MADEIRA ISLANDS

OFFSHORE COMPANY FORMATION
TAX AND LEGAL INFORMATION

TAXATION AND TAX TREATIES

Tax Reform Act 2000
The Tax Reform Act 2000 made some changes to the tax benefits granted to MIBC companies. The Act also requires that companies wishing to benefit from the tax incentives must provide documentary evidence proving that all transactions are with non-Portuguese residents.

Manufacturing companies in the Free Trade Zone
Receive exemption from income tax and capital gains tax, including the transactions carried out in mainland Portugal or with Portuguese residents. This only applies to duly incorporated entities within the Industrial Free Zone of Caniçal.

For other entities the exemption does not apply in transactions carried out in mainland Portugal or with Portuguese residents.

Service and Financial Companies
Service and financial companies in the MIBC, including banks and insurance companies, licensed before 2001 receive tax exemption until 2011 on revenues derived from other companies within the MIBC and on revenue derived from non-residents on Portuguese territory.

In December 2002, a new regime was approved by the E.U., for companies licensed as from 1/1/2004. This new regime foresees a minimum taxation of 1% in 2003 and 2004, 2% in 2005 and 2006, and 3% in 2007 until 2011 - subject to certain limitations and conditions.

SGPS Holding Companies
The SGPS tax regime is described below:

1. Dividends received relating to non-EU subsidiaries and subsidiaries domiciled in the MIBC are exempt from taxation.
2. Dividends received from EU subsidiaries are treated in a similar manner to Portuguese SGPS and are entitled to a 100% tax reduction resulting in an effective rate of 0%.
3. Dividends paid to Portuguese non-residents and companies domiciled on the MIBC are not subject to withholding tax.
4. Capital gains relating to non-EU subsidiaries and subsidiaries domiciled in the Madeira IBC are exempt from taxation.
5. Capital gains relating to EU subsidiaries are subject to normal Portuguese taxation unless they are re-invested. Capital gains tax is payable in five equal annual installments.

Mixed Holding Companies
A Madeira Mixed Holding Company is a Madeira company without SGPS provisions that has a wide objects clause allowing the holding of participations as well as other commercial activities. Madeira Mixed Holding Companies benefit from total exemption on all participations held in either EU or non EU companies. Companies licensed after 2000 will be subject to the new tax regime as indicated above for service companies.

Withholding Taxes
Broadly speaking all types of company in the International Business Centre (i.e. licensed under the MIBC Legislation) are exempt until 2011 from charging withholding tax on remittances dividends and some other payments to non-residents (whether on Portuguese territory or not) or to other companies within the Centre.

Double Tax Treaties
As part of Portugal, Madeira has access to the substantial number of tax treaties entered into by the mother country. Generally speaking, the treaty benefits are available to all Madeira companies. However, Madeira companies licensed under the MIBC Legislation are able to remit dividends and royalties to non-residents without the imposition of withholding tax, so that treaty benefits in that instance are not needed.

The participation exemption available under the EU Parent/Subsidiary Directive No. 90/435 also overrides treaty benefits: any company in the EU owning 25% or more of another company and having done so for 2 years or since incorporation is able to receive income from it without the application of withholding tax. Among Madeira companies, only the Mixed Holding Company is sometimes unable to take advantage of the Directive (because many countries consider that it does not pay enough tax).

Tax Treaty Table

* The treaties with Brazil and the USA exclude MIBC companies.

This table lists the percentage rates of withholding tax on payments made from Treaty countries to Portugal and vice versa. When two rates are quoted, the lower one applies to payments from a company in which the payee has 10% participation - this is the usual level in OECD model treaties.

Death Duties
No death duties are payable in Madeira on the transfer of a shareholding in a company licensed to operate under the MIBC Legislation unless the shareholder was resident in Portugal.

Stamp Duty and Capital Transfer Tax
No stamp duties are levied on the documents or transactions of companies incorporated under the MIBC Legislation.

Capital Transfer Tax applies to real estate purchases made by Free Trade Zone companies, except that the purchase of land or buildings for use as a head office is exempt. Standard rates apply: 8% for urban properties and 10% for rural ones.

VAT
VAT applies in Madeira at the rate of 14% (20% in Portugal).

Taxation of Foreign Employees
There is in fact no distinction between the employees of resident or non-resident operations. It is a question of individual status; residents and non-residents are treated differently of course. Most types of compensation and benefit paid to employees are taxable; there are no special privileges or exemptions for expatriate workers, except that the officers and crew of ships registered under the Madeira Shipping Registry are exempt from income and social security taxes.