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Major Questions Surround New Madeiran Tax Regime

by Ulrika Lomas, Tax-News.com, Brussels

18 December 2002


Although the European Commission authorised a new aid scheme last week for companies setting up in Madeira's industrial free zone and international services centre over the period 2003-2006, allowing very low rates of tax to apply until 2011, its announcement raises almost as many questions as it answers.

The Commissions's press release specifies that tax benefits will 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). It's not clear whether 'tax base' means taxable profits, or taxable turnover, although the former is presumably intended. It's also a question, whether the limit would apply within each tax period, or whether unused 'tax base' in one period could be carried forward to the next. And how would the limit be calculated if the number of employees varies within or between tax periods?

The Commission classifies the scheme as acceptable state aid, but it's unclear whether this means that parent companies in other member states (than Portugal) would escape the operation of local Controlled Foreign Corporation rules. A number of EU member states have recently started tightening up on their CFC rules within the Union, for instance the UK in relation to Ireland. In the case of Madeira, if a subsidiary pays tax at a rate lower than 75% of the UK parent company's rate (usually 30%) then the parent would have to pay full UK tax rate on their Madeira subsidiary to the UK tax authorities. This would seem to defeat the object of allowing the Madeiran regime, except for non-EU parents, who would thus be preferred to EU parents.

The Commission sets a number of criteria that have to be fulfilled by companies seeking to be licensed under the scheme, for instance a minimum employee count of five: but is this a continuing criterion or not? What happens if the count drops below 5? It's also unclear whether employees can be of any EU or foreign nationality, or whether they have to be Portuguese or Madeiran only.

The Commission's announcement is also unspecific about the licensing and monitoring arrangements for the new scheme. Since it has been 'adopted' by Brussels, unlike the previous scheme, does that mean that administration will be handled elsewhere than in Madeira?

These and a number of other questions need to be answered before new entrants can make their plans. Advisory firms who specialise in Madeiran affairs are urgently seeking clarification from the authorities. The benefits are potentially great for companies which qualify to carry on business under the new regime 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%).


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