The International Business Centre of Madeira (IBCM) boasts one of the EU’s lowest corporate income tax regimes through three entities: an industrial free zone (the only one in Portugal), an international services centre, and an international shipping register with 600 vessels, making it the third largest in the EU.

Opened in 1987 with the purpose of diversifying Madeira’s economy through FDI, the IBCM encompasses a wide scope of sectors ranging from manufacturing, trading, shipping, technology and other commercial activities.

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With steady growth in recent years, it is home to just over 2000 companies and was responsible for between 13% to 20% of Madeira’s total tax revenue over the past seven years, according to Roy Spode Garibaldi, executive director of SDM, the semi-public company that runs and promotes IBCM. Today, it generates 3000 qualified jobs, equivalent to 2.3% of Madeira’s working population, he adds. 

EU conditions

As an extra-peripheral location in the EU, and a small island facing structural constraints, Madeira’s IBCM was granted favourable treatment under the EU’s state aid rules, meaning it was allowed to offer 0% corporate income tax between 1987 and 2003, according to Frederico Gouveia e Silva, managing partner at Newco, an independent corporate services provider in Madeira.

However, from 2003 onwards, the EU began increasing the minimum corporate tax rate allowed as well as raising its substance requirements, leading to the departure of hundreds of investors. “The investments that remained on the island, and those that have been created since, are much more sustainable and productive. [They also appreciate the advantages of having access to a high-quality and multilingual] workforce, a professional business environment, and comparatively low operational costs,” adds Mr Silva. 

Madeira’s current tax regime, initiated by the EU in 2015, allows incorporated and licensed entities until December 31, 2020 to benefit from a reduced corporate income tax rate of 5% until the end of 2027 – among other advantages – subject to certain substance requirements, namely the number of jobs created and a minimum investment of €75,000.

A level playing field?

However, many Madeirans are discontent with the substance requirements that the EU enforces on the IBCM. “Ultra-peripheral regions such as Madeira suffer from permanent handicaps which [warrant some level of compensation]. For us to compete internationally, we need a level playing field. Other EU jurisdictions similar to Madeira, namely Malta, Luxembourg, Cyprus and Ireland, have complete tax sovereignty and can offer whatever rates they want without any limitations imposed by the EU,” says Mr Garibaldi.

The Madeiran parliament is united in its efforts to negotiate better terms for the IBCM with the EU, and recently hired a leading consultancy to review its strategy over intended tax reforms. 

In terms of the political backdrop to this issue, Lidia D’Ambini, legal consultant at Madeira TIP Investments, says that competing low-tax destinations have successfully lobbied against Madeira at the European Commission and, following the Portuguese financial crisis, it was bailed out by EU institutions under condition that the IBCM was restricted. 

However, Ms D’Ambini ultimately views the situation positively. “[As a result of EU limitations on the IBCM], Madeira lost ‘papers companies’ [seeking tax evasion] and gained legitimate companies. [Unlike other low-tax locations in the EU, many of whom have less restricted fiscal regimes], Madeira is more clean and white-listed, and is not about short-term tax evasion, but long-term investments and tax planning,” she adds. 

Financial credibility

Indeed, companies located in Madeira operate under a credible regime, supported by the 28 EU member states, and Madeira is not considered to be a tax haven or included in any international blacklists. The IBCM has some significant investors and members, such as Paris-based Eutelsat, a leading satellite operator; renowned US software developer WinZip; and the world’s largest shipping container operators, such as Maersk.

Foreign employees at companies such as these also benefit from Portugal’s ‘golden visa’ scheme and attractive non-habitual tax resident regime, effectively a tax holiday for a worker's first 10 years of living in Portugal.

Some of the most active Portuguese exporters operate from Madeira, such as Empresa de Cervejas, the producer of Coral beer and other beverages, and one of Portugal’s top 10 exporters to China. Meanwhile, Sweets & Sugar, one of the first companies to enter the Madeira Free Trade Zone, has been exporting its confectionary around the world for decades.