Partners of a company in Madeira

Partners or shareholders of a Company in Madeira are subject to the same legislation and principles applicable to the partners of companies in Portugal. There are however some differences at the level of the tax treatment of non-resident partners or shareholders of companies licensed to operate in the International Business Centre of Madeira, since these may benefit from withholding tax exemption on the distribution of dividends, under certain conditions described hereafter:

Distribution of profits/dividends

Tax Perspective

Provided they are not residents of Portugal or of tax havens, partners or shareholders of Madeira companies (entities and individual/physical persons) are exempt from tax on profits made available to them, including amortization of shares without reducing capital, provided that such profits derive from income that has benefitted from a reduced tax rate, or if they have not benefitted from such a rate, they derive from income obtained outside of Portuguese territory (except for tax havens).

If the partners or shareholders reside in Portugal (only for entities and not for individual/physical persons), distribution of profits/reserves made by the Madeira company shall also be exempt from taxes (withholding tax) if they hold, directly or indirectly, and uninterruptedly for the 12-month period prior to distribution, a shareholding no smaller than 10% of the shareholder capital or voting rights of that company.

If the partners or shareholders reside in Portugal (only for entities and not for individual/physical persons), distribution of profits/reserves made by the Madeira company shall also be exempt from taxes (withholding tax) if they hold, directly or indirectly, and uninterruptedly for the 12-month period prior to distribution, a shareholding no smaller than 10% of the shareholder capital or voting rights of that company.

Partners or shareholders of licensed companies authorized to work within the IBCM until 31 December 2014 (only entities and not individual/physical persons) who did not opt to benefit from the new regime of the IBC are exempt from taxation on distribution of profits/reserves, provided that they comply with the following conditions:

• Are resident in another EU Member State or the European Economic Area (EEA*) – provided that administrative cooperation is guaranteed with respect to taxation in terms equivalent to those established in the EU – or in a state with which it has signed a convention to avoid double taxation (provided it is in force and the exchange of information);
• Are subject to and not exempt from a tax mentioned in the Parent-Subsidiary Directive (companies resident in the EU) or a tax that is identical or similar to Corporate Income Tax, providing the rate applicable to the entity is not less than 60% (12%) of the corporate income tax rate (other cases);
• Hold, directly or indirectly, and uninterruptedly for the 12-months period prior to distribution, a participation no smaller than 10% of the share capital or voting rights of the Madeira company that distributes the profits or reserves;

*The Member States of the European Economic Area include the 28 Member States of the European Union, Iceland, Liechtenstein and Norway.

If the aforementioned time requirement has not been complied with, the beneficiary entity can request reimbursement of the tax that was withheld at the source, up to two years after actual compliance with this requirement.

If the aforementioned conditions have not been met, dividends paid to shareholders shall generally be taxed at a withholding rate of 28% or 35% if payment of the dividends is made to shareholders residing in tax havens;

Prior to the date when the income is made available to the partner, there must be evidence that the requirements for exemption or reduction have been met, via statement confirmed and authenticated by the relevant tax authorities of the state where the beneficiary resides.

In the case of shipping or industrial activities, the tax exemption on distributed profits/reserves shall apply even if the partners or shareholders reside in Portugal and the profits derive from income obtained in Portuguese territory.

In the relationship between Madeira and Swiss companies and in the event of failure to comply with the aforementioned requirements, namely with respect to the tax rate that the Swiss company is subject to, the withholding tax exemption on distribution of profits is also applicable, pursuant to the Agreement between the EU and the Swiss Confederation, if the company that is the beneficiary of profits has held a minimum direct participation of 25% in the shareholder capital of the company that distributes the profits for at least 2 years, both entities are subject to income tax without benefitting from any exemption and both take on the form of a limited company. If these requirements have not been met, under the Double Taxation Treaty signed with Switzerland, the minimum rate for withholding tax shall be 5%.

Legal Perspective

Unless something different is agreed in the articles of association of the company or a resolution is passed by a majority corresponding to 75% of the share capital in a general shareholders meeting called for such purpose, half of the yearly net profits, which are distributable, must be distributed to the shareholders.

The distribution of dividends that each shareholder is entitled to matures 30 days subsequent to the respective resolution, unless the shareholder agrees to a deferred payment. However, in exceptional company circumstances, shareholders may request an extension of said period for a further 60 days.

However, there is a minimum legal reserve that cannot be distributed to the shareholders. A minimum of a twentieth part of the net profits of each year of the company is destined for the legal reserve until it represents 20%of the share capital. The articles of association may set up a higher minimum percentage and higher amounts to the legal reserve. Nevertheless, the legal reserve cannot be less than 2500 Euros.

The legal reserve may only be used:

1. To cover the portion of losses in the balance sheet that cannot be covered by the use of other reserves;
2. To cover the portion of losses from the previous year that cannot be covered by net profits from the present year or by the use of other reserves;
3. To increase share capital.

Further to the mentioned legal reserve, there are some limitations to the distribution of dividends to the shareholders:

• Company assets cannot be distributed to the shareholders when the equity capital, including the year net income, as shown in the approved accounts, is less than the sum of the share capital and the reserves or becomes less than this sum as a result of the distribution;
• Dividends cannot be distributed to shareholders if they are necessary to cover accumulated losses or to form or reconstitute reserves required by law or by the articles of association;
• Dividends cannot be distributed to shareholders if the incorporation costs or research and development costs are not completely paid, unless the amount of free reserves and retained earnings is at least equal to those costs not paid;
• The reserves whose existence and amount does not appear explicitly in the balance sheet cannot be used for distribution to shareholders;
• The distributed reserves, in whole or in part, either alone or together with the yearly profits, must be expressly mentioned in the shareholders resolution.

The articles of association may authorize that, in the course of a year, advanced payments of profits are made to shareholders, provided that some rules are followed:

1. The board of directors approves the advanced payment;
2. Such resolution shall be supported by a interim balance report, no more than 30 days old and certified by a statutory auditor, showing the existence of available amounts, according to the legal limits and taking into account the results obtained during the elapsed period of the year in which the advance is to be made;
3. Only one advanced payment is allowed during each year and always in its second half;
4. The amounts to be advanced cannot exceed half of what would be distributable, as referred before.

Shareholders must return to the company all the assets received in breach of the law, but those who have received dividends or reserves whose distribution was not permitted by law, are only required to refund if they knew the irregularity of distribution or, given the circumstances, should have not ignored it. The company’s creditors can propose legal action for refund of the company regarding these amounts.