Marlborough

As the property market has taken a big hit we will see fire sales from vendors looking to offload property or sites below even current market value as they are forced to do so because of lack of liquidity or limited bank re-financing. For the cash rich developer this is an ideal time to cherry pick some very valuable real estate. If the view is to perhaps sell off within the next couple of years on the market upturn or look to hold before developing, then the trading nature of the business should be considered. Previously we have recommended using the Guernsey double taxation agreement (“DTA”) in order to hold development properties ensuring that the profits are taxed in Guernsey rather than the UK. Since the attack on Isle of Man partnerships in the Finance Act 2008 (damn those scurrilous Manx types) it may be a more robust approach to use EU jurisdictions and their DTA’s to protect UK development profits.  Marlborough has an established operation using Madeiran companies (and therefore the Portuguese DTA) to enable taxation at 4%. We are also investigating the potential of using Hungarian companies to achieve a similar result.

We recognise that Hungary has far greater fiscal advantages and that is why we will be investigating the establishment of an office in the jurisdiction in the coming months. This should decrease the horrific levels of red tape that we have experienced using Hungarian companies and therefore open up the corporate services sector in Hungary to active property developers. Watch this space for updates.

There are a number of advantages of operating in Madeira not least because the current corporate tax rate is 3%. This rises to 5% in 2013. There are also currently 0% companies available up until 2013. The 5% tax rate has also been confirmed by the EU until 2020.

In order to ensure that the presence of a company in Madeira has substance we offer to rent office space to individual client companies, employ local Madeirans directly for the company and run the business as it should be done rather than as a registered office facility. This is vital if an investigation is ever mounted by the Revenue. The various EU treaties do allow freedom of movement between member states however the reason to do so cannot be wholly to avoid tax therefore by establishing a presence in the country this further provides justification commercially and the tax advantages are simply an added bonus!

As from 1st July 2008 the VAT rate in Madeira will drop to 14%, the lowest in Europe. This can be used extensively for trading and e-commerce activities supplying goods to other EU member states at a competitive advantage.

Madeira utilises the double tax treaties of Portugal and therefore has access to 38 treaties including potentially favourable treaties with the UK, China and Ireland. The treaties are all relatively modern and therefore the terms are defined more clearly than some of those in offshore jurisdictions allowing greater certainty when planning between jurisdictions.

It is also possible to receive dividends in Madeira at reduced rates, or even nil rate, and then transfer those dividends outside of the EU with no withholding tax. Furthermore the UK / Portuguese treaty is very specific about what constitutes a permanent establishment as, for example, a building site in the UK owned by a Madeiran company is not a permanent establishment providing that it does not exist for more than 12 months.

For UK residents using Madeira has the added attraction of being in the EU. Under Article 56 of the Treaty of Rome every EU citizen has the freedom to move capital within the EU without penalty. Article 43 also gives every EU citizen the freedom to establish a business anywhere in the EU without penalty. An important case in this context is Hughes de Lasteyrie v Ministre de l’Economie where a French resident transferred a local business to Belgium. This led to a tax advantage and France attempted to impose tax on a deemed disposal of assets however Article 43 contravened and the European Court of Justice rules in favour of the taxpayer.

Using EU law provides an added layer of protection against attack by HMRC however care needs to be taken to ensure that a suitable presence is maintained in the member state as discussed later.

We have now established an operation in Madeira. Although in the EU it has very preferential tax rates and no withholding tax when transferring outside of the EU. This is obviously a distinct advantage. In addition we can take advantage of Portuguese double tax treaties, including the UK treaty, that has a 12 month permanent establishment clause for building sites. Client contact will continue to be maintained via the Guernsey office but we have gone to considerable lengths to ensure that the management and control will be absolutely maintained in Madeira. Further details and uses of Madeiran companies through Marlborough Madeira Management Lda will be in future newsletters or can be obtained by contacting us.