Madeira Free Trade Zone (Portugal)

[Super Tucano]

Hello,

I've been searching the forum and it seems that, like myself, quite a few people are interested in moving to Portugal and are trying to find a company solution that works well with it.

In that regard, why isn't the Madeira Free Trade Zone mentioned more? Companies there are basically normal Portuguese companies that, upon fulfilling certain requirements, only have to pay 5% corporate tax.

That would result in a low tax burden and no need to worry about CFC and effective management rules, completely above board.

What am I missing? Are there hidden drawbacks?

Any comments would be appreciated.

BR.

 

[fshore]

fulfilling certain requirements

Maybe when you dig a bit further into this you'll get a clearer picture.

 

[Perry8]

What am I missing? Are there hidden drawbacks?

Both the Madeira and the Canary Islands options seems to be very good options. BUT, you either need to employ a number of people or invest a substancial amount of money to be qualified.

You could have a look at Ceuta and Melilla. The tax there is on pair with Cyprus and Ireland, and there are not many requirements.

 

[Super Tucano]

Maybe when you dig a bit further into this you'll get a clearer picture.

Both the Madeira and the Canary Islands options seems to be very good options. BUT, you either need to employ a number of people or invest a substancial amount of money to be qualified.

You could have a look at Ceuta and Melilla. The tax there is on pair with Cyprus and Ireland, and there are not many requirements.

Thank you for the feedback.

So that's the main issue people have with it?

The tax benefits are tied to the number of jobs you create but one of the jobs can be yours and that allows you to have up to € 2,73 million of taxable income at the 5% rate.

Plus, if you create less than 6 jobs, you have to invest €75,000 in the acquisition of tangible or intangible (goodwill, copyrights, trademarks, intellectual property, etc) fixed assets during the 2 first years of activity.

I can live with that. My fear is an overbearing tax office or a big amount of ongoing paperwork/bureaucracy.

Ceuta and Melilla would unfortunately bring about the problem of effective management rules and also substance for someone living in Portugal.

 

[Perry8]

So that's the main issue people have with it?

Yes, that is the big issue. It makes it "too expensive" for most people that work for themselves. They tend to use Malta (effective 5% tax after refunds), Cyprus (12,5%), Ireland (12,5%), or to a lesser degree Gibraltar (10% and no VAT) instead.

If you have a business of a certain size it might not matter to much, provided that you can find qualified people. The advantage with Madeira is that it is a fully EU recognised "tax haven", also when it comes to VAT.

 

[Super Tucano]

Yes, that is the big issue. It makes it "too expensive" for most people that work for themselves. They tend to use Malta (effective 5% tax after refunds), Cyprus (12,5%), Ireland (12,5%), or to a lesser degree Gibraltar (10% and no VAT) instead.

If you have a business of a certain size it might not matter to much, provided that you can find qualified people. The advantage with Madeira is that it is a fully EU recognised "tax haven", also when it comes to VAT.

Thanks. It seems that it should work for my case then.

It might be more expensive than most other options but 5% tax while living in Portugal, being 100% above board and EU "approved" sounds perfect.

 

[fshore]

Thanks. It seems that it should work for my case then.

It might be more expensive than most other options but 5% tax while living in Portugal, being 100% above board and EU "approved" sounds perfect.

You will live in Madeira right ?
Keep in mind if you employ yourself then you need to pay income tax (at higher rates) and social security on that income.

 

[Super Tucano]

You will live in Madeira right ?
Keep in mind if you employ yourself then you need to pay income tax (at higher rates) and social security on that income.

Indeed, you'll have to have your fiscal residency in Madeira if you want your job to count towards the number of jobs created. A decent pied-à-terre would cost +- €500 euros per month.

If you pay yourself a small salary, say €1000, then taxes are not that bad in absolute terms. For that amount, social security would cost €237,5 per month and income tax a further €117 per month according to a simulator I found online.

There's always the option to hire someone locally and do away with all of the above.

 

[fshore]

Indeed, you'll have to have your fiscal residency in Madeira if you want your job to count towards the number of jobs created. A decent pied-à-terre would cost +- €500 euros per month.

If you pay yourself a small salary, say €1000, then taxes are not that bad in absolute terms. For that amount, social security would cost €237,5 per month and income tax a further €117 per month according to a simulator I found online.

There's always the option to hire someone locally and do away with all of the above.

Seems you have found why this is not for everyone, but if you want to live in Madeira then can be a great option.

I think you forgot the social security that the employer has to pay in your calculations.

Not sure if there are other requirements in regards to industry or physical location or anything else, have you researched that?

 

[Martin Everson]

The headline 5% corporate tax rate is a trap. That tax rate only lasts until 2027. The devil is in the detail with the Madeira option. Last time I looked at it back in 2017 it made no financial sense to move or operate there.

Personal income tax alone is very high. You need to calculate the total costs.

 

[Super Tucano]

Seems you have found why this is not for everyone, but if you want to live in Madeira then can be a great option.

I think you forgot the social security that the employer has to pay in your calculations.

Not sure if there are other requirements in regards to industry or physical location or anything else, have you researched that?

As a manager, afaik, you don't actually have to live in Madeira, just if you want your job to count towards the jobs created number. Personally, I'm thinking about living in Lisbon but wouldn't mind spending some time in Madeira, it's a very nice place with warm winters (being off the cost of Africa).

Indeed I forgot about the social security but on the employee's side, in this case it would be a further €110 (11%).

There are other requirements but they don't matter to most people (like you can't operate financial services). If you employ more than 15 people in manufacture/light industry you can even slash the tax rate to 2.5%, making the effective tax rate probably very close to 0%.

The headline 5% corporate tax rate is a trap. That tax rate only lasts until 2027. The devil is in the detail with the Madeira option. Last time I looked at it back in 2017 it made no financial sense to move or operate there.

Personal income tax alone is very high. You need to calculate the total costs.

The 2027 deadline is a risk but the special regime has been extended since the 80s and its ending would destroy the local economy. Still, makes it a bit of a gamble.

Regarding personal taxation, as a non-habitual resident, placing an EU holding company (as long as you don't directly control it) between the Madeira company and yourself would result in tax-free dividends.

It's for sure not straightforward but I have been living in multiple countries in the past 9 years and would really like to settle down back home. This seems like the best way to do it while managing a not so small e-commerce/direct-to-consumer company above board and the costs themselves are not that high.

 

[catpower]

As a manager, afaik, you don't actually have to live in Madeira, just if you want your job to count towards the jobs created number. Personally, I'm thinking about living in Lisbon but wouldn't mind spending some time in Madeira, it's a very nice place with warm winters (being off the cost of Africa).

Indeed I forgot about the social security but on the employee's side, in this case it would be a further €110 (11%).

There are other requirements but they don't matter to most people (like you can't operate financial services). If you employ more than 15 people in manufacture/light industry you can even slash the tax rate to 2.5%, making the effective tax rate probably very close to 0%.



The 2027 deadline is a risk but the special regime has been extended since the 80s and its ending would destroy the local economy. Still, makes it a bit of a gamble.

Regarding personal taxation, as a non-habitual resident, placing an EU holding company (as long as you don't directly control it) between the Madeira company and yourself would result in tax-free dividends.

It's for sure not straightforward but I have been living in multiple countries in the past 9 years and would really like to settle down back home. This seems like the best way to do it while managing a not so small e-commerce/direct-to-consumer company above board and the costs themselves are not that high.

I think that anyway 75k euros are to be invested,plus the creation of a certain number of jobs,same is the ZEC in Canary Islands.

 

[Martin Everson]

Regarding personal taxation, as a non-habitual resident, placing an EU holding company (as long as you don't directly control it) between the Madeira company and yourself would result in tax-free dividends.

You will need a tangible holding company where place of control and operation is in the country of incorporation. How do you plan to get the offshore holding company in your name? You will be in trouble for creating a tax evasion structure for onshore activity if the money ever came back in your name from holding company.

It's for sure not straightforward but I have been living in multiple countries in the past 9 years and would really like to settle down back home. This seems like the best way to do it while managing a not so small e-commerce/direct-to-consumer company above board and the costs themselves are not that high.

Non-habitual residence (NHR) status only lasts 10 years. So 5% tax regime lasts 7 years and NHR lasts 10 years . Also Portugals Socialist party had a proposal to abolish NHR for retirees coming to Portugal in 2020. Lets hope they don't so for this scheme.

 

[Super Tucano]

I think that anyway 75k euros are to be invested,plus the creation of a certain number of jobs,same is the ZEC in Canary Islands.

Yes, it's quite similar to the ZEC in the Canary Islands but with less/more lenient requirements.

You will need a tangible holding company where place of control and operation is in the country of incorporation. How do you plan to get the offshore holding company in your name? You will be in trouble for creating a tax evasion structure for onshore activity if the money ever came back in your name from holding company.

Non-habitual residence (NHR) status only lasts 10 years. So 5% tax regime lasts 7 years and NHR lasts 10 years . Also Portugals Socialist party had a proposal to abolish NHR for retirees coming to Portugal in 2020. Lets hope they don't so for this scheme.

The holding company bit is the simplest, from what I gather. I'll create it in the EU (benefiting from the Parent-Subsidiary Directive and no CFC rules because of the EU
freedom of establishment for companies) and have it managed by one of the Big Four, or a reputable local company, with local directors.
I imagine that they'll have to meet 2-3 times per year tops so hopefully it won't be expensive.

Interestingly, most companies in the Portuguese stock exchange are part-owned by Dutch holding companies.

The NHR regime already changed for retirees, now they have to pay 10% tax on foreign source pension income, but only for new applications starting April 1, 2020. The people that already had the status stay at 0% for the 10 year period. The NHR regime was created by a Socialist Party government, shockingly enough, so I don't think that they'll want to do away with it.

I loathe complex structures and bureaucracy (like most people here I assume) but I'll have to bite that bullet.

 

[Martin Everson]

The holding company bit is the simplest, from what I gather. I'll create it in the EU (benefiting from the Parent-Subsidiary Directive and no CFC rules because of the EU
freedom of establishment for companies) and have it managed by one of the Big Four, or a reputable local company, with local directors.
I imagine that they'll have to meet 2-3 times per year tops so hopefully it won't be expensive.

You will be UBO for EU holding company which will be in UBO public register in EU. Plus the bank account for holding company if in CRS country will report the account to Portugal under CRS because you are UBO. Does not matter how many local directors you have you will be UBO meeting with local directors '2-3 times per year'.

Since January 10th 2020 all banks and obligated entities (including Big Four) in EU by EU law must now inform the public registry that you are a UBO of the company or receive a heavy fine and this includes all EU providers of corporate services also. Anyone assisting you in not complying with updating the UBO register or concealing ownership will face a fine of up to 1m euros for breach and 1k euro a day for continued breach.

‘Obligated Entities’, e.g. lawyers, accountants, administration service providers, credit institutions and financial institutions, are responsible to update the Public Registry. The Fifth AML Directive widens the scope of services providers to include: custodian wallet providers, virtual currency and fiat currencies exchange service providers; art dealers (≥€10,000); in addition to auditors, external accountants and tax advisors, any person that provides direct or indirect material aid, assistance or advise on tax matters as principal business or professional activity; and estate agents including when acting as intermediaries in the letting of immovable property (≥€10,000 monthly rent).

I discussed it below in detail months ago.

https://www.offshorecorptalk.com/th...roblems-avoid-bank-problems.27898/post-117936
P.S Have you also looked into Portugal Exit Taxation as part of ATAD? I wouldn't want to just try and leave before 10 years is up as a Non-Habitual Resident . Bottom line forget about Portugal solution.

 

[fshore]

Regarding personal taxation, as a non-habitual resident, placing an EU holding company (as long as you don't directly control it) between the Madeira company and yourself would result in tax-free dividends.

Why can't you just make the holding company the operating company? In a low tax eu country like Ireland, Cyprus? Won't be 5% but not that much higher.

 

[Super Tucano]

You will be UBO for EU holding company which will be in UBO public register in EU. Plus the bank account for holding company if in CRS country will report the account to Portugal under CRS because you are UBO. Does not matter how many local directors you have you will be UBO meeting with local directors '2-3 times per year'.

Since January 10th 2020 all banks and obligated entities (including Big Four) in EU by EU law must now inform the public registry that you are a UBO of the company or receive a heavy fine and this includes all EU providers of corporate services also. Anyone assisting you in not complying with updating the UBO register or concealing ownership will face a fine of up to 1m euros for breach and 1k euro a day for continued breach.

‘Obligated Entities’, e.g. lawyers, accountants, administration service providers, credit institutions and financial institutions, are responsible to update the Public Registry. The Fifth AML Directive widens the scope of services providers to include: custodian wallet providers, virtual currency and fiat currencies exchange service providers; art dealers (≥€10,000); in addition to auditors, external accountants and tax advisors, any person that provides direct or indirect material aid, assistance or advise on tax matters as principal business or professional activity; and estate agents including when acting as intermediaries in the letting of immovable property (≥€10,000 monthly rent).

I discussed it below in detail months ago.

https://www.offshorecorptalk.com/th...roblems-avoid-bank-problems.27898/post-117936
P.S Have you also looked into Portugal Exit Taxation as part of ATAD? I wouldn't want to just try and leave before 10 years is up as a Non-Habitual Resident . Bottom line forget about Portugal solution.

I think you're misunderstanding me regarding the holding company.
I don't mind that Portugal knows about it or that I'm the UBO because it will be a normal holding company doing what holding companies are supposed to do, owning and managing stock in other companies.
The directors won't be nominees, they'll actually run the day-to-day of company. It's just that, being a holding company with just one or two subsidiaries, there won't be much to do.

The exit taxation is a fair point that I need to look into, thank you.

Why can't you just make the holding company the operating company? In a low tax eu country like Ireland, Cyprus? Won't be 5% but not that much higher.

Finding someone to manage a holding company will be simple. It will be much harder to find someone to actually operate my business, let alone someone that I'll trust. This whole thing is because of the "place of effective management" issue while living in Portugal.

 

[Martin Everson]

I think you're misunderstanding me regarding the holding company.
I don't mind that Portugal knows about it or that I'm the UBO because it will be a normal holding company doing what holding companies are supposed to do, owning and managing stock in other companies.
The directors won't be nominees, they'll actually run the day-to-day of company. It's just that, being a holding company with just one or two subsidiaries, there won't be much to do.

So you think the Portuguese taxman will be ok with this tax avoidance structure is what I am trying to explain? You think you can run a local business and receive the income offshore via the parent holding company that you control as UBO and not pay local Portugal tax?

I am trying to understand purpose of the holding company if it offers no tax advantage.

 

[Super Tucano]

So you think the Portuguese taxman will be ok with this tax avoidance structure is what I am trying to explain? You think you can run a local business and receive the income offshore via the parent holding company that you control as UBO and not pay local Portugal tax?

I am trying to understand purpose of the holding company if it offers no tax advantage.

Yes, I do. There's nothing wrong with the holding company setup. It's Portugal itself that doesn't tax me by granting me the NHR status, I'll declare every cent of it on my IRS form.

Seems that others had the same idea regarding the holding company:

Malta as a Holding Company Jurisdiction for Portuguese Non-Habitual Residents

NEWCO - Non-habitual residents in Portugal (page 7)

Of course, before committing to something like this I'll have everything properly vetted.

 

[Martin Everson]

NEWCO - Non-habitual residents in Portugal (page 7)

They describe a normal holding structure for offshore activity i.e Malta holding company with an EU subsidiary (non-Portugal). How does this solve your tax issues of living in Portugal with a Maderia company? This Would only work tax wise if EU subsidiary is OUTSIDE Portugal where you will be tax resident....lol.

You totally misunderstood the setup .