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:

• Extremely low corporate taxe rate of 5% until the end of 2027;
• Full exemption from withholding taxes on the payment of dividends, interest and royalties;
• Access to Portugal’s network of Double Taxation Agreements;
• Full compliance with C.F.C. rules;
• Last but not least, full approval by the E.U., conferring the whole system the transparency and credibility which many other jurisdictions lack.

HOLDING ACTIVITIES

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:

• The E.U. Parent/Subsidiary Directive applies, exempting from taxation the income received from E.U. affiliated companies;
• Income received from non-E.U. subsidiaries, as well as worldwide income derived from interest and services, will be taxed at reduced tax rates of 3% to 5%;
• There is full participation exemption on worldwide capital gains received;
• No withholding taxes apply on dividends distributed to shareholders, regardless of their origin or nationality, with the exception of residents in Portugal;
• Access to Portugal’s network of Double Taxation Agreements.

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:

• E.U. register, with total access to continental and island cabotage within the framework of the E.U.;
• Flexible crew nationality requirements. The captain and 50% of the safe manning of the ship must be European or citizens of Portuguese-speaking countries. This requirement may be eliminated whenever it is duly justified;
• A competitive social security regime. The members of the crew of vessels registered in MAR and their respective employers are not obliged to contribute to the Portuguese social security system. However, some form of insurance must be guaranteed;
• Flexible mortgage system, allowing both parties to choose the jurisdiction which will regulate the terms of the mortgage;
• The vessel may be registered in the name of a company licensed within the framework of the MIBC or of a company based abroad.
• In this case, a legal representative in Madeira must be nominated with sufficient powers;
• Existence of a network of correspondents in various European countries with the objective of providing local support to shipowners wishing to register vessels in MAR.
• Specific advantages on the registration of yachts:
• E.U. register with full access and without any restrictions to navigation in E.U. waters;
• Low taxation, including V.A.T.;
• Reimbursement of V.A.T. in case the yacht is chartered;
• Exemption from V.A.T. on the purchase of fuel by commercial yachts and on chartering activities;
• No obligation to form a local company;
• No citizenship requirements for the crew on board the commercial yachts registered in MAR;
• Flexible social security regime for the crew on board commercial yachts.
• All classification societies recognised by Portugal may undertake surveys and other services regarding the registration of vessels in MAR.
• Currently, Portugal recognises seven classification societies in order to undertake some of its tasks within the framework of MAR:
• Lloyd’s Register of Shipping (LRS);
• Bureau Veritas (BV);
• Det Norske Veritas (DNV);
• Registro Italiano Navale (RINA);
• American Bureau of Shipping (ABS);
• Germanischer Lloyd (GL);
• Rinave Portuguesa (RINAVE).

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).

TAX SYSTEM

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.

TAXABLE PROFIT

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

±

Fiscal corrections

(e.g., non deductible costs or non taxable proceeds)

=

Taxable profit

–

Tax losses from previous accounting periods

–

Tax incentives

=

Taxable income

x

Tax rate

=

IRC assessed income

–

Tax Credit

=

Assessed IRC

–

Withholding at Source

–

Advance Payments

=

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:

• Production or acquisition of any goods or services such as used materials, labour, energy and other manufacturing, conservation and repair costs;
• Distribution and sale;
• Financial costs;
• Administrative costs, such as remunerations, allowances, etc.;
• Research, analysis, rationalisation;
• Tax planning;
• Provisions;
• Depreciation and amortization;
• Realised capital losses;
• Indemnities paid on non-insurable risks.

There shall not be accepted as costs for the determination of taxable profit, in particular, costs related to:

• illicit expenses;
• that part of rents under a leasing agreement designed for financial depreciation;
• non-substantiated charges;
• losses borne in relation to the transfer for consideration of corporate rights, regardless of how such transfer occurs, where:

- 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;

• IRC or any other taxes levied, directly or indirectly, on profits;
• Amounts shown on documents issued by taxable persons with null or void tax identification number, or by taxable persons whose notice of termination of business is officiously produced;
• Taxes or any other charges levied on third persons, which the enterprise is not entitled to bear;
• Fines and penalties of a non contractual nature resulting from any kind of infringement;
• Indemnities for any event with insurable risks;
• Allowances for expenses and compensation in respect of the use by the employee of his own vehicle in the service of the employer, which are not attributable to clients, regardless of how they are registered into the accounting records, where the employer does not keep for each payment a control chart of such displacements, except for that part subject to IRS in the hands of the beneficial owner;
• Amounts due on renting of light or mixed passenger vehicles (without a driver) for that part corresponding to the depreciation value of such vehicles not allowed as costs;
• Fuel costs for that part in relation to which the taxable person has no supporting document that they are related to goods belonging to his assets or used by him under a leasing arrangement, provided that the average consumption is not exceeded;
•  Interest and any other kind of remuneration of supplies and loans granted to the company by its members for that part in excess of an amount corresponding to Euribor 12-month reference rate on the day in which the debt was incurred plus 1.5 per cent spread.

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:

• the market value of goods or rights received, in the case of exchange;
• the market value of goods permanently allocated to non-business purposes, and in case of a merger or demerger;
• indemnity payment in case of expropriation;
• the value of the transaction after deduction of interest due since the last maturity date, or from issuance, first placement or endorsement, if no maturity occurred until the transfer date, as well as the difference for that part corresponding to such periods of time between the reimbursement value and the issuance price, in the case of securities whose remuneration is, wholly or partly, composed by that difference in case of securities;
• the consideration value in any other cases.

FISCAL LOSSES

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.

TAX CREDIT

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.