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Madeira Waits For The 'Devil In The Details' Of New Aid Scheme

by Ulrika Lomas, Tax-News.com, Brussels

30 December 2002


While corporate service providers in Madeira wait for the full text of the new aid scheme approved by the EU Commission for the period 2003 - 2006, speculation continues on crucial aspects of Madeira's new status. In a briefing note issued by prominent adviser Corporate and Treasury, Managing Partner Tim Wilkie predicts that the number of companies seeking licenses under the new scheme will be up to 80% fewer than under the old scheme, and highlights the value of companies which obtained their licenses under the previous scheme, given the restricted nature of the new scheme.

The previous scheme authorised by the Commission expired on 31 December 2000 and was suspended for new entrants by the Portuguese authorities in 2001 and 2002. Qualifying companies received exemption from corporation tax and capital gains tax until 2011. Under the Regional Aid guidelines imposed by the EU, the new scheme 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 corporation tax of 1% in 2003-2004, 2% in 2005-2006 and 3% in 2007-2011 (instead of the normal rate, currently 30%).

The Portuguese authorities are drawing up a detailed list of eligible activities under the new scheme, and Mr Wilkie speculates that this may allow all activities in the EC's statistical classification list (NACE Rev 1.1) other than those in section J (financial services) and section K subsection 74.1 (ancillary services), although the approved scheme appears to disallow the latter only if they are intra-group. This is in fact an irrelevant distinction for most EU parent companies, since Controlled Foreign Corporation rules ensure that most EU companies are unable to ring-fence the profits of internal administrative subsidiaries in any case.

Mr Wilkie also comments on the future of Madeira's VAT regime, which currently attracts many companies because it is the lowest in the Union at 13%. He worries that new rules likely to be approved at January's ECOFIN (finance ministers) meeting will apply a 'place of consumption' rule to VAT on digital services as from 2006, meaning that the telcos and other digital-product companies flocking to Madeira to take advantage of the 13% rate will be forced to apply destination country rates to their charges. Even if so, however, Madeira's other fiscal attractions are likely to maintain its appeal, he thinks.


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