Offshore 2 Offshore

* Portuguese companies required to show Madeira subsidiaries involved in genuine business activity







For many parent companies the establishment of a subsidiary in Madeira is in itself not sufficient to ensure that the profits of the company based in Madeira are exempt from tax in the jurisdiction in which the holding company is based, says Robert Homem of Dixcart, MSI's Madeira offshore services member firm.

With a growing number of international companies establishing subsidiaries in Madeira it has increasingly become a requirement for the Portuguese company to show that the management, control and day to day decisions regarding activity are taken in Madeira. The company itself needs to operate through an establishment which provides a real presence on the Island.

Unless this substance and presence is illustrated, the tax benefits enjoyed by the Portuguese company operating from Madeira may be mitigated by a tax imposition in the country in which the parent company itself is based.

This issue has recently been addressed within the European Union and the position confirmed in the preliminary ruling in September 2006 regarding a case of two Cadbury Schweppes companies established outside the United Kingdom. The United Kingdom Inland Revenue had endeavoured to claim United Kingdom taxation on the profits of the overseas operating companies.

The European Court of Justice has ruled that a parent company does have the right to establish a subsidiary in a member country of the European Union with a lower rate of taxation and does not have any obligation to pay taxes on the profits of that subsidiary in the jurisdiction of the parent, if genuine activity can be shown to have taken place in the jurisdiction in which the subsidiary is based.

The key is the obligation to show genuine economic activity. In recognition of this requirement Dixcart in Madeira has established the Dixcart Business Centre, on the Island. This provides local office facilities, and communication systems which are organised through Madeira. Companies can then demonstrate that:
 
• Management, control and decision making processes are substantially taken in Madeira by local directors and management.
• The company has local employees and pays personal taxes and social security contributions.
• A physical office presence is established.
• Separate communication arrangements are established for telephone and email for the company operating from Madeira, in the local company name.