CREDIBILITY AND TRANSPARENCY
MULTI SERVICE COMPANIES
Madeira is one of the most efficient locations in the E.U. to set up service-oriented companies to carry out a wide range of activities such as import and export, e-business, maritime transportation, real estate investments or to hold intellectual property, both within and outside the European Union. Several reasons contribute to make Madeira an attractive location, among which we highlight the following:
Madeira's IBC companies qualify for the Portuguese participation exemption regime, applicable to both dividends and capital gains, for which the following conditions must be fulfiled:
- A minimum shareholding of 5% held for 24 consecutive months;
- The subsidiary must be subject to taxation at a rate of at least 60% of the Portuguese general rate;
- The subsidiary must not be resident in a jurisdiction included in Portugal's "black list"
The regime applicable to S.G.P.S. – Sociedades Gestoras de Participações Sociais (Portuguese pure holding companies) in Madeira is, undoubtedly, one of the best tools available today to structure investments in the European Union, given that:
YATCH AND SHIP REGISTRY
Madeira’s International Shipping Register – MAR was created within the framework of the MIBC and has become a credible and competitive alternative compared to other international registers, maintaining the quality levels and the safety culture of an E.U. register.
All entities which undertake the maritime transportation of persons and goods - companies, branches or agencies - may register vessels in MAR, flying the Portuguese flag. Shipping companies licensed to operate within the framework of Madeira’s International Business Centre will fully benefit from the tax regime in force.
Specific advantages on the registration of commercial vessels:
The register has a Technical Commission whose duties include the establishment of the crew composition. As a matter of fact, the shipowner may propose the crew composition of his vessel, and on the basis of the characteristics of the ship to be registered as well as in full compliance with the international conventions on safety and the preservation of the quality of life on board and at sea, the Technical Commission will establish minimum crew composition requirements.
Temporary registration is allowed by law, as well as the bareboat charter, and may be carried out in Portuguese consulates or in any other departments which have been or may come to be duly authorised for such effect.
MAR, as a Portuguese register, is among the international registers of the highest quality, having guaranteed adequate measures to ensure an efficient surveillance of all vessels registered. All international conventions ratified by Portugal are fully applicable to and respected by Madeira’s Register, which has never been considered as a “flag of convenience”, namely by ITF (International Traffic Federation).
The present tax regime allows the incorporation of new entities within the legal framework of the International Business Centre of Madeira (IBC) until the end of 2020, granting a reduced corporate tax rate of 5%, applicable on the taxable income, until the end of 2027.
In the case of international services activities, the reduced rate is applicable to profits derived from operations exclusively carried out with non-resident entities or with other companies operating within the ambit of the IBC of Madeira.
There are no restrictions, nevertheless, on the development of business activities with Portuguese companies which will be taxed at the general corporate tax rate in Madeira, currently 21%
Tax benefits requirements
In parallel, it is expected that the addressed entities are entitled to a reduction in the corporation tax rate, arising from the activities actually and effectively carried out in the region, applicable to a maximum tax amount that depends on the number of jobs created.
To qualify for the tax reductions, companies incorporated in Madeira's IBC have to comply with one of the following pre-established requirements:
On the other hand, the reduced corporate tax rates are applicable up to a ceiling placed upon the annual taxable income, which varies according to the number of jobs created, as follows:
Number of Jobs Minimum Investment Ceiling
1 to 2 jobs € 70,000 € 2,730,000
3 to 5 jobs € 75,000 € 3,550,000
6 to 30 jobs - € 21,870,000
31 to 50 jobs - € 35,540,000
51 to 100 jobs - € 54,680,000
More than 100 jobs - € 205,500,000
Additionally, companies will be subject to one of the following maximum annual limits applicable to the tax benefits of the present regime:
Creation of Jobs
The creation of jobs by entities licensed to operate in the IBCM must be assessed and confirmed by the labour relationship established between the employee and the licensed activity, based on a work form provided for in the general labour law in force in Portugal Thus, the requirement of jobs creation is accomplished:
a) With the conclusion of an employment contract of indefinite duration, a fixed term employment contract, determined or undetermined, an employment contract for a work commission, an employment contract for part-time work, an employment contract for tele-work or an employment contract for intermittent work, even with a number of employers, provided that they are entities licensed to operate in the IBCM;
b) With the filling of the positions of members of the governing bodies of the entities licensed to operate in the IBCM, provided their work relationship with the company may be considered within a salaried employment, in accordance with law;
c) With regimes of secondment, temporary assignment or casual assignment of employees, provided that the entity licensed to operate in the IBCM is responsible for paying the wages in such terms that the work provided may be classified as dependent on that entity;
d) With the perception by the employee of remuneration considered, for purposes of income tax and social security, as an income from salaried employment, whether or not subject to any taxation or effective contribution in the national territory, the worker maintaining a labour relationship with the activity licensed in the IBCM.
Remuneration and allowances:
Remuneration is considered as the compensation for which the employees are entitled in return for their work.
The said compensation must be satisfied in cash, na d must be available to the employee on the due date or on the previous business day. (see articles 258º, 259º, 276º and 278º of the Labour Code). In addition to this monthly salary, employees are entitled, in each calendar year, to paid vacations, due in January with a minimum duration of business 22 days. Employees are also entitled to a Christmas allowance equivalent to one month salary, to be paid by 15 December of each year.
Workers shall be guaranteed a minimum guaranteed monthly salary, which amount is determined every year by specific legislation. In 2015, the minimum guaranteed monthly salary for the mainland Portugal was determined in 505 euro and in 515 euro for the ARM.
The monthly salary paid to the employees is subject to the following mandatory taxes to be supported be the company:
• The company must withhold, upon the payment of wages and other due remunerations, the amount referring to the individual income tax (IRS), which rate varies according to the salary level and the worker’s household. The amounts to be withheld in the ARM are set out in the tables published in the Official Gazette, Series II, No. 30 of 12/02/2009 and Oder 3/2009/M.
• The company should also make the mandatory social security contributions at the following rates:
General Contribution Rates
Type of Employee Managers Other Employees
Rate borne by the Employer 23,75% 23,75%
Rate borne by the Employee 11,00% 11,20%
Total Rate 34,75% 34,95%
Nationality of the Managers
Directors of the companies licensed by the IBCM may be natural persons, non residents in Portugal, providing they are invested of full legal capacity.
The salaries of officers of companies non resident in Portugal are also subject to the compulsory deductions set out above in respect of income tax, as this is a yield obtained in the Portuguese territory and therefore subject to withholding. However, contributions to the Portuguese social security may be waived if the officer makes prove that he/she is already covered under the social security system of another Member State of the Union.
Tax benefits for shareholders
Non-resident single and corporate shareholders of Madeira's IBC companies will benefit from a full exemption from withholding tax on dividend remittances from the Madeira companies, provided that they are not resident in jurisdictions included in Portugal's "black list".
Moreover, Portuguese corporate shareholders will also be exempt if holding a participation of at least 5% for 24 consecutive months.
In addition, the following benefits will be applicable:
Exemption on capital gains payments to shareholders not resident in black listed jurisdictions;
No withholding tax on the worldwide payment of interest, royalties and services.
CONVENTIONS AGAINST DOUBLE TAXATION
Companies operation on Madeira International Business Centre are considered Portuguese companies for all purposes and therefore conventions signed by the Portuguese Republic for the elimination of double taxation are applicable to these companies.
The Conventions against double taxation signed by Portugal are described below. Many other are under negotiation.
Documents, contracts and other operations requiring public registration carried out by IBC companies will benefit from an 80% exemption on stamp (capital) duty, provided that other parties involved are not resident in Portuguese territory or are also companies operating within the legal framework of the IBC of Madeira.
ADVANCE TRANSFER PRICING
The possibility of concluding Advance Pricing Agreements (hereinafter TPAs), a well known practice in other jurisdictions where it is already deeply implemented, was recently introduced in Portugal, lying under Article 128-A of the CIRC and Ordinance No. No 620-A/2008 of 16 July.
With its introduction and regulation, companies are now allowed to notify the tax authorities on their interest in concluding an TPA, setting forth in advance the best transfer pricing methodology to be used in operations with related parties. By concluding a TPA, companies may avoid subsequent adjustments and corrections to the taxable base by the tax authorities, since the method or methods had been accepted in advance for determining the taxation on operations subject to the principle of free competition.
Thus, these agreements contribute for an increased competitiveness and security for taxpayers and even for the tax administration itself, as they introduce greater transparency in the tax system, making it a more predictable system for international operations.
TPAs may cover the whole or part of the company’s business operations. These agreements may be unilateral, when involving the agreement between a single Tax Authority and the taxpayer (DGCI and an individual tax payer of IRS or IRC), or multilateral when, in addition to the agreements celebrated with the DGCI, they involve one or more Tax Authorities under the mutual friendly agreement procedure provided for in the Convention to avoid double taxation on income taxes. In the Autonomous Region of Madeira, the process of concluding a TPA follows the same procedures as the ones concluded in mainland Portugal, being subject to the same requirements, forms and deadlines provided under terms of the Ordinance. Under the fiscal decentralization that took place in 2005, the agreement proposal should be addressed, not the Director General of Taxes, as provided under the ordinance, but to the Regional Director for Fiscal Affairs, which is the competent authority in the Autonomous Region of Madeira in these matters.
In fact, the Decree-Law No. 18/2005 of 18 January (the pioneer legislative act of the Portuguese fiscal decentralization) enabled the transfer to the Autonomous Region of Madeira of all the taxation duties and powers that, within the frame of the Tax Directorate of
the Autonomous Region of Madeira and all its related services, were being conducted in the Region by the Portuguese Central Government. As a result of this tax decentralization, it was created in Madeira the Directorate Regional of Fiscal Affairs, RDFA, wich became the competent authority to pursue such matters working in coordination with, but as a separate and independent body of the Directorate General of Taxes.
The Regional Regulatory Decree 29-A/2005/M of August, 31, defines and explains the functions, duties and powers of the DRAF. The DRAF mission is not only to secure and manage the taxes on income, expenditure and capital and on other incoming provided by law, but also
to execute the fiscal policies and guidelines set by the Regional Government in fiscal matters to be applied in the ARM including, without prejudice of the provisions of Articles 140 and 141 of Law No 130/99 of 21 August, the administration, assessment, levying and collecting of the taxes that are a revenue of the region and to ensure the implementation and enforcement of further legislation on national tax matters.
It is further provide that, in the exercise of the powers assigned to it, DRAF should be guided by the same principles of exemption, independency and strict obedience to the rules of secrecy provided for by law and to the unity of the tax system, working in articulation and coordination with the Directorate General of Taxes, although being an autonomous and independent body.
Accordingly, a TPA concluded by a company incorporated in the ARM or at the IBCM will be proposed, discussed, negotiated and accepted by the Directorate Regional for Fiscal Affairs, which, in the exercise of its functions, is the competent authority at the ARM.
The TPA process begins with the submission of a draft agreement to the Directorate Regional for Fiscal Affairs for a preliminary assessment within the following 60 days. Within this time frame, the Directorate Regional for Fiscal Affairs may decide immediately or it may make use of the entire 60 days deadline, when and if the complexity of the proposal so requires. If the proposal is not particularly complex, the Directorate Regional for Fiscal Affairs shall diligently pronounce its decision and, therefore, the applicant may promptly present its TPA project, duly accompanied by all data and documents required under the Ordinance. On the contrary, the applicant may only submit its TPA proposal after 60 days on submission of its initial draft.
After the reception of the request, the TPA formalization process is initiated going through at least four stages: preliminary assessment, proposed agreement, evaluation and negotiation with tax authorities of other states, in case of a multilateral agreement, and conclusion of the agreement.
According to the Ordinance, these agreements can not be concluded for a period exceeding three years. However, TPAs may be renewed if the applicant so requests within six months before the term of the validity period.
After the conclusion of the agreement and with the fulfilment of all the conditions set out therein, the price may not be revised, leading to a greater stability in the operations carried out by the companies, providing a much desired fiscal security.
The use of TPAs is, therefore, an efficient mechanism for taxpayers to advocate their point of view on this matter without a pre-litigation or litigation with the tax authorities which, in turn, are required to adopt a proactive and cooperative behaviour.
THE TAXABLE PERIOD
The IRC falls due for each taxable period corresponding, in principle, to a calendar year.
Legal entities having their head-office or effective management in the Portuguese territory and required to have a consolidated accounting, as well as legal persons or other entities liable to IRC without their head-office or effective management within the domestic territory but having a permanent establishment in that territory may adopt a yearly tax period other than the calendar year. However, such tax period must be kept for at least the next five fiscal years.
This option may also be extended to other entities, upon request and in the same conditions, by decision from the Minister of Finance, on the ground of special economic reasons.
Determination of Taxable Income
Legal Persons and Other Resident Entities Exercising as Their Main Business a Commercial, Industrial or Agricultural Activity
The taxable income - the assessment of which is in accordance with the distinctions resulting from the different taxable bases for IRC taxable persons - is determined, as a general rule, on the basis of a taxpayer’s tax return, without prejudice to its auditing by the Tax Administration. If there is no tax return, it is incumbent upon the Directorate General for Taxation to assess the taxable income, as the case may be.
The use of indirect methods for assessing taxable profits shall only be accepted in the following circumstances:
a) Simplified taxation regime;
b) Impossibility of certifying and obtaining a direct accurate quantification of thoseelements absolutely necessary to an accurate determination of taxable income;
c) A significant deviation of taxable amount with no justifiable reason in relation to objective indicators relating to such activity on a technical-scientific base;
d) Taxpayer producing without a justified reason null taxable income or tax losses during three consecutive years.
General Regime for the Determination of the Taxable Income The determination of the taxable income is based on the amounts shown by the accounting records, representing the algebraic sum of the net income for that period (the difference between profits or gains and costs or losses) as well as positive or negative variations in net equity during the same period which are not reflected in the taxable income and fiscal corrections deriving, as a general rule, from non deductible accounting costs or non taxable accounting profits.
IRC Assessment Scheme Net income
Positive changes in net equity non reflected on the income
Negative changes in net equity non reflected on the income
(e.g., non deductible costs or non taxable proceeds)
Tax losses from previous accounting periods
IRC assessed income
Withholding at Source
Payable or receivable IRC
PROFITS AND COSTS
Profits and costs as well as other positive or negative components of the taxable income are attributable to the accounting period to which they relate according to the accrual basis principle (cash basis method). There shall be considered as profits or gains those derived from an operation of whatever nature as a result of a normal or occasional action, basic or merely accessory, resulting from: selling or supply of services, discounts, bonus and reductions, commissions and brokerages; income from immovable property, financial and industrial property income; supply of scientific or technical services; realized capital gains; indemnities and operating subsidies or subventions.
With regard to subsidies or subventions granted to finance the acquisition of fixed assets if in connection with the reintegration or amortization of fixed assets elements, there shall be comprised in the taxable profit a part of the subsidy or subvention, at the pro rata of the reintegration or amortization estimated on the acquisition or production cost.
However, the yearly taxable part shall not be lower than the reintegration minimum quota corresponding to such fixed asset. If the subsidies are not in connection with fixed assets elements, they shall be included in the taxable profit, in equal parts, in the accounting periods during which such elements may not be alienated, according to the law or to the concession agreement or, in all other cases, for 10 years as from the year in which such subsidy or subvention is received. There shall be considered as costs or losses those deemed to be absolutely necessary for the realisation of profits or gains liable to tax, or to the maintenance of the productive source, in particular, costs related to:
There shall not be accepted as costs for the determination of taxable profit, in particular, costs related to:
- Corporate rights held by the transferor for less than three years and having been acquired or, regardless for how long they are held, having been transferred to any entity with which there is a special relationship, or to an entity with its domicile in a country or territory with a more privileged taxation system, or also to an entity resident in the Portuguese territory subject to a special taxation regime;
- The alienator entity results from the transformation, including the modification of the social object, of a company to which a different tax regime would apply in respect of such costs, and the period of time between the moment that fact occurs and the date of transfer is less than 3 years;
50 per cent of the negative difference between the realized capital gains and capital losses by way of a transfer for consideration of corporate rights, including its redemption and depreciation with capital decrease, as well as other losses or negative changes in equity in connection with corporate rights or other elements belonging to the equity capital, namely supplementary payments not covered by the preceding paragraph;
DEPRECIATION AND AMORTIZATION REGIME
Depreciation and amortization are estimated, as a general rule, on the acquisition or production costs of the relevant fixed assets that they may refer to. There may also be accepted as costs any allowances higher than those resulting from the application of such methods by reason of an extraordinary devaluation as a result of duly justified abnormal circumstances.
Depreciation and amortization are, as a general rule, allowed by way of the straight-line method according to the rates as set down by a legal text (Decreto Regulamentar nr. 2/90, of 12th January).
REGIME OF REALISED CAPITAL GAINS AND LOSSES
Realised capital gains or capital losses are gains derived or losses suffered in respect of elements belonging to fixed assets. The law adopts a broad concept of realisation for this purpose in order to cover both voluntary capital gains (e.g. from a sale or exchange) and involuntary capital gains (e.g. from expropriation or indemnity for destruction or theft). Nevertheless, in order to assure the continuity of the exploitation by companies there shall be excluded from taxation by 50 per cent of the positive difference between realised capital gains and losses through the transfer for consideration or casualties, involving tangible fixed assets elements, whenever the realisation value, corresponding to the whole sum of the elements referred to, is reinvested in the acquisition, production or construction of tangible assets elements in connection with the exploitation, other than secondhand goods purchased to a IRS or IRC taxpayer with whom there are special relations. The reinvestment has to be carried out between the immediately preceding accounting period and the end of the second accounting period next following that in which the realisation takes place. Furthermore, the elements belonging to tangible assets must be held for a minimum period of one year. This partly exemption is also applicable to the positive difference between realised capital gains and realised capital losses from the transfer for consideration of corporate rights. However, the realisation value must be reinvested, in the whole or in part, in
the acquisition of corporate rights in trading companies or civil companies under commercial form with their head-office or effective management in the Portuguese territory, in Government bonds issued by the Portuguese State or in tangible assets elements in connection with the exploitation and that such alienated corporate rights must have been held for a minimum period of one year and correspond, at least, to 10 per cent of the equity capital of the controlled company.
In any case, if the reinvestment is made only in part, the corresponding fraction shall be excluded from the exemption.
If such total or partial reinvestment is not concluded in the abovementioned period of time, the difference (or the corresponding fraction) not included in the taxable profit of the realisation period shall be considered as a profit or gain, increased by 15 per cent. Capital gains and capital losses are determined by the difference between the realisation value after deduction of any charges connected thereto and the acquisition value after deduction of any reintegration or depreciation amount. The adjusted acquisition amount is updated by applying the currency devaluation coefficients where, on the realisation date, at least two years have elapsed since the acquisition date. This adjustment shall not apply to financing investments, except for investment in immovable property and corporate rights.
FiscalCapitalGain = RealisationAmount -
(AcquisitionAmount - Reintegration/ Depreciation) x Coeff.
There shall be considered as realisation amount:
Losses carry-over is allowed for tax purposes according to the carry-forward method up to a maximum of the six subsequent financial years. Any loss carry-over shall cease to have effect if at the end of the fiscal period during which the deduction takes place there is a change in the social object of the enterprise concerned, or a substantial modification is introduced in the nature of the previously exercised activity or the ownership is modified by, at least, 50 per cent of the corporate capital or of the major part of the voting rights. However, in some specific cases of generally recognized economical interest, the Minister of Finance may authorise, upon request by the entity concerned, the nonapplication of the above-mentioned limitation.
There shall be allowed as deductions from the amount resulting from the application of the tax rate to the taxable income (assessment base) the following amounts:
(a) Deduction for international double taxation(9);
(b) Deduction concerning tax incentives;
(c) Special advance payment.
After these deductions – a negative value being not accepted – the IRC withheld at source shall also be deducted. In relation to those entities exercising as their main business a commercial, industrial or agricultural activity not covered by the simplified tax regime, as well as non-resident entities with a permanent establishment in Portugal, tax assessed by way of a periodical income tax return, after deduction for international double taxation and tax incentives, may not be lower than 60 per cent of the amount which would be assessed if the taxpayer would not benefit from tax incentives.
(9) The deduction for international double taxation occurs where income derived from abroad is included in the taxable income. The tax credit is equal to the lesser of the following amounts: the income tax paid abroad or the IRC fraction calculated before the deduction is given corresponding to incomes that may be taxed in the country concerned, net from any costs or losses, directly or indirectly incurred, for the purposes of its realisation. Where there is a convention concluded by Portugal to eliminate double taxation, the deduction may not exceed the tax paid abroad, according to the terms provided for under the convention.
CREDIBILITY AND TRANSPARENCY
As a result of the findings of the G20 summit, held on the 2nd of April 2009 in London, the International Business Centre of Madeira (IBCM) has consolidated its position as a transparent and well regulated jurisdiction, fully integrated in the new architecture of the world’s financial order.
The IBCM is a Portuguese place of business focused to the international markets, expressly authorized by the European Commission following the proposal made by Portugal aiming to
create the most adequate conditions for the development and diversification of a small island and outermost economy such as the one of Madeira.
The most consensual matter discussed at the summit, which gathered the twentieth most powerful economies in the world (G20), was the need to distinguish the States that have always cooperated with the rules of transparency and sharing of information, in which Portugal has always been included and, inherently, the IBCM, from those that do not cooperate and that need to be under a more strict surveillance.
Based on this decision, Portugal was left out of the new black and gray lists published by the Organization for Economic Cooperation and Development (OECD), clearly confirming the position of the IBCM as a credible and legitimate jurisdiction, at a time when world leaders seek to restore confidence in the international financial system.
However, the fact of IBCM being out of these lists is not surprising, as in more than twenty years of operation it has never been classified as an “Offshore” or a “tax shelter” by the major international organizations, namely the European Union or OECD, being entirely subordinated to the community and national legal regulations.
The stability of the IBCM tax regime, which will remain unchanged until 2020, and the confirmation of its accuracy and transparency on the part of the world’s leading authorities on regulatory and fiscal supervision, place the IBCM at a high level of security and competitiveness that gives national and international investors a unique package of benefits, applicable to a wide range of activities.
A PROGRESS REPORT ON THE JURISDICTIONS SURVEYED BY THE OECD GLOBAL FORUM IN IMPLEMENTING THE INTERNATIONALLY AGREED TAX STANDARD(2)
Progress made as at 2nd April 2009
Jurisdictions that have substantially implemented
the internationally agreed tax standard
(2) The internationally agreed tax standard, which was developed by the OECD in cooperation with non-OECD countries and which was endorsed by G20 Finance Ministers at their Berlin Meeting in 2004 and by the UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting, requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes. It also provides for extensive safeguards to protect the confidentiality of the information exchanged.
3) Excluding the Special Administrative Regions, which have committed to implement the internationally agreed tax standard.
Madeira companies are governed by the same corporate law, central bank regulations and accounting principles, which means that they enjoy from a solidity and credibility not available in other business centres.
The rules established in SNC – Accounting Standards System are duly applicable to the Madeira companies, therefore companies incorporated within the scope of Madeira Free Trade Zone are obliged to fill annual tax returns, VAT declarations and in general to maintain their bookkeeping in accordance with the international accounting rules in force in the EU and with the current versions of the fourth and seventh community accounting directives regarding individuals and companies, respectively.
Decree Law 212/94, allow Madeira Companies to be incorporated with only one shareholder, however the expression “Sociedade Unipessoal” or simply “Unipessoal” must be added to the social denomination.
Companies operating in MIBC are also allowed to use foreign names on their social denomination, due to the specific exception created by Decree Law no. 225/95 only applicable to entities operating under the scope of MIBC.
Madeira IBC companies have immediate access to VAT registration and are entitle to free circulation of goods and services and the right of establishment within EU market.
Decree Law 234/88 created the Madeira Free Trade Zone Private Notaries Office to ensure that public deeds, contracts, powers of attorney or any other notary act are executed in due time and furthermore free of stamp duty and emoluments.
Since the Private Notaries Office is only competent to legalised documents concerning MIBC companies, the efficiency and celerity demanded for issuing legal documents concerning the companies, is guaranteed. Portugal as a signatory of the Hague Convention will provide for the international legalisation of those documents trough the Hague Apostille.
For the purposes of incorporation of a company, which will take 2 days approximately, the following main six steps must be complied with:
(i) Obtaining the company’s corporate name. The National Registry of Corporate Names is the entity responsible for issuing the certificate of corporate name. The name shall not be approved if it may be confusable with an already existing name.
(ii) Obtaining a license issued by the “Madeira Development Company” (“Sociedade de Desenvolvimento da Madeira”) in order to allow the company to operate within the Madeira Free Trade Zone;
(iii) Deposit of the minimum share capital;
(iv) Signature of the Memorandum and Articles of Association by the correspondent shares holders.
(v) Registration of the company near the Commercial Registry Office of Madeira Free Trade Zone with automatic publication of the Articles of Association adopted at the official web site of the Ministry of Justice;
(vi) Registration of the commencement of the activity form near the Tax department and the Social Security.
The main types of companies are the following:
(i) A limited liability company (locally called “Limitada” or “Lda”); and
(ii) A limited liability company incorporated by shares / stock company (locally called “Sociedade Anónima” or “S.A.”)
In order to incorporate a limited liability company (“Limitada”) it must be respected the statutory minimum share capital of € 5.000 (five thousand euros). The incorporation of a stock company is subject to a higher share capital in the minimum amount of € 50.000 (fifty thousand euros).
There are no requirements to have local directors. In fact, directors can be nationals of any other countries.
The relevant aspects of the principal type of companies are described below:
PARTICULAR ASPECTS OF STOCK COMPANIES
(S.A. SOCIEDADE ANÓNIMA)
ISSUANCE OF BONDS
According to chapter IV of the Portuguese corporate code stock companies are allowed to issue bonds, provided its articles of association have been registered more than a year before the date of issuance of bonds.
SA companies are not allowed to issue bonds in amount exceeding twice the value of its own capitals. The fiscalization body shall supervise the fulfilment of this requirement.
There are also some exceptions to the limit of issuance of bonds. The issuance of bonds must be deliberated by the shareholders, unless the articles of association authorise the board of directors to do so.
The issuance of bonds when made for private offer shall be registered at the commercial registry. The bond titles cannot be issued before the registration of the issuance of bonds near the commercial registry.
The creditors of series of bonds may meet at a bondholders meeting. The bondholders meeting is convoked and presided by the common representative of the bondholders.
A company may issue bonds that:
1. Apart from the right to obtain a fixed interest, confer to the bondholder the right to a supplementary interest or a reimbursement premium, which can be pre determined (fixed interest) or a variable interest, depending on the profits of the company,
2. Show a reimbursement plan and an interest income dependent and variable in accordance with the profits;
3. That may be converted in shares;
4. That may confer the right to subscribed one or more shares;
5. That confers premiums of issuance
7. Supplementary interest and reimbursement premium
The supplementary interest and the reimbursement premium may be determined;
1. as a fixed percentage of each annual profit, independently from its amount and from its oscillation during the loan period;
2. in accordance with the previous paragraph, but only if the profits exceed a certain minimum limit of profits, which shall be determined on the issuance of the bonds. The applicable percentage may be calculated on top of all the profits or only on the exceeding part;
3. in accordance with previous paragraphs, but as a variable percentage of the volume of the profits of each exercise or only on the profits exceeding the limit referred on the last paragraph.
4. in accordance with the previous paragraphs, but with the imputation of the profits of the shareholders and the bondholders in proportion to the nominal value of the existing titles.
The profits to be considered for the purposes referred on paragraph 1 and 2 of the previous item (Supplementary interest and reimbursement premium), correspond to the net profit of the exercise deducted from the amount due for legal and compulsory reserves, without consideration of the depreciations, adjustments and provisions exceeding the maximum legal limits accepted on the corporate income tax.
The determination of the profits to be considered for the purpose defining the amounts due to the bondholders, as well as the calculation of the amounts to be paid to the bondholders shall be submitted, together with the management report, to the opinion of an auditor appointed by a meeting of the bondholders.
The proposal of issuance of bonds to be submitted to the shareholders meeting, must define the following conditions:
A) the global amount of bonds to be issued and the reasons for such issuance, the nominal value of the bonds, the issuance price and the reimbursement price or the method of determining the reimbursement price.
B) The interest rate and, depending on the cases, the method of calculating the appropriations for the payment of the interest and the reimbursement or the fixed interest rate, the criteria for determination of the supplementary interest or the reimbursement premium;
C) The loan amortisation plan,
D) The identification of the bond subscribers and the number of bonds to be subscribed by each one of them, should it be a private subscription;
The supplementary interest of each year shall be paid in one single payment or in several payments, together with or separated from the fixed interest. The reimbursement premium shall be integrally paid at the date of amortisation. The amortisation date cannot be scheduled for a date prior to the deadline for the approval of the accounts.
The bonds issued can be converted into shares.The proposal of issuance of bonds convertible into shares must be approved by a majority of votes. The majority shall be determined on the articles of association of the company. The proposal of issuance of bonds must specify:
1. the global amount of bonds to be issued and the reasons for such issuance, the nominal value of the bonds, the issuance price and the reimbursement price or the method of determining the reimbursement price, the interest rate and the loan amortisation plan;
2. The terms of the conversion;
3. If the preference right of the shareholders on the subscription of the bonds converted into shares shall remain untouched or if it should be withdrawn;
4. The identification of the bond subscribers and the number of bonds to be subscribed by each one of them, should it be a private subscription;
The bondholders are entitle to the interests of the correspondent bonds until the moment of its conversion.
The issuance conditions shall determine the regime of attribution of dividends to be applicable to the shares created by the conversion of the bonds, regarding the year on which the conversion occurs.
The increase of the share capital resulting from the conversion of bonds into shares shall be declared in writing by any of the company directors.
It is possible to issue bonds with warrant. Such bonds confer the right to subscribe one or more shares that will be issued by the company during a certain length of time and for the price and conditions set at the moment of issuance.
Unless otherwise established on the conditions of issuance, the rights of subscription can be negotiated and sold independently from the bonds.
Under the terms of decree law no. 160/87, of 3rd of April, the limited liability companies (LDA) may issue shares, being applicable the regime of the SA companies above described.
THE REGIME OF PREFERENCE SHARES
The memorandum of association of the company may authorise the issuance of preference shares without voting right, provided it does not exceed half of its share capital.
Preference shares confer to its owner the right to a priority dividend, equivalent to not less than 5% of its nominal value, withdrawn from the distributable profits, which may be distributed to the shareholders and to the priority reimbursement of its nominal value on winding up the company.
Apart from these rights, the preference shares without voting right confer to its owner all the rights inherent to ordinary shares, except the right to vote.
These shares do not count for the determination of the representation of the share capital, required by law or by the memorandum of association for the deliberations of the shareholders.
Non payment of the priority dividend
If the distributable profits or the actives on liquidation are not sufficient to fulfil the payment of the dividend or the nominal value of the shares, it shall be split proportionally by the preference shares without voting right.
The priority dividend not paid during a social exercise, shall be paid on the following 3 social exercises, prior to dividends of such exercises, provided there are distributable profits.
If the priority dividend is not fully paid during 2 social exercises, the preference shares will confer, from there on, the right to vote under the same conditions of the ordinary shares, being such right cancelled only on the social exercise after the one in which the overdue dividends are paid.
Participation on the shareholders meetings
If the memorandum of association of the company does not allow shareholders without voting right to participate on the ordinary shareholders meetings, then the owners of preference shares with out voting right, are entitle to be represented at those meeting by one of such owners, provided those shares were issued at the same time.
The ordinary shares may be converted into preference shares without voting right, upon deliberation of the shareholders meeting. The deliberation must be published.
The conversion of shares is made upon request of the interested shareholders, within the period set on the deliberation, not less than 90 days from the date of the publication, being its execution submitted to the principle of equal treatment.
1. Special rights of the owners and privilege shares.
Under the terms of article 24º of the Portuguese Corporate Code (hereinafter PCC) privileges can only be conceded to the shareholders if authorise by the memorandum of association.
The authorisation can be given at the time of incorporation of the company or introduced by amendments.
For this analysis there are, in particular, 2 modalities of special rights that need to be referred: those related to the distribution of the profits and those connected with the reimbursement of the shares due to the winding up of the company.
The first (connected with the distribution of dividends) concedes a privilege which consists on giving to those types of shares a certain percentage of dividends calculated in respect to the nominal value of the share. The priority dividend may be accumulated or not, meaning in case of accumulation, that if the priority dividend due for one certain social exercises is not fully paid, it shall then be paid prior to any other dividend, by the profits of the social exercises of the following years (for example: if the privilege is 5% of the nominal value and during a certain exercise it is only paid 3% of that nominal value, then on the following year the owner of the privilege shares is entitle to receive, prior to any other dividend receiver, 2% in respect to the previous year plus the 5% due for the current year). Another factor of importance is the existence or non existence of the right to participate of the remaining dividends, meaning that either the privilege shares may be fully paid upon satisfaction of the privilege dividend or it may also be entitle to participate together with the other type of shares (ex: ordinary shares) on the distribution of the remaining available dividends.
2. Companies that can issue privilege shares
According to the Portuguese law there are no requirements in respect to the issuing company, which means that any S.A. company can issue privilege shares.
3. Contractual authorisation for the creation of these shares
In order to issue privilege shares it is required the specific authorisation of the memorandum of association. The memorandum of association should not simply authorise the issuance of such type of shares, it should also specify eventually the number of such shares that will be created, the express indication of the number of shares and the rights inherent to such category of shares. One fundamental characteristic is naturally the percentage of priority dividend that such shares are entitled to.
As previously mentioned, the authorisation can be given at the memorandum adopted at the incorporation of the company, or alternatively during the life of the company by way of amendment to the former memorandum. The authorisation may respect also to shares to be issued immediately after the incorporation of the company or it may respect to shares to be issued on a future increase of capital. In any case such amendments shall be formalised by public deed signed before a notary public, preceded by a shareholders meeting in which 2/3 of the votes approve the amendment. There is however doubts if the qualified majority of the votes are enough to amend the articles of association in light of issuing new privilege shares.
In Italy for example, this matter has been studied in face of article 2376º 1 tr. Codice Civile: «Se esistono diverse categorie di azioni, le deliberazioni dell’assemblea, che pregiudicano I dirriti di una di esse, devono essere approvate anche dall’assemblea speciale dei soci della categoria interessata» FERRI, Le società, pp. 340.
The solution is not pacific, however, it is commonly accepted that due to the principle of equal treatment of the shareholders, it should not be created any differentiation between ordinary and privilege shareholders.
4. Limitation on the number of privilege shares
Some legislation establishes limitations to the quantity of privilege shares that can be issued, in other, such limitations do not exist. Among theses last, we can find the German Law, and on the opposite side we can find the British Companies Acts and the Italian Law. The PCC disposes on its article 341º no 1 that privilege shares can not exceed half of the amount of the share capital. The share capital corresponds to the nominal share capital, not having any relevance if it is liberated or not, or if it has been affect by losses.
5. Specific content of those shares
The preference shares in comparison to the ordinary shares have an added patrimonial privilege however on the other hand they do not have the voting right.
The preference shares without voting right concede an untouchable double privilege to its holders:
- Regarding the dividends: the right to a priority dividend not less than 5% of its nominal value.
- Regarding the reimbursement: the right to priority reimbursement of its nominal value at the liquidation of the company.
According to article 341º no. 2 of PCC the priority dividend shall be withdrawn from the profits which under the terms of article 32º and 33º of the said Code can be distributed to the
shareholders, therefore, before payment of the priority dividend, the accumulated losses and the legal reserves shall be covered. Then the distributable dividends shall be used at first to pay the priority dividends.
Article 297º no 1 do PCC allows payments made to the shareholders by anticipation of profits. The owners of preference shares are entitle to theses anticipations in the same conditions of the owners of ordinary shares, having however priority on the payments made.
6. Conversion of other shares in preference shares
The conversion of shares is subject to the fulfilment of 2 requirements (article 341º no. 1 PCC):
- The existence of an authorisation on the memorandum of association (regarding this requirement, the memorandum of association should authorise the conversion of shares);
- The limit of such category of shares (regarding this requirement the limited amount of preference shares shall be calculated in connection to the amount of preference shares to be created by issuance and by conversion).
REDEEMABLE PREFERENCE SHARES
If authorised by the memorandum of association, shares benefiting from a patrimonial privilege may be subject to redemption on a fixed date or whenever the shareholders decide on a shareholders meeting.
Redeemable shares shall be redeemed in accordance with the dispositions of the memorandum of association, without prejudice of the following rules:
– Shares must be liberated before its redemption.
– Redemption is made by the nominal value of the shares, unless the memorandum of association establishes the concession of a premium.
– The value due for the redemption of the shares, including the premium, can only be withdrawn from profits and distributable reserves, provided the net assets of the company are higher than the amount of the share-capital added of the legal reserves. Also the redemption of the shares can not be done unless the legal reserve is fulfilled and losses are covered.
– From the redemption on, an amount equal to the nominal value of the shares redeemed shall be taken into a special reserve, which can only be used for incorporation on the share capital, without prejudice of its cancellation in case of capital decreases.
- The redemption of shares does not implicate the reduction of the share capital and, unless the memorandum disposes otherwise, if decided by the shareholders meeting, it can be issued new redemption shares on the same amount of the redeemed shares.
- The deliberation of redemption of shares is subject to registration and publication.
- The memorandum of association may establish penalties for the non compliance of the duties of redemption on the set date; In case of omission, any holder of those type of shares may require a Court Law to promote the dissolution of the company, one year after the date set for the redemption of the shares.
1. The importance of the memorandum of association.
The central instrument for the creation of redeemable shares is the memorandum of association, either it is the memorandum adopted at the incorporation of the company or its future amendment.
The memorandum of association does have to comply with the rules set on paragraphs of article 345º of the PCC, therefore, the memorandum of association apart from the authorisation to issue redeemable shares it should:
a) Determine the event that will operate the redemption of shares;
b) Establish the premium for the redemption, should it exist;
c) If so required, forbid the issuance of new redemption shares of same kind, in substitution of the redeemed;
d) Establish penalties for the non compliance of the obligation of redemption on the date fixed on the memorandum of association;
e) Determine the procedures for the redemption of the shares.
2. The redemption act.
The redemption of shares even when occurring on the date fixed on the memorandum of association does not operate automatically.
The redemption is therefore dependent of a special deliberation taken for that purpose. In fact the redemption (because followed by a payment) needs to be analysed by the shareholders, at least to verify if there are funds to proceed with the payment due. This operation obviously should take place at a shareholders meeting.
The redemption of the shares does not have to be formalised by public deed.
3. Consequences of the redemption.
The deliberation of redemption will cause 2 consequences:
1 – The shares will be cancelled, and its owners will become creditors of the company for the amount due for the redemption;
2 – Such credit is immediately due.
According to no 7 of article 345º of PCC the redemption of shares does not implicate the reduction of the share capital. The first option therefore is to allow the shareholders meeting to decide to issue new redemption shares to substitute the extinguished, unless the memorandum of association does not authorises it.
No. 6 of the referred article orders, that from the date of redemption, the importance equivalent to the amount of the nominal value of the shares, shall be incorporated on a special reserve which can only be used for incorporation on the share capital, unless the shareholders opt to reduce proportionally the share capital. This paragraph corresponds to the paragraph e) of article 39th of the 2nd Directive CEE.