depending on acquisition cost;
- Entertainment expenses – 10%;
- Undocumented expenses – 50%;
- Payments to entities established in blacklisted tax havens with more favorable tax regimes - 35%;
- Per diem allowances and compensation for the use of private vehicle paid to workers and not invoiced to clients – 5%;
- Redundancy payments made to directors and managers, unless related to the fulfillment of productivity goals set out in
contract – 35%;
- Bonuses paid to directors and managers – 35%;
- Expenses or charges related to bonuses and other variable compensation paid to managers, administrators and
managers - 35%;
- Dividends distributed to tax exempt entities when the shares granting entitlement to the dividend are held for less than
one year – 23%;
- All previous rates are increased by 10% in the case of payments made by entities with a tax loss in the relevant year.
21
Special tax on undocumented /entertainment and motor /tax haven expenses
• Under the black letter of the law, entities established in the MFZ were liable to
the PEC even when the tax exemption regime was in force, although it was
never charged to them.
• In 2004 a rule was enacted expressly exempting certain kinds of entities from
the PEC, namely fully CIT exempt entities such as the State, municipalities, etc.
This rule did not include a reference to taxable entities with exempt income, as
was the case of entities established in the MFZ.
• Tax Authorities started assessing the PEC to MFZ entities under the exemption
regime in that year.
• Several court decisions ruled against the assessment, based on the ability to
pay principle (entities with only exempt income had no duty to pay on account of
undue tax).
• Starting from 2006, a new rule was enacted, providing for a PEC limited to
€1.250 (€ 1.000 since 2009) for entities only deriving tax exempt income.
22
Special payment on account (PEC) of CIT
• That rule was declared unconstitutional by a decision of the Constitutional Court
in 2009, also based on the ability to pay principle.
• In 2010 a new rule was enacted, providing for an exemption of PEC for entities
with only exempt income.
• From then on the limitation to €1.000 was abolished and MFZ entities became
liable to PEC according to the general rules, provided that they:
- had non-exempt income (such as Portuguese non-MFZ source income) and were under the
previous exemption regime; or
- were already under the rate reduction regimes.
• The MFZ exemption regime ended in December 31, 2011, which means that all
MFZ entities are now liable to PEC according to the general rules, ranging
between €1.000 and €70.000, levied at the rate of 1% on the previous year
turnover.
• The Tax Authorities have already issued a ruling stating that the effect of the
reduced CIT rates in force in the MFZ is not to be taken into account when
computing this prepayment.
23
Special payment on account of CIT
• The CIT Code currently establishes a surcharge of 3% on income from
€1.500.000 up to €7.500.000, of 5% on income from €7.500.000 up to
€35.000.000 and of 7% on income above €35.000.000.
• This surcharge was enacted in 2010 (with different brackets and rates).
• However, the surcharge was “transposed” into Madeira legislation by a
Regional Legislative Decree, issued by the Parliament of the
Autonomous Region of Madeira, under its powers to legislate in tax
matters.
• Such transposition was apparently devoid of any effects, as:
a) The surcharge established in the CIT Code is applicable to the entire
Portuguese territory, regardless of such “transposition”.
b) The Regional Legislative Decree created a regime which was an exact
copy of the surcharge established in the CIT Code and which has been
updated to remain exactly similar to it whenever changes to the CIT Code
are made. 24
State / Regional surcharge
• There is, however, one significant difference between both regimes.
• In 2011 a rule was enacted by the Parliament of the Autonomous Region of Madeira exempting entities
established in the MFZ from the surcharge, whether they were under the exemption or the reduced rate
regimes (this rule was enacted following an administrative order of the Regional Finance Secretary, issued in
2010 and providing for the same surcharge exemption for MFZ entities. This administrative order was however
of infra-legal status).
• This rule was not included in the CIT Code provisions establishing the CIT surcharge.
• However, it is a fact that the revenue raised by the CIT collected from entities established in Madeira, even in
the MFZ, belongs to the Regional Government.
• Could the Regional Parliament legislate to exempt MFZ entities from the surcharge? Is the exemption legal?
• In our view it is doubtful, as the creation of this exemption was not comprised in the list of legislative powers in
tax matters granted to the Regional Parliament by the Regional Finance Law; moreover, this Law expressly
provides that all matters relating to the MFZ regime must be dealt with by a law of the National Parliament (or
of the National Government, acting under an authorization to legislate granted by the Parliament).
• Regional legislation has been amended in a try to clarify the issue in 2014, but doubts still remain.
• Therefore, although the surcharge was generally not assessed (this has happened in only 2 cases, as far as
we are aware) in regard of MFZ entities since 2010, it is not guaranteed that it will not be so in the future, with
retroactive effects.
• The are rumors according to which Tax Authorities may accept that the State/Regional surcharge is only due
on taxable income liable to the standard CIT rates (thus not encompassing income liable to the reduced 5%
rate). No formal ruling has been issued to reflect such position and its validity is therefore also unclear.
25
State / Regional surcharge
• Transfer pricing rules are specifically set in Article 63 of the Corporate
Income Tax Code and on the Ministerial Order (Portaria) no. 1446-C/2001,
of 21 December – the latter is pending revision following the Reform of the
CIT Code.
• The general rule is that taxpayers are deemed associated with a direct or
indirect participation of 20%.
• Profitability of companies vs. MFZ exemptions.
• Companies whose turnover in the previous year has not exceeded
€ 3.000.000 are waived from documentation compliance requirements.
• Although is not likely that the Portuguese Tax Authorities will focus their
efforts and audits on CIT low-taxed MFZ companies, the fact is that some
have been inspected due to their high turnover.26
Transfer pricing regulations
• New rules were introduced by the Law approving the Reform of the CIT Code in this regard
• Financing costs are now only deductible up to:
(i) € 1.000.000 (previously €3.000.000); or
(ii) A percentage of earnings before net financial costs, depreciation and taxes - EBITDA
(70% for 2014, decreasing 10% each year until reaching 30% in 2018);
whichever is higher
• Amounts exceeding these limits may be carried forward and deducted in the subsequent 5
years, provided that the deduction relating to those years is below them. Amounts not used
under the percentage of EBITDA limit (but not under the €1.000.000 limit) may also be
carried forward for the same period and used to absorb excesses verified in regard of it in
subsequent years.
• The regime applies to permanent establishments of non-resident entities.
• The regime applies proportionally in the case of taxable periods shorter than one year (such
as on the starting-up or winding-down of business).
• Tax groups may opt to apply the regime on a consolidated basis for a minimum period of 3
years, subject to certain restrictions, although the option does not increase any of the
above limits (previously the option was not available and the regime applied on an
individual basis even to the members of a tax group). 27
Restriction on the deductibility of financing costs
• Are you getting consulting services invoices from mainland Portugal at the 23%
VAT rate?
– You shouldn’t. VAT should be self-assed under the reverse charge mechanism and
the correct rate is 22%. See Articles 2 (1) (e) and (g), and (5), and 6 (6) (a) of the
VAT Code and Article 1 (2) and (3) of Decree-Law no. 347/85, of 23 August.
• Are you notifying Portuguese Foreign Trade Institute (ICEP) on the
incorporation of MFZ companies / foreign investment operations?
– You no longer need to do it. Decree-Law no. 321/95, of 28 November, was revoked
by Decree-Law no. 203/2003, of 10 September.
• Are you notifying the Bank of Portugal on foreign accounts held by MFZ
companies / branches, of financial operations with non-resident entities and of
assets and liabilities vis-à-vis non-residents?
– You should. See Decree-Law no. 295/2003, of 21 November, Law no. 22/2008, of
13 May, Instructions 34/2009 and 27/2012 of the Bank of Portugal, EC Directive no.
88/361, of 24 July, and EC Regulation no. 184/2005, of 12 January.
28
Due diligence matters (I)
• Are you submitting monthly statistic reports to the Bank of Portugal?
– You should, as this report is mandatory to all entities established in Portugal under
Instruction 27/2012 of the Bank of Portugal. The report should be filed electronically
by the 15th working day following the month to which it refers.
– Entities with less than € 100 000 of economic and financial operations per year with
non-resident entities are exempt from reporting.
• Are you notifying Portuguese Securities and Exchange Commission (CMVM) on
the issuing of shares in Sociedade Anónima companies?
– You shouldn’t, unless the company has a “Sociedade Aberta” status or the company
is listed in a stock exchange. See Article 110 (2), of the Securities Code.
• Are you notifying the Portuguese Tax Administration on the transfer for a
consideration of shares in Sociedade Anónima companies?
– In principle you should. See Articles 138 of the Personal Income Tax Code and 129
of the CIT Code.
29
Due diligence matters (II)
• Are you obtaining a certificate of tax residence or equivalent document from
the royalty and service fee recipients?
– You should. See Article 33, paragraphs 14 and 15, of the Tax Incentives Statute.
• Are you appointing a contact person in Madeira?
– Although this requirement was established in an administrative order of the
Regional Secretary for Planning and Finance of Madeira, and therefore it does not
have legal status, MFZ entities directly carrying out commercial, industrial and
services activities (which does not encompass pure holdings established as an
SGPS) should appoint a staff member with professional domicile and personal
residence in Madeira as a contact person before the MFZ Office and the
Sociedade de Desenvolvimento da Madeira, the entities managing the Free Zone.
30
Due diligence matters (III)
31
Taxation of MFZ companies
• Dividend received exclusion (dividends received by Portuguese companies).
• Underlying tax credit (for non-excluded received dividends).
• Capital gain full and partial exclusions (capital gains made by Portuguese companies).
• 50% Exemption for IP income and 20-year goodwill amortization.
• Excluded foreign PE income.
• MFZ reduced rate (taxable income received by MFZ companies).
• Capital gain exemption (capital gains made by shareholders of Portuguese companies).
• Dividend withholding tax exemption (dividends paid to foreign shareholders of
Portuguese companies).
• Taxation of holdings (summary).
• Blacklisted jurisdictions.
Dividend Received Exclusion (2014)
32
REQUIREMENTS FOR THE 100% EXCLUSION ON DIVIDENDS RECEIVED BY
PORTUGUESE COMPANIES FROM PORTUGUESE SUBSIDIARIES:
• 5% shareholding (capital or voting rights) – direct or both direct and indirect (direct
participation is always required).
• 24-month uninterrupted holding period completed either before or after the dividend
distribution.
• The receiving company must not be taxed under the Portuguese tax transparency regime.
• Dividends only qualify for the exclusion if (a) they are not tax deductible at the sphere of the
subsidiary and (b) (i) if the subsidiary is not subjectively tax exempt or (ii) if the subsidiary
is subjectively tax exempt, they are not dividends distributed out of objectively exempt
income at lower levels of the chain of participations.
• Dividends qualifying for the exclusion are not liable to withholding tax (interestingly, provided
that there is an uninterrupted holding period of only 1 year).
Dividend Received Exclusion (2014)
33
REQUIREMENTS FOR THE 100% EXCLUSION ON DIVIDENDS RECEIVED BY
PORTUGUESE COMPANIES FROM EU/EEA SUBSIDIARIES:
• 5% shareholding (capital or voting rights) – direct or both direct and indirect (direct
participation is always required).
• 24-month uninterrupted holding period completed either before or after the dividend
distribution.
• The receiving company must not be taxed under the Portuguese tax transparency regime.
• The subsidiary must be subject and not exempt from one of the taxes listed in the Parent-
Subsidiary Directive or from a tax comparable to the Portuguese CIT, in the latter case at a
nominal rate of at least 60% of the CIT rate in force (i.e., 13,8%), in both cases with the
exception of distributions by entities developing activities not targeted by the Portuguese CFC
regime.
• Dividends do not qualify for the exclusion if they are tax deductible at the level of the
subsidiary.
Dividend Received Exclusion (2014)
34
REQUIREMENTS FOR THE 100% EXCLUSION ON DIVIDENDS RECEIVED BY
PORTUGUESE COMPANIES FROM NON-EU/EEA SUBSIDIARIES:
• 5% shareholding (capital or voting rights) – direct or both direct and indirect (direct
participation is always required).
• 24-month uninterrupted holding period completed either before or after the dividend
distribution.
• The receiving company must not be taxed under the Portuguese tax transparency regime.
• The subsidiary must be subject and not exempt from a tax comparable to the Portuguese
CIT at a nominal rate of at least 60% of the CIT rate in force (i.e., 13,8%), except for
distributions by entities developing activities not targeted by the Portuguese CFC regime.
• The subsidiary must not be established in a blacklisted jurisdiction.
• Dividends only qualify for the exclusion if (a) they are not tax deductible at the level of the
subsidiary and (b) (i) the subsidiary is not subjectively tax exempt or (ii) if the subsidiary is
subjectively tax exempt, the dividends are not distributed out of exempt income at lower
levels of the chain of participations (this last criterion is applicable to distributions by exempt
subsidiaries developing activities not targeted by the Portuguese CFC regime).
Underlying tax credit (2014)
35
FOREING SOURCED DIVIDENDS (BOTH FROM EU/EEA STATES AND THIRD STATES)
NOT ELIGIBLE FOR THE 100% EXCLUSION QUALIFY FOR AN UNDERLYING TAX
CREDIT PROVIDED THAT THERE IS:
• 5% direct or indirect (no direct participation required) shareholding (capital or voting rights).
• 24-month uninterrupted holding period completed either before or after the dividend
distribution.
• This option implies considering the proportion of income tax paid by directly and indirectly
held foreign subsidiaries at their States of residence corresponding to the dividends
distributed to the Portuguese parent as taxable income in the latter’s sphere.
• Income tax paid by subsidiaries established in blacklisted jurisdictions or by subsidiaries
held through them is not eligible for this credit.
• The credit corresponds to the lowest of: (i) the proportion of income tax paid by directly and
indirectly held foreign subsidiaries corresponding to the dividends distributed to the
Portuguese parent or (ii) the Portuguese CIT that would be payable on the distributed gross
dividends, plus the income tax paid abroad by the distributing subsidiaries, deducted of
related expenses and of withholding tax levied at source and credited in Portugal.
• This indirect tax credit is deducted only after the standard credit to avoid international
double taxation.
Capital gain 100% exclusion (2014)
36
REQUIREMENTS FOR THE 100% EXCLUSION ON GAINS MADE BY PORTUGUESE
COMPANIES ON THE SALE OF SHARES AND OTHER EQUITY INSTRUMENTS
RELATING TO SUCH SHARES:
• 5% shareholding (capital or voting rights) – direct or both direct and indirect (direct
participation is always required).
• 24-month uninterrupted holding period must be completed at the time of disposal (≠ from
100% dividend exclusion regime).
• The selling company cannot be subject to the Portuguese tax transparency regime.
• The subsidiary must be subject and not exempt from one of the taxes listed in the Parent-
Subsidiary Directive or from a tax comparable to the Portuguese CIT, in the latter case at a
nominal rate of at least 60% of the CIT rate in force (i.e., 13,8%), in both cases except for
distributions by entities developing activities not targeted by the Portuguese CFC regime.
• The exclusion does not apply to capital gains on the sale of shares in subsidiaries
established in blacklisted jurisdictions or whose assets are comprised, directly or indirectly, in
more than 50% of rights in rem over immovable property in the Portuguese territory, acquired
after January 1, 2014 and not assigned to an agricultural, industrial or commercial activity not
consisting in the sale of immovable property.
Capital gain 50% exclusion
37
REQUIREMENTS FOR THE 50% EXCLUSION CAPITAL ON GAINS
MADE BY PORTUGUESE COMPANIES:
• Reinvestment of the sale price on assets qualifying as fixed tangible assets,
intangible assets, bearer biological assets or investment property (bought as new
or as used but in the latter case not to related entities).
• Capital gains on shares do not qualify for reinvestment.
50% Exemption for IP income and goodwill amortization (2014)
38
• Income resulting from the assignment or licensing of patents, models and industrial
designs protected by IP rights subject to registration.
• Requirements:
- Only in case of rights registered after 1 January 2014.
- The rights must derive from research and development activities of the taxpayer.
- The assignee must effectively use the patent, model or industrial design in the scope
of a commercial, industrial or agricultural activity.
- If the assignee is a related company the IP cannot be used to produce deductible
expenses for the taxpayer;
- The assignee cannot be resident in a blacklisted jurisdiction.
• The acquisition cost incurred with certain intangible assets with unlimited-life acquired after
1 January 2014 and goodwill deriving from business combinations are deductible at a 5%
yearly rate over 20 years.
Portuguese companies (including MFZ ones) may opt to apply the exemption
method to income derived through their foreign PEs, provided that:
– Their profits are subject and non-exempt from a tax listed in the Annex to the Parent-
Subsidiary Directive or from a tax comparable to the Portuguese CIT, in the latter
case at a nominal rate of at least 60% of the CIT rate in force (i.e., 13,8%).
– They are not located in a blacklisted jurisdiction.
– The relevant PE concept is the one established in double tax treaties in force with the
source state or, in the lack thereof, in Portuguese domestic law.
– Under this regime foreign PEs are treated as fully separate entities (which is
debatable under the general domestic rules and of Portuguese tax treaties in force).
– This option has to cover all PEs of the same jurisdiction and must be kept during a
minimum period of 3 years.
39
Exemption method for foreign PEs (2014)
Non-excluded income – MFZ 5% rate
40
• Non-excluded income is taxed at a 5% rate, provided that the above job creation
and investment requirements are met.
• Income not covered by the 5% rate is taxed at the CIT rate in force in the
Autonomous Region of Madeira – currently 23%, as in the Mainland.
• The latter rate is also applicable to non-exempt income derived by pure holding
companies established as Sociedades Gestoras de Participações Sociais from
EU sources.
General capital gain exemption
41
CAPITAL GAINS MADE BY HOLDERS OF PORTUGUESE (INCLUDING MFZ)
COMPANIES ARE EXEMPT:
• If they are non-residents without a permanent establishment in Portugal to which the gain is imputable.
EXCEPT
• If made on Portuguese resident companies owning immovable property in Portugal, when more than 50%
of the company’s assets consist of Portuguese real estate, or the disposed company is a holding with
control of a Portuguese subsidiary company in those conditions;
• If more than 25% of the capital of the non-resident holders is held, directly or indirectly, by Portuguese
resident entities;
• The non-resident holders are resident in blacklisted jurisdictions (tax havens).
A word of caution: this exemption rule has been amended frequently since 1998 and complex
transitory regimes apply. It is crucial to know when the participation was acquired in order to
determine the applicable regime!
General dividend WHT exemption
42
DIVIDENDS PAID BY PORTUGUESE (INCLUDING MFZ) COMPANIES TO FOREIGN
CORPORATE SHAREHOLDERS ARE EXEMPT FROM CIT WITHOLDINGS PROVIDED
THAT THERE IS:
• 5% shareholding (capital or voting rights) – direct or both direct and indirect (direct participation is
always required).
• 24-month uninterrupted holding period completed before the dividend distribution (if holding period is
only subsequently completed WHT applies but a refund may be requested upon completion).
• The distributing company is not taxed under the Portuguese tax transparency regime and is liable
and not exempt from CIT (MFZ entities fulfil this condition).
• The shareholder is resident in an EU Member-State, in an EEA State provided that administrative
cooperation measures equivalent to those existing in the EU are in place with that State (in general
terms exchange of information not limited by bank secrecy and assistance in the collection of taxes)
or in a Third State which has entered into a double tax treaty with Portugal providing for the same
measures.
• The shareholder must be subject and not exempt from one of the taxes listed in the Parent-
Subsidiary Directive or from a tax comparable to the Portuguese CIT, in the latter case at a nominal
rate of at least 60% of the CIT rate in force (i.e., 13,8%).
• Distributions to shareholders not fulfilling one of these two requirements but developing activities not
targeted by the Portuguese CFC regime do not qualify for the exemption, contrarily to what happens
in the case of the CIT exclusions for dividends received and capital gains made by Portuguese
companies.
Taxation of Holdings (summary)
43
• 100% dividend exclusion on Portuguese, EU/EEA and Third
State dividends (if requirements are met).
• Underlying tax credit on EU/EEA and Third State dividends
(if requirements are met).
• 100% capital gain exclusion on Portuguese, EU/EEA and
Third State shares and associated equity instruments (if
requirements are met).
• 50% capital gain exclusion on other assets (if reinvestment
requirements are met).
• Exemption method for foreign permanent establishments (if
requirements are met).
• 50% exemption for IP income (if requirements are met).
• 5% rate (2013-2020) on non-exempt MFZ and non-EU
taxable income (capital gains, interest, royalties, service
fees), depending on the fulfillment of job creation and
investment requirements – pure holding companies under
SGPS form.
• 5% rate (2013-2020) on non-exempt MFZ, EU/EEA and
Third States taxable income (capital gains, interest,
royalties, service fees), depending on the fulfillment of job
creation and investment requirements – mixed holding
companies not under SGPS form.
• 23% rate on other income.
MFZ (Pure or Mixed)
HOLDING COMPANY
EU COMPANY
OUTSIDE EU COMPANY
MFZ COMPANY
PORTUGUESE COMPANY
• Andorra, Anguilla, Antigua and Barbuda, the Netherlands Antilles, Aruba,
Ascension, the Bahamas, Bahrain, Barbados, Belize, Bermuda, Bolivia,
Brunei, the Channel Islands (Alderney, Guernsey, Jersey, Great Sark, Herm,
Little Sark, Brechou, Jethou, and Lihou), the Cayman Islands, the Cocos o
Keeling Islands, the Cook Islands, Costa Rica, Djibouti, Dominica, United Arab
Emirates, the Falkland Islands, Fiji, Gambia, Grenada, Gibraltar, Guam,
Guyana, Honduras, Hong Kong, Jamaica, Jordan, the Queshm Island, Kiribati,
Kuwait, Labuan, Lebanon, Liberia, Liechtenstein, the Maldives, the Isle of
Man, the Northern Marianas Islands, the Marshall Islands, Mauritius, Monaco,
Montserrat, Nauru, Natal, Niue, Norfolk Island, Oman, Palau, Panama,
Pitcairn Island, French Polynesia, Puerto Rico, Qatar, the Solomon Islands,
American Samoa, Samoa, St. Helena, St. Lucia, St. Kitts-Nevis, San Marino,
St. Pierre and Miguelon, St. Vincent and the Grenadines, the Seychelles,
Swaziland, Svalbard Islands (Spitsbergen archipelago and the Bjornoya
island), Tokelau, Tonga, Trinidad and Tobago, Tristão da Cunha Island, Turks
and Caicos Islands, Tuvalu, Uruguay, Vanuatu, the British Virgin Islands, the
U.S. Virgin Islands, and Yemen. And also “Other Pacific Islands not
specifically mentioned”.44
Portuguese blacklisted jurisdictions
• Gibraltar is not a constituent part of the United Kingdom – it is a British overseasterritory.
• However, it is a part of the EU pursuant to article 355(3) and of Declaration 55Annexed to the Treaty on the Functioning of the EU (which reads as follows:“Declaration by the Kingdom of Spain and the United Kingdom of Great Britain andNorthern Ireland - The Treaties apply to Gibraltar as a European territory for whoseexternal relations a Member State is responsible. This shall not imply changes inthe respective positions of the Member States concerned.”)
• Therefore, it is highly doubtful whether Gibraltar’s inclusion in the Portugueseblacklist is compliant with EU law (Cyprus was stricken from the list in 2011 on thebasis of its prior accession).
• The UK has been condemned in the EU Court of Justice in 2005 for failing toimplement in Gibraltar Council Directive nr. 77/799/EEC, of 19 December 1977,concerning mutual assistance by the competent authorities of the Member States,in regard of indirect taxes (Gibraltar had already implemented it for direct taxes).
• Portugal has recently entered into an agreement for exchange of information in taxmatters with Gibraltar, which will work independently from the Directive and whichentered into force on April 24, 2011.
• Thus, the absence of exchange of information is no longer a valid argument forGibraltar's inclusion in the list.
45
Portuguese blacklisted jurisdictions – the special case of Gibraltar
The State Budget Law for 2014 provides new general criteria for blacklisting
jurisdictions. A jurisdiction should be listed if:
• It does not have a tax on income comparable to the Portuguese CIT or if such
tax has a nominal rate lower than 60% of the Portuguese rate (i.e., 13,8%).
• Its determination of taxable income diverges significantly from internationally
accepted or applied standards, namely by the OECD member countries.
• It has special taxation regimes or tax benefits, such as tax exemptions,
deductions or credits, more favorable than the Portuguese ones, that lead to a
substantial reduction of taxation.
• Its law or administrative practice does not allow the access and exchange of
information, namely tax, accounting, corporate, banking or information of other
nature that identifies the shareholders or other relevant people, the holders of
income, assets or rights and the performance of economic transactions.
46
General criteria for blacklisting jurisdictions
• Any listed jurisdiction may request to the Portuguese government a
revision and removal from the blacklist grounded on the non-fulfilment of
the general criteria mentioned above.
• Any delisting will only have effects for the future and the list currently in
force remains applicable until the publication of a new one.
47
General criteria for blacklisting jurisdictions
• Commissionaire or Trading Structure
• Patent Royalty and Service Structure
• Capital Duty Structure
• Tax Sparing Structure (Loan)
• Controlled Foreign Company Blocking Structure
• Dividend Reduction Structure
48
Madeira’s Practical Structures
SWISS
PRODUCER
SWEDISH COMMISSIONAIRE
BELGIUM RETAILER
49
Commissionaire or TradingStructure (Before)
• Corporate Income Tax:
- Taxation at the rate of 26,3%
on the commissions / trade
income received by the
Swedish company.
SALE
COMISSION
COMISSION
SWISS
PRODUCER
MFZ COMMISSIONAIRE
BELGIUM RETAILER
SALE
COMISSION
COMISSION
50
Commissionaire or Trading Structure (After)
• Corporate Income Tax:
- Taxation at the rate 5% (2013-
2020) on the commissions /
trade income received by the
MFZ company.
51
Patent Royalty and Service Structure (Before)
• SPAIN
- 24.75% on royalty and service payments by
the Spanish company to the Jersey company;
- Deduction of royalty and service fees
charged by the Jersey company may be
challenged at the level of the Spanish
company;
- 30% capital gain tax on the sale of the
Spanish company shares by the Jersey
company.
JERSEY COMPANY
SPANISH COMPANY
52
Patent royalty and ServiceStructure (After)
• MFZ
- 0% withholding tax on licensing patent royalties and
service payments paid to the Jersey company;
- 2,5% effective Corporate Income Tax rate on patent
royalties sublicensing income received from Spanish
company;
- 5% effective Corporate Income Tax rate on service
income received from Spanish company;
- Exemption (if conditions are met) or 5% (2013-2020)
capital gain tax on the sale of the Spanish shares.
• SPAIN
- 0% withholding tax on royalty and service payments
made by the Spanish company to the MFZ company;
- Royalty and services fees charged by the MFZ company
are deductible at the level of the Spanish company.
JERSEY COMPANY
MFZ COMPANY
SPANISH COMPANY
53
Capital Duty Structure (Before)
• The contributions by the USA
company of the UK company shares
gives rise to a capital duty in the
country of the Holding.
USA COMPANY
LUXEMBOURG
NETHERLANDS
HOLDING
UK COMPANY
ACTUAL
ENVISAGED
ENVISAGED
54
Capital Duty Structure (After)
• No capital duty or other relevant
fees in MFZ for the first asset
contribution.
• Under the internal law of
Luxembourg / Netherlands and EU
Directives, the second asset
contribution is tax neutral and no
capital duty is levied.
• Subsequently, the MFZ company
may be dissolved and the
participation in the Luxembourg /
Dutch Holding company pushed up.
USA COMPANY
UK COMPANY
MFZ COMPANY
LUXEMBOURG
NETHERLANS
HOLDING
FIRST ASSET
CONTRIBUTION
SECOND ASSET
CONTRIBUTION
55
Tax Sparing Structure
• 0% withholding tax on rents paid by
OECD Model Treaty State company.
• 5% (2013-2020) CIT on rents
received by MFZ company.
• 0% withholding tax on interest paid
by MFZ company under EU Directive
and domestic law.
• 15% tax credit regarding interest
received by Italian Bank.
ITALIAN
COMPANY
MFZ COMPANY
OECD MODEL TREATY
STATE COMPANY
ASSETS
LOAN
LEASE
INTEREST
PAYMENTS
56
Controlled Foreign Company Blocking Structure (Before)
• Profits of the Jersey and
Gibraltar companies are
imputed even without
distribution to the French
company and taxed at a
33,33% rate.
FRENCH COMPANY
GIBRALTAR
COMPANY
JERSEY
COMPANY
57
Controlled Foreign Company Blocking Structure (After)
• Profits of the Jersey and Gibraltarcompanies are not imputed /eventually imputed even withoutdistribution to the MFZ company;
• Despite the eventual imputation,CFC income is low taxed at the levelof the MFZ company [5% (2013-2020)
CIT];
• CFC income from Gibraltar andJersey companies is blocked at thelevel of MFZ, avoiding French CFCrules and enabling a deferred taxationof that income;
• Dividends paid by the MFZcompany to the French company maybenefit from the Parent-SubsidiaryDirective.
FRENCH COMPANY
GIBRALTAR
COMPANY
JERSEY
COMPANY
MFZ HOLDING COMPANY
58
Dividend Reduction Structure (Before)
• Withholding at source on dividends
distributed by Non-EU shareholdings.
• Tax credit in Mainland Portugal for
withholding tax levied at source on
the Non-EU country.
• Overall taxation of a maximum of
33,5%.NON-EU
SHAREHOLDING
PORTUGUESE
MAINLAND
COMPANY
HOLDING DIVIDENDS
59
Dividend Reduction Structure (After)
• Withholding at source on dividends
distributed by the Non-EU shareholdings.
• Exemption (if requirements are met) or
5% CIT (2013-2020), with underlying tax
credit or credit for withholding tax levied at
source on the Non-EU country, in the MFZ
• 100% dividend participation deduction
on distributions by the MFZ company to
the Portuguese company, if requirements
are met.
• Overall taxation = taxation of the
distributing company, if underlying tax
credit is applied, or withholding at source,
or 5%.NON-EU
SHAREHOLDING
PORTUGUESE
MAINLAND
COMPANY
MFZ HOLDING COMPANY
HOLDING
HOLDING
DIVIDENDS
DIVIDENDS
Contact details
• Pessoa de Contacto / Contact Person: Ricardo da Palma Borges / [email protected]
- Sócio-Administrador da / Managing Partner of RICARDO da PALMA BORGES & ASSOCIADOS,SOCIEDADE DE ADVOGADOS, R.L.
- Licenciado e Mestre em Direito Fiscal / J.D. and LL.M. in Tax Law
- Advogado-Especialista em Direito Fiscal pela Ordem dos Advogados / Specialist Lawyer in Tax Law bythe Portuguese Bar Association
- Antigo Assistente da Faculdade de Direito da Universidade de Lisboa / Former Teaching Assistant ofthe Lisbon University School of Law (1994-2007)
- Ex-Tax Manager da Ernst & Young e ex-Adjunto do Secretário de Estado dos Assuntos Fiscais / FormerTax Manager at Ernst & Young and Aid to the Portuguese Secretary of State of Tax Affairs
• Sede social / Registered office: Rua Abranches Ferrão, n.º 10, 9.º Piso, Fracção D, 1600-001 Lisboa,Portugal
• Registada na Ordem dos Advogados Portugueses sob o n.º: 77/2008 / Inscribed on the Portuguese BarAssociation under the registration nr.: 77/2008
• Capital Social em Euros / Stock Capital in Euro: 5.000
• Número Único de Identificação Fiscal e de Pessoa Colectiva / Tax and Corporate Body SingleIdentification Number: PT 508 674 301
60
Proper legal advice is recommended before any decision is taken on this subject. RPBA hasan in-depth knowledge and expertise on the Madeira Free Zone regime. To book aconsultation or to obtain our professional fees on this subject please e-mail us:
Recent tax recognition
• Chambers & Partners – Ricardo Band 1 / RPBA Band 3 (2015)
• Legal 500 – Ricardo and Pedro are Recommended Lawyers / RPBA Band 3 (2015)
• World Tax – Ricardo mentioned / RPBA Tier 3 (2015)
• Best Lawyers – Ricardo ranked under the "Tax Law" practice area and the "Tax Planning"subspecialty (2015)
• World Transfer Pricing – Ricardo mentioned / RPBA Tier 3 (2014)
• Tax Directors Handbook – Ricardo mentioned / RPBA Tier 3 (2015)
• Who´s Who Legal – Ricardo ranked as a top lawyer in the Corporate Tax Lawyers directory (2013)
• Acquisition International Tax Award – RPBA Portuguese Tax Law Boutique Firm of the Year (2015)
• Acquisition International Legal Award – RPBA Boutique Law Firm of the Year – Portugal (2014)
• Corporate Intl Magazine Legal Award – RPBA Boutique Tax Law Firm of the Year in Portugal(2014)
• Global Law Experts - RPBA Boutique Tax Law Firm of the Year – Portugal (2015)
• Corporate Intl - RPBA Tax Law Firm of the Year in Portugal (2014)
61
General warning, disclaimer, copyright and authorised use
• In the preparation of this presentation, every effort has been made to offer current, correct and clearlyexpressed information. However, the said information is intended to afford general guidelines only. Thispresentation reflects information current at 29 October 2014.
• This presentation is distributed with the understanding that RICARDO da PALMA BORGES & ASSOCIADOS,SOCIEDADE DE ADVOGADOS, R.L. is not responsible for the result of any actions taken on the basis ofinformation herein included, nor for any errors or omissions contained herein.
• RICARDO da PALMA BORGES & ASSOCIADOS, SOCIEDADE DE ADVOGADOS, R.L. is not attempting throughthis work to render legal or tax advice and the information in this presentation should be used as a researchtool only, and not in lieu of individual professional study with respect to client legal matters.
• Portuguese domestic legislation, foreign legislation, EU Directives and tax treaties have anti-abuseprovisions, and each actual client structure should be analysed taking those into account.
• RICARDO da PALMA BORGES & ASSOCIADOS, SOCIEDADE DE ADVOGADOS, R.L. is the copyright owner ofthis presentation and hereby grants you a non-exclusive, non-transferable license to use this presentationsolely for your internal business, provided that you do not modify its content in any way and that you donot retain any copyright or other proprietary notices displayed on such content. You may not otherwisereproduce, modify, distribute, transmit, post or disclose the content on this presentation without RICARDOda PALMA BORGES & ASSOCIADOS, SOCIEDADE DE ADVOGADOS, R.L.’s prior written consent.
62
(+351) 212 402 743
www.rpba.pt
www.linkedin.com/company/rpba
www.slideshare.net/rpba
15