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EU Commission Finally Approves New Madeira Free Zone Scheme

Tax-News.com, Brussels

12 December 2002


After lengthy and at times difficult negotiations between the EU Commission, the Portuguese government and the autonomous zone of Madeira, the Commission has finally approved a new aid scheme for companies setting up in the industrial free zone and the international services centre of the free zone of Madeira over the period 2003-2006. In its decision, the Commission finds that the aid, granted in the form of tax reductions up to the end of 2011, could contribute to the economic diversification of the region. The aid should also compensate for the handicaps brought about by the region's dependence on a small number of sectors (such as tourism and public works).

The previous scheme authorised by the Commission expired on 31 December 2000 and was suspended by the Portuguese authorities in 2001 and 2002. The Commission decision therefore concerns the creation of a new aid scheme for the free zone of Madeira for the period 2003-2006. The free zone will now comprise an industrial free zone, an international services centre and an international shipping register, and the new companies which will be licensed to carry on business there between 1 January 2003 and 31 December 2006 will be able to enjoy a reduced rate of tax of 1% in 2003-2004, 2% in 2005-2006 and 3% in 2007-2011 (instead of the normal rate, currently 30%).

As certain aspects concerning application of the scheme to the international shipping register still have to be clarified, that part of the free zone scheme will be the subject of a separate Commission decision. Access to the scheme will be restricted to companies which meet the specific eligibility criteria, based on the number of new, permanent jobs created. Companies that create more than five jobs will have access to the scheme without further conditions, while those that create between one and five jobs will be eligible only if they make a minimum investment of EUR 75000 during the first two years of business.

In all cases, the tax benefits will nonetheless be limited by the ceiling placed on the tax base which ranges from EUR 1.5 million (where less than three new jobs are created) to EUR 125 million (where more than 100 new jobs are created). The companies involved will have to start business within a fixed time limit (six months in the case of international services and one year in the case of industrial activities), or else the new licences granted in the free zone will no longer be valid.

Access to the international services centre is also restricted to the activities included in the list drawn up by the Portuguese authorities on the basis of the statistical classification of economic activities in the European Community (NACE Rev. 1.1). This list includes services supplied to agriculture, forestry and fisheries, the motor trade including wholesale, transport and communications, real estate, renting and services to business, higher education and adult education, recreational, cultural and sporting activities and personal services. However, the list explicitly excludes all financial and insurance intermediary activities, financial and insurance auxiliary activities and all "intra-group services" (coordination, accounting and distribution centres).

In its decision, the Commission particularly notes that the aid will be granted in an outermost region which is one of the least developed in the Union, and is aimed at promoting the establishment of activities which at present play little or no part in the region's economy. Given that activities which would contribute very little to the development of the region compared with the possible amount of aid (i.e. financial services and "intra-group" services) are excluded from the scheme, and that activities with a greater local impact (such as industrial activities and those which will lead to more job creation) are given priority, the Commission felt that the aid was likely to make a proportional contribution to the economic diversification of the region, and therefore to offset the additional costs of carrying on business which arise from the factors outlined in Article 299(2) of the Treaty (remoteness, insularity, small size, difficult topography and climate and economic dependence on a few products).

The Commission therefore considers that the aid will be granted in accordance with the conditions laid down in the guidelines on national regional aid with regard to operating aid, and thus meets the conditions necessary for it to be considered compatible with the common market under the derogation set out in Article 87(3)(a) of the Treaty.


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