The Legislative Assembly of the Autonomous Region of Madeira presented a bill to the Assembly of the Republic to extend the rules of the Madeira Free Trade Zone (ZFM) until 2033, maintaining the IRC at 5% until that date.
The initiative entered parliament on Monday, after being approved in the plenary session of the regional legislative assembly on October 16.
Deputies are called upon to decide whether companies licensed in the ZFM between January 1, 2015 and December 31, 2026 continue to be taxed at the IRC rate of 5% “until December 31, 2033” on profits generated from activities in the autonomous region.
If the proposed amendment to the Tax Benefits Statute is approved, there will be an extension of the application of the tax incentive for another five years, since, currently, the legislation provides that entities licensed between 2015 and 2026 can only benefit from the IRC rate of 5% until December 31, 2028.
The Madeiran legislative assembly also proposes that partners or shareholders of companies “enjoy exemption from IRS or IRC, until December 31, 2033”, as currently happens, on profits made available to them by these companies, with the exception of those resulting from operations carried out with entities resident or domiciled in tax havens.
The ZFM is a special tax regime that allows companies licensed there to benefit from tax reductions on certain taxes, including IRC in relation to profits generated from activities carried out in Madeira. To do this, they must meet certain conditions, first of all, creating and maintaining jobs in the region.
The 5% rate applies up to a certain value of the tax base, which varies depending on the number of jobs created (for example, it applies up to 3.55 million euros for the creation of three to five jobs, up to 21.87 million euros for the creation of six to 30 jobs, or up to 205.50 million euros of tax base for the creation of more than 100 jobs).
For a company to operate in the ZFM and be able to benefit from the incentives, it must obtain authorization from the Madeira Development Society (SDM), a regional public company responsible for keeping the register of licensed entities updated.
The Free Zone is divided into three areas: international services, the industrial free zone and the international ship registry (known as “MAR”).
Madeira can apply an IRC rate to companies that is especially lower than the general rate (5% compared to the current rate of 20%), as well as other incentives, because the Treaty on the Functioning of the European Union (TFEU) allows outermost regions – such as Madeira, the Azores, the Canary Islands or French Guiana – to benefit from a regional development aid scheme.
In Madeira, this mechanism exists through a scheme to aid the operation of companies, through taxation, which translates into the existence of the ZFM, to compensate the economic agents present there for the structural disadvantages they faced as a result of carrying out their activity in an isolated region.
As companies authorized to operate in this business center benefit from special aid conditions, they must comply with certain conditions so as not to jeopardize EU competition rules.
In 2020, after an investigation initiated in 2018, the European Commission concluded that Portugal applied the aid regime illegally, without complying with the decisions of the community executive on state aid from 2007 and 2013. Some companies benefited from the reduced IRC without creating the required jobs.
Following this decision, which was now considered valid by the EU Court of Justice, the Portuguese State was obliged to recover from the companies the portions of the tax incentive considered illegal, having notified the entities to pay the missing IRC.