MADEIRA ISLANDS
AN EUROPEAN OFFSHORE CENTRE

OFFSHORE COMPANY FORMATION
MADEIRA – GENERAL OVERVIEW

Madeira is an island of approximately 270,000 inhabitants, 700 kilometers from the coast of North Africa. The island is an autonomous region of Portugal and, as such, is a full member of the European Union (EU). Local language is Portuguese and currency is the Euro.

By legislation approved in Lisbon, and in Brussels by the EU, tax advantages have been extended to companies registered in Madeira under the International Business Centre legislation. These advantages, which are currently guaranteed until 2011, provide for a full exemption from taxation for companies licensed prior to 31st December 2000 and for a low-level of corporate taxation for companies licensed after that time.

Madeira is presently one the best locations in the E.U. for companies with operations in the single market and worldwide. With reduced direct and indirect taxation, adequate infrastructures, competitive operational costs, safety and quality of life, Madeira is positioned to provide the investor with a unique package of benefits, offering a wide range of solutions to enhance the efficiency and performance of various forms of investment.

Moreover, Madeira's preferential tax regime has not only been approved by Portugal, but also by the European Union as a valid form of State Aid for regional development, providing Madeira's IBC with credibility and transparency. To find out more about Madeira's special status in the E.U., please consult State Aid nº 222-A-02; State Aid nº 222-B-02 and the Commission's Decision 2003/294/CE.

FAST GROWING ECONOMY
Madeira, an integral part of Portugal fully integrated in the E.U., is located in the Atlantic Ocean, 900 km southwest of Lisbon. The archipelago, with a total population of nearly 254,000 inhabitants, has the city of Funchal as its most important centre.

Madeira has been the fastest-growing region of Portugal and one of the highest in the European Union in the last ten years. The growth of the Madeira economy and its consequent appeal to international investors have been the result of the island’s consistently low inflation rate, low direct and indirect taxation, and its extremely competitive operational costs, in comparison with other European locations.

A significant contribution to Madeira’s economic growth has been brought about by Madeira’s International Business Centre, the island’s main tool for attracting foreign investment. Madeira's IBC has been formally approved by the European Union as a legitimate program of economic development. Such fact, coupled with Madeira's IBC full integration in the Portuguese and the EU’s legal system, have made of Madeira not only an efficient investment location, but also a well-regulated business centre regarded by the OECD as a model to follow.

TAXATION
The present regime of tax benefits allows the incorporation of new entities within the ambit of Madeira's IBC up until 2006, granting significantly reduced corporate tax rates until 2011, as described in the following chart:

To qualify for the tax reductions, companies licensed to operate within Madeira's IBC have to comply with pre-established requirements. On the other hand, the reduced corporate tax rates are applicable up to a ceiling placed upon the annual tax base, which varies according to the number of jobs created:

Pure holding companies (SGPS – Sociedades Gestoras de Participações Sociais) operating within the ambit of Madeira's IBC are also exempt from withholding tax on the distribution of dividends from E.U. affiliated companies and from capital gains taxes.

Manufacturing companies enjoy custom duties exemption on the importation of certain raw materials and components, according to Regulation CE 1482/97, specifically approved for Madeira’s IBC. A 50% reduction on the taxable income may also be applicable to these companies, when fulfilling two of the following criteria:

• contribution to the modernization of the economy through technical innovation, new products and procedures;
• diversification of the regional economy by introducing new activities of added value;
• fixation of qualified human resources;
• contribution to the improvement of the environment;
• creation of 15 jobs for a period of 5 years.

All companies licensed to operate in the Business Centre may also benefit from the large network of international treaties to avoid double taxation ratified by Portugal.
Last but not least, Madeira enjoys the lowest VAT rate in Europe at 14%, since 1st July 2008, particularly interesting for operations in the sector of telecommunications and e-business within Europe.

OPERATIONAL COSTS
Madeira offers low operational costs when in comparison with other European countries. In fact, costs may become considerably lower when establishing operations in Madeira.

A few examples are the average and minimum wages, as well as real estate, telecommunications and energy costs.

BUSINESS ENVIRONMENT
Madeira offers investors a pro-business attitude as well as a deep commitment by the Madeira authorities and the local population to develop the island’s economy by encouraging and welcoming foreign investment and the consequent transfer of know-how.

Companies setting up in Madeira, therefore, benefit from a wide range of supporting services, private and public, in most areas of activity. These include assistance in the incorporation of new companies, consultancy services, accountancy, legal advice, support in the recruitment of labour, financial, insurance and banking services, amongst others.

INFRASTRUCTURES
Madeira has witnessed a remarkable development of its infrastructures in recent years, from new road connections, the new commercial port and the enlargement of the local airport to the setting up of state of the art telecommunications systems and a technological centre. Also available to investors are several conference rooms and office centres providing office space for rental, as well as a local university and laboratories.

Additionally, Madeira benefits from a Submarine Cable Station, hosted in the “Madeira Datacenter”, operating several international optical submarine cables, allowing interconnectivity with national and international SDH networks and providing, as such, significant advantages in terms of quality, cost, bandwidth and scalability.

Another available infrastructure is the Internet Gateway provided by Marconi Internet Direct (MID). This MID offers international Internet access without any kind of contention, and using diversity in the access to international backbones. The IP platform has its international connectivity distributed by: 3 PoPs (London, Amsterdam and Paris), peering connections with hundreds of major international ISPs and IP transits to Europe and the USA.

FINANCIAL CENTRE
Madeira offers international financial institutions full EU status. Madeira welcomes international financial institutions, financial services and insurance companies to its financial centre.

Regulation and supervision of all banking, financial services and investment funds activities is conducted by the “Banco de Portugal” - the Portuguese Central Bank. Insurance, Reinsurance and Pension Funds management operations are regulated and supervised by the Insurance Institute of Portugal.

BANKING
As from 1st January 2001, financial activities can no longer obtain new licenses. Entities licensed prior to 31/12/2000 may continue until 2011.

International and Portuguese banks may establish offshore subsidiaries or branches anywhere in Madeira to take advantage of the MIBC Legislation. Permitted activities include foreign exchange, the management of investment funds and the issuance of negotiable securities as well as a normal range of banking services. Unless a bank holds an international banking license it cannot supply financial services to Portuguese residents.

The Bank of Portugal oversees and regulates all banking matters; the regulations are the same as those that apply to the establishment of financial institutions in mainland Portugal and involve prior authorisation from the Bank of Portugal or the Ministry of Finance. Capital requirements are high at 3.5 billion escudos prior to the issue of a banking license.

It takes between 5-7 months for the license application to be processed and the application must be conducted by a Portuguese representative. The banks of European Union member states are subject to less stringent authorisation requirements than non European Union financial institutions, under the EU "passport" rules.

Approximately 30 banks are currently licensed to operate under the Free Trade Zone Legislation. They include such household names as Chemical Bank, Citibank, Deutschebank and ABN AMRO.

TYPES OF COMPANY
All companies incorporated under the Madeira Free Trade Zone Legislation are subject to the same regulations and principles as any other Portuguese company. The most widely used types of company are:

Private Limited Liability Company ("Limitada")
The “Limitada” Company has a minimum paid up share capital of € 5,000. The capital is represented by quotas and the value of each quota can vary, but must not be less than € 100. The minimum number of subscribers is one.

Stock Corporation ("SA")
“Sociedade Anónima” ("SA") companies have a minimum paid up share capital requirement of € 50,000. The capital of such companies is represented by shares of a minimum of € 0.01 each. The original subscriber shares must be registered but thereafter bearer shares are permitted. The minimum number of shareholders is five.

Pure Holding Company ("SGPS")
A particular form of holding company, known as an SGPS – SOCIEDADE GESTORA DE PARTICIPAÇÕES SOCIAIS, may take advantage of the EU directive eliminating withholding taxes between parent and subsidiary companies within the EU.

For SGPS companies licensed prior to 31st December 2000, these dividends are exempt from tax. For SGPS companies licensed after 31st December 2000 the dividends received will be subject to a low-level of corporate tax. There is no withholding tax on dividends paid out of the SGPS.

Madeira has access to the numerous double tax treaties negotiated by Portugal.

A Pure Holding Company is limited to holding investments in other companies and the management of those investments.

RESTRICTIONS ON TRADING
Companies cannot undertake any business that is not specified in their constitution.

Companies cannot undertake the business of banking, insurance, assurance, reinsurance, fund management and asset management (other than their own assets) without prior consent and licensing.

COMPANY FEATURES

* Companies may be structured with a single quota or share holder, as "Sociedades Unipessoal"

COMPLIANCE

BACKGROUND
By legislation approved in Lisbon, and in Brussels by the EU, tax advantages have been granted to Portuguese companies registered in Madeira under International Business Centre of Madeira (‘IBC’) Legislation.

The object of the legislation is to provide a boost to the economy of the island of Madeira, since the tax advantages apply to industrial and manufacturing activity within the physical geographical area of the International Business Centre Zone of Madeira, as well as to financial activities which can be organized through entities registered under the legislation operating from any location, both within Madeira or elsewhere in the world.

These advantages provide not just low levels of taxation, but also certainty of exemption from any restrictions that might arise under any Portuguese exchange control regulations.

TAX EXEMPTIONS AND LOW CORPORATE TAX RATES
The advantages are guaranteed until, presently, the year 2011 and all companies licensed to operate in the IBC prior to 31st December 2000 will continue to enjoy a total taxation exemption until 31st December 2011.

Our Firm has a number of companies which were licensed during 2000, which are entitled to a zero tax exemption until 31st December 2011. For companies licensed from 1st January 2003 the Portuguese authorities have agreed a low rate of corporation tax will be charged.

MANAGEMENT AND CONTROL
Directors of these companies incorporated in Portugal and granted taxation advantages under the legislation may be based anywhere in the world. Management and control of the companies need not be exercised in Madeira itself to be able to benefit from the tax advantages. All that is required is that the company has local legal representation, which our office in Madeira can provide.

OTHER ADVANTAGES
The companies registered in the IBC of Madeira are, on incorporation, provided automatically with a VAT registration number. Trading within the EU is therefore made simpler and more effective from a cash flow point of view by the provision of a registration number for VAT purposes.

Portuguese companies registered under the Legislation of the IBC are able to take advantage of most of the network of double taxation agreements entered into between Portugal and countries elsewhere and may also enjoy the benefits of nearly all international conventions signed by Portugal.

ACCOUNTING OBLIGATIONS
The accounting records and supporting information must be maintained and filed in Madeira on a regular basis. Companies are automatically given a 31st December year end and annual accounts must be submitted to the tax authorities by 31st March the following year.

VAT returns must be filed with the tax authorities within 45 days after each quarter end.

DIRECTORS
The Directors do not need to be Portuguese residents. However, if all directors are resident overseas, the company must appoint a local legal representative who can be provided by Our Firm. Our Firm can provide Portuguese resident directors to manage a company. However, in that situation, we seek to provide 100% of the management to ensure that the full nature and activity of the company is understood.

a) “Limitada” (Lda)
A “Limitada” may be managed by one or more directors who may be resident anywhere in the world.
b) Sociedade Anonima (S.A.)
An “SA” is legally required to have both a Board of Directors and an Audit Board. The Board of Directors should comprise of an odd number of members and the Audit Board should comprise of 3-5 members. The directors may be resident anywhere in the world. However, if the share capital of the SA is below € 200,000, a sole director and a qualified statutory auditor (ROC) may be appointed.
c) SGPS
The requirements for directors of an SGPS are as either an Lda or SA as above.

SHARE CAPITAL AND SHAREHOLDERS
a) Private Limited Liability Company ("Limitada” or “Lda")
The minimum share capital requirement for an Lda is €5,000. This amount must be divided into quotas, the minimum value for each quota being €100. Each Lda must have at least one quota holder. However should the company be a single quota holder company, then the expression "Sociedade Unipessoal" must be reflected with the name of the company.

b) Stock Corporation ("Sociedade Anonima” or “SA")
The minimum share capital is €50,000 divided into shares with a minimum value of €0.01 each. A minimum of 30% of the share capital must be paid up Immediately with the balance of 70% payable within 5 years. Each SA must have at least five shareholders. Share certificates can only be issued if the share capital of the company is fully paid up. An SA in generally used by clients who wish to use a company that has a more substantial formal structure than an Lda. An SA is able to easily transfer shares and is subject to audit.

c) Sociedade Gestora de Participações Sociais ("SGPS")
This type of company may only carry out the activities of a holding company.
It can have either a Lda or a SA share capital structure. The minimum share capital requirement would therefore be as per an LDA or SA, dependent upon which capital structure is chosen.

COMPANY NAME
Our Firm maintains a number of available Lda and SA companies, in addition to lists of approved names. Should a specific name be required, three alternatives should be provided to enable an application for the name approval to be made. The corporate name must describe the principal activity of the company. Foreign names are permitted but the principal activity must be described in Portuguese.

COMPANY ACTIVITY
A clear description of the proposed activity of the company is required to draft the incorporation documentation and to submit the request for the approval of the corporate name. SGPS are strictly Holding Companies and therefore have precise Objects Clauses relating to the holding of shares and participations.

REGISTERED OFFICE
A registered office is required in Madeira.

ACCOUNTING SERVICES
The accounting and statutory records of the company are governed by the Portuguese Official Accounting Plan and must be maintained in Portuguese. Therefore, books of account must be kept in Madeira. Accounting information and supporting documentation must be forwarded to our offices on a monthly basis as this will enable the accounting affairs of the company to be kept up to date. Annual accounts must be submitted to the Tax Authorities, even if there is no liability for taxation. The annual accounts must be signed by all the directors and the Official Registered Accountant (TOC). All companies must appoint a TOC, who is responsible for ensuring that all accounting and fiscal requirements are met by the company. The TOC may only sign the annual accounts if he or she has all the information necessary in order to form an opinion on the affairs of the company and the information available is complete and accurate. We provide a TOC for all client companies. If incomplete information is supplied, the TOC may have to resign and annual accounts could remain uncompleted. This will result in fines and tax liabilities.

INCORPORATION
The incorporation process generally takes from 4 to 6 weeks to complete. Should a specific newly incorporated company be required, as opposed to the acquisition of one of our available companies, the shareholders must provide a Power of Attorney to effect the incorporation of the company on their behalf.

VALUE ADDED TAX (VAT)
All Portuguese companies and, therefore, all companies registered under the Free Trade Zone Legislation of Madeira, are automatically provided with a VAT number on incorporation. The current VAT applicable in Madeira is 14%.

Companies registered under the provisions of the IBC Legislation are able to recover all VAT charged to them in Portugal and as a result of the provision of a VAT number are able to confirm a number for trading purposes within the EU and enjoy the advantages this brings. Companies registered under the IBC Legislation will be charged VAT on purchases made within Portugal in the normal way. They are, however, able to reclaim all VAT that they incur and must, within 45 days after each quarter end, file a VAT return. Repayments of claimed annually or quarterly when the amount repayable exceeds €7,500. VAT must be added to invoices rendered by the management companies in Madeira where these invoices are addressed to the Portuguese companies registered in Madeira under the IBC Legislation. If the invoice is raised against a client outside of the EU, or an entity outside of Portugal but within the EU and with its own VAT registration number, no VAT is applicable.

LICENCE AND ANNUAL FEES
An application for a license to operate within the IBC of Madeira must be made to the “Sociedade de Desenvolvimento da Madeira” ("SDM - Madeira Development Company) once the company name has been approved. The application fee is €750 (reduced to €500 if paid by the required date through a local Management Company).

For “Limitadas” and “Sociedades Anonimas” the annual fee charged by SDM is €1,500 per annum (reduced to €1,000 if paid by the required date through a local Management Company) for a company with no physical presence in Madeira. For companies operating from their own office on the Island the annual license fee is €1,500.

For SGPS companies the annual license fee in the first year is the same as for an Lda. For subsequent years the annual fee charged is €1,500 plus 0.5% of the profits of the previous year exceeding €1,000,000 (limited to a maximum of €30,000). Most of the companies licensed to operate in the IBC of Madeira operate on the basis of not having any physical presence in Madeira and, as such are charged an annual license fee by SDM of €1,500 (reduced to €1,000 if paid by the required date through a local Management Company).

SDM have the power to withdraw the license for a company whose annual license fee is long overdue, with the result that liability to Portuguese taxation on all profits and capital gains would then arise at the current corporation tax rate. The withdrawal of the license is made retrospective to the date when the invoice became due.

FINANCIAL STATEMENTS REQUIREMENTS
Accounts must be prepared in the Portuguese language in accordance with Portuguese accounting rules. Normally the fiscal year ends on 31st December, and accounts must be approved by the shareholders before the 31st March of the following year. A tax form must be filed with the authorities before the end of May.

IN SUMMARY
Portuguese companies registered under the IBC Legislation of Madeira provide for a variety of opportunities in international tax planning. They are tax advantageous and can be operated in a similar manner to companies incorporated in the better known jurisdictions such as the Cayman Islands, the Channel Islands, the Isle of Man or the British Virgin Islands. However, they provide other benefits not available elsewhere:

- The ability to take advantage of the double tax agreements and the non inclusion of Portugal in the list of tax haven countries within many countries' tax regulations ensures that the political presence of the companies’ jurisdiction of incorporation is much more acceptable to other companies with whom trade is conducted or in whom investments are made.

- The political presence of a company with incorporation in Portugal is also useful in undertaking direct investments into countries where there may be some sensitivity to direct investments which might otherwise be made through financial services centers.

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