Worldwide: Madeira IBC Companies Are Increasingly Becoming Favoured International Corporate Structures To Consider In France

A Changing Focus Regarding International Tax Planning

International tax planning is becoming increasingly sophisticated, with considerations often far more complex than just seeking the 'lowest' rate of corporate tax.

Particularly in markets such as Europe, a location that facilitates cross-border trade and investment is becoming increasingly important for businesses aiming at globalisation and to remain competitive with their peers.

A number of previously popular structures have become difficult to use, especially in markets like the EU, due to non-compliance with OECD, BEPS and Pillar II requirements, which are changing the landscape of international tax planning.

The Madeira International Business Centre (MIBC): An Attractive Option for International Tax Planning

The Madeira International Business Centre (MIBC) has been around since the late 1980s and has seen a series of developments introduced which make it increasingly attractive for international tax planning.

• Madeira IBC companies, that satisfy the minimum substance criteria, benefit from a 5% corporate income tax rate for business conducted internationally in Madeira.

MIBC, based in the Madeira Portuguese Island, has; a specific taxation regime for international services, an industrial free trade zone and a ship registry that is fully integrated into the Portuguese and European legal system. MIBC is also fully compliant with the requirements of the OECD, BEPS and other EU Directives.

Based in the Atlantic Ocean, Madeira is a one-and-a-half-hour flight from the Portuguese capital, Lisbon. The island has taken several active steps to ensure that the important topic of substance is addressed in terms of corporate structuring. Companies in Madeira have predefined substance rules, specifying the criteria needing to be met, to be fully compliant with the regime.

The substance criteria are defined as having at least one employee employed within the first six months of operation and a €75,000 investment in fixed assets, tangible or intangible, within the first two years of operation. Alternatively, there must be six full time employees. All employees need to be based/tax resident in the island of Madeira.

What Advantages Can an MIBC Offer to French Tax Residents?

MIBC companies can be used as holding companies or for trading purposes.

The Double Tax Treaty between Portugal and France, dating originally from 1971, presents a number of tax efficiencies and other benefits, as detailed below:

• Madeira IBC companies, that satisfy the minimum substance criteria, benefit from a 5% corporate income tax rate for business conducted internationally and up to 14.7% for business conducted in the Portuguese national market, with the exclusion of financial service activities.
• Distributions such as dividends, capital gains, interest, royalties and services made to French residents, single or corporate shareholders of the MIBC, will benefit from a FULL exemption from withholding tax in Portugal. This applies to all Portuguese non-residents as long as they are not resident in one of Portugal's "blacklist" jurisdictions.
• In addition, Portuguese corporates will also be entitled to the participation exemption in Portugal, if holding a participation of at least 10% for 12 consecutive months.
• As a Madeira IBC is a full Portuguese company, it is regarded as an onshore company and is subject to Portuguese legislation. This means that the DTT between Portugal and France is applicable. It only needs to be considered for inbound distributions to French tax residents, as the outbound distributions from Portugal are not subject to tax according to the rules of the Madeira IBC.
• No withholding tax applies when the EU Parent & Subsidiary Directive and/or the EU Interest & Royalty Directive apply.
• The Double Tax Treaty may provide for the following tax on income received in France:
  • Up to 15% tax rate on dividends paid.
  • A 12% tax rate on interest (or 10% in the case of interest on bonds).
  • 5% on royalties.

What Attraction is there for Employees of French Nationality to Move to Madeira?

The non-habitual resident regime attracts a flat personal income tax rate of 20% with no ceiling, making it an attractive reason for employees to relocate.

Why is Madeira Regarded as a Favourable Place to Do Business?

Madeira is regarded as a favourable place to do business in Europe for a variety of reasons:

• Lower operational costs, namely set up fees, costs of employment (less than €15,000 for a full-time employee per annum, including National Insurance), registered office fees, local directors, and other costs associated with the set up and maintenance of a company.
• Simple structure: the structure is easy to administer when compared to other jurisdictions, making the running costs lower and providing fewer operational complexities.
• Madeira IBCs have been approved by the European Commission, due to the definition of Madeira as a less prosperous region and, on this basis, the European Commission has approved a lower tax rate in compensation for Madeira not receiving specific subsidies from the EU.
• This 5% tax rate is guaranteed until the end of 2027 with discussions currently ongoing with the EU for a further extension. The tax rate has been reviewed and renewed every few years since the 1980s.
• The ability to operate and do business in Madeira is straight forward, with a strong pool of talent in Madeira.
  • Typically, Madeirans speak at least two additional languages, in many cases, English and French.
  • With a university situated on the island, students from the IT and other sectors can be employed at a significantly reduced cost, when compared to neighbouring EU jurisdictions.
• Incubation and R&D facilities exist in Madeira, to assist start-up operations.
• European subsidies and grants may be applied, as Madeira forms part of the EU.
• When registering a company through the MIBC, an automatic VAT number is allocated to the company and no separate application needs to be made.

Summary

Madeira should be rightly considered as a 'new' essential in relation to corporate structuring, particularly for international business, and as an entry point into the EU market or even a means to doing business in the EU.

Whether it be establishing companies for IT applications, for trading, or other types of services, Madeira is a good fit for virtually all sectors (with the exception of financial services).

Madeira is fully considered to be part of Portugal. Similarly, Madeira companies are also regarded as Portuguese and required to comply with Portuguese laws and regulations. Madeira is therefore not listed as a blacklist jurisdiction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.