New companies in Madeira could lose tax benefits from 2025 – from 5% now to 14.7% in future

 In News, Offshores, Tax

The offshore tax haven of the island of Madeira, in force since 1980, could lose one of its fiscal benefits from next year.

The Portuguese government’s State Budget for 2025 could spell the end of the Madeira Tax Regime for new companies which currently pay 5% but would soon have to pay 14.7%.

Madeira provides the highest tax efficiency for companies and investors in Portugal.

Under the current tax regime’s general corporate tax rate, resident pre-established SME companies pay 11.7% on the first €50,000 capital gains and resident non-SMEs entities and permanent establishments of non-resident entities pay 14.7%.

There is a withholding tax on dividends of 0% or 28%. However, for new companies setting up the tax is even lower at 5%

There is also capital gains tax exemption on the sale of participations held in a Madeira registered company and exemption of notary fees and an 80% reduction on the rate of Stamp Duty, municipal transaction and property taxes.

For Madeira residents, capital gains are added to their annual income and taxed at the standard IRS (Personal Income Tax) rates, which range from 14.5% to 48%. However, only 50% of the gain is subject to taxation, and residents may also benefit from inflation relief after two years of property ownership.

But this new proposal means that if the budget is passed by parliament at the end of the month, as of January 1, 2025, new companies that establish themselves offshore on the Madeira Free Trade Zone will be taxed at the general IRC rate of the Autonomous Region, currently set at 14.7%, instead of the 5% currently in force for new companies.

The State Budget for 2025 (OE2025) could spell the end of an era for the Madeira Free Trade Zone, with the Government not planning to extend the island’s preferential tax regime in the OE2025 Draft Budget – on a tax regime that has been the cornerstone of Madeira’s tax status as an international business centre.

Although termination of the favourable 5% tax regime for new companies setting up on Madeira would mean in practice that from next year they would be subject to the general tax regime of 14.7%, the preferential 5% tax regime for new companies that had already set up prior to that date would continue until 2028.   

The non-inclusion of the extension of the preferential tax regime of the Madeira Free Zone in the draft OE2025 does not come in isolation, but in the context of longstanding pressure exerted by Brussels on the tax regime of the Madeira Free Zone. The turning point dates back to December 2020, when the European Commission declared the way Portugal implemented the so-called “III Regime” of the Madeira Free Trade Zone as illegal.

Between 2007 and 2014, companies licensed in the Madeira Free Trade Zone were able to enjoy lower IRC taxation on their profits between 2007 and 2020 (with rates of 3% from 2007 to 2009, 4% from 2010 to 2012, and 5% from 2013 to 2020). This incentive was provided for by law but presupposed the fulfillment of a number of conditions which Brussels says were not always met.

In other words they did not conform to decisions the European Commission made in 2007 and 2013 in relation to two issues: the geographical origin of profits that benefited from a tax cut did not conform to approved decisions, and there was little link between the amount of tax reduction support and creating and maintaining jobs in the region.

The European Commission argued that companies that did not carry out their activities in Madeira did not bear additional costs arising from carrying out activities in an offshore region and, therefore, could not be considered legitimate beneficiaries of the scheme.