Certain legislative changes have been published in recent months which may affect our clients.

The most important of these is the publication of the new tax regime for companies now setting up in business at the Madeira International Business Centre (MIBC). This regime reinforces the competitiveness of Madeira as a modern and creditable jurisdiction with a tax regime that has no equal within the European Union. From 2012, this regime will also apply to established companies.

ECOFIN has decided to maintain VAT tax regulations for telecommunications and electronic services until 2015. This decision provides a 7-year window of opportunity for investors providing these types of services via Madeira, enabling them to benefit from the lowest VAT rates in the European Union.

Other new items covered in this editorial are the introduction of the option to establish advance transfer pricing agreements, greater autonomy for the Madeira tax authority, the establishment of the 2008 minimum salary, the reduction of the corporate income tax (IRC) general rate in Madeira to 20% and the publication of the agreement with Israel on double taxation.

NEW TAX REGIME
The new tax regime for companies licensed to operate in the Madeira International Business Centre from January 2007 was published in Decree Law no. 13/2008 of 18 January. The system envisages the following lower rates for corporate income tax (IRC):
2007 to 2009: 3%
2010 to 2012: 4%
2013 to 2020: 5%

The regime also envisages maintaining other current benefits until 2020, namely:

-	Exemption from deductions at source on payments of royalties, interest, dividends and services to non-residents in Portugal
-	Exemption from stamp duty on company capitalisation
-	Exemption from local charges and taxes
-	The lowest VAT rates in Europe (15%)
-	Exemption from registration charges

In order to benefit from these tax reductions and benefits, licensed entities must comply with certain substantive requirements.

Entities which are already licensed to operate within the MIBC will continue to benefit from the existing regime of total exemption from taxes until the end of 2011. From 2012 onwards, they will change to the new regime approved by Brussels, which will remain in force until 2020.

We are convinced that this decision will reinforce Madeira's standing as a jurisdiction which offers the most advantageous tax regime in the European Union.

REINFORCEMENT OF THE AUTONOMY OF THE REGIONAL TAX AUTHORITY
The Regional Director for Tax Affairs has publicly stated that during 2008 the autonomy of the Madeira regional tax authority in relation to the national General Directorate of Taxes will be increased. Consequently, it will issue more rulings covering a wider range of areas including the belowmentioned advance transfer pricing agreements, the application of thin capitalisation regulations and the application of the MIBC tax regime and its new substantive requirements. Within this context, it was also announced that the regional authority will issue circulars and interpretations of existing regulations whenever this is deemed necessary.

Considering that, from the outset, the regional tax authority has always displayed an openness to dialogue, flexibility and a pro-business attitude, in addition to the large amount of support it has given to the Madeira International Business Centre and its companies and investors, this increased autonomy can only reinforce the legal security that is essential to the success of a jurisdiction competing to attract external investment.

EXTENSION OF THE VAT REGIME FOR TELECOMMUNICATIONS AND ELECTRONIC SERVICES
Community legislation currently establishes that Community suppliers of telecommunications and electronic services (such as the companies in Madeira) who sell these services to final consumers resident in countries which are member states of the European union must charge VAT at the rates applicable to the country of origin.

In recent years, large American and European telecommunications and electronic services companies have shown a preference for establishing their B2C operations within Community territory in Madeira, as it has the lowest VAT rates in the European Union (15%).

These companies enjoy other benefits in addition to favourable VAT rates, such as:

-	Administrative facilities which enable them to deal with just 1 VAT rate instead of 27
-	Access to the most competitive tax regime in Europe, in terms of taxation of profits
-	The security and credibility that comes from operating within a mature, well-regulated Community jurisdiction in which all Community directives on electronic commerce have been transposed into national legislation
-	Excellent broadband facilities and connectivity. Due to its geographical location, Madeira is an Atlantic hub for submarine cables linking various continents
-	Modern and efficient telecommunications infrastructures

The European Union Economic and Financial Affairs Council (ECOFIN) has now reached an agreement on approval of the VAT package designed to alter VAT regulations to ensure that these types of services are taxed in the state where the service is provided, not where the provider is located.

Under this agreement, after 1 January 2015 these operations will be taxed in the state where they are consumed.

As a result, the benefits enjoyed by suppliers of these services operating in Madeira now or in the near future are safeguarded for a period of 8 years, reinforcing the security and certainty that current benefits obtainable in Madeira will remain unaltered for a considerably lengthy period of time.

DOUBLE TAXATION AGREEMENTS
The Assembly of the Republic (parliament) has approved the new agreement with Israel (copy enclosed). Portugal now has a network of 51 treaties, although the agreements with Chile, Indonesia and Israel have not yet come into force.

REDUCTION IN THE CORPORATE INCOME TAX (IRC) RATE
Following approval of the 2008 Regional Budget, the general rate of corporate income tax (IRC) for the Autonomous Region of Madeira, which applies to operations outside the MIBC, has fallen from 22.5% to 20%. Consequently, the minimum sum for IRC Special Payments has been reduced to EUR 1,000 (formerly EUR 1,125).

INVOICING
Following OECD recommendations, from 1 January 2008 all accounts transactions and invoices must be issued using software which allows the respective data to be exported in a specific format known as SAF-T PT (Standard Audit File for Tax Purposes Portuguese Version). This standard format was created to facilitate the work of tax inspectors in collecting information, and they may at any time, within the scope of their authority, request the file referring to a particular transaction or invoice.

In order to comply with this requirement, we recommend that our clients use the appropriate software for issuing invoices and accounts records or that they delegate this task to New Madeira.

DIRECTIVE ON PARENT COMPANIES AND SUBSIDIARIES
The requirements to obtain exemption from IRC deductions at source relating to profits distributed by a Portuguese company (outside the scope of the MIBC) to a company resident in another EU member state have been substantially reduced. They are now as follows:

-	A holding of not less than 10% (formerly 15%) or an acquisition price of not less than EUR 20,000.000 (a new alternative requirement)
-	Uninterrupted ownership of holding for a period of not less than one year (formerly two years)

MINIMUM SALARY
The current minimum salary for Madeira in 2008 has been updated to EUR 434.52. This figure is important since it is used as a reference in various cases including the establishment of minimum social security contributions for company directors in Madeira.

Considering the social security contribution rate of 31.25% (21.25% paid by the company + 10% paid by the director), the minimum monthly social security contribution will be updated to EUR 135.79, corresponding to an annual charge of EUR 1,629.48.

ADVANCE TRANSFER PRICING AGREEMENTS
From 1 January 2008, it will be possible to request permission from the tax authority to execute advance transfer pricing agreements. Applications must contain:

-	The proposed method for determining pricing
-	Identification of the operations covered and their duration, which must not exceed 3 years
-	Subscription by all entities involved in the operations
-	A declaration from the tax-payer responsible on the obligation to collaborate, without infringing any commercial or professional rules of confidentiality

A request for an agreement covering operations with entities resident in any state with which Portugal has agreed a Convention on the Elimination of Double Taxation must also request transfer pricing matters to be submitted to the appropriate authorities in the other state in question.

Provided that there are no alterations to legislation or significant changes in economic or other circumstances, the tax authority will be bound by the terms of the agreement. The tax-payer, in turn, will be prevented from claiming or appealing against the contents of the agreement and will be bound by the respective terms and conditions for the established period of time.

VAT DECLARATION PERIODS
The turnover required to change to the system of monthly VAT declarations is now EUR 650,000. Tax-payers with a lower turnover submit their VAT returns on a quarterly basis.

This newsletter provides information and general advice about the law but laws and procedures change frequently and they have to be interpreted differently for different people. For specific advice geared to your situation consult an expert. For more information visit www.newmadeira.com