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Tax Authorities Home in On Illegal Aid to Madeira Free Trade Zone

The Government of Portugal has announced that it will instruct the Tax Authority to “act unilaterally” in the absence of a consensus by the working group charged with preparing the recovery plan for support granted to companies licensed to operate in the Free Trade Zone of Madeira (ZFM).

This statement was made yesterday by the Secretary of State for Tax Affairs, António Mendonça Mendes, during a hearing at the Budget and Finance Commission (COF) on a Government proposal to change tax benefits, which will include clarifying the rules of the tax regime applicable to the ZFM in order to avoid misuse of the regime and to ensure its compatibility with Community law.

The Secretary stated that the technical group in which the Tax and Customs Authority (AT) and the Madeira Tax and Tax Affairs Authority (AT-RAM) participate, which was created in February, has already had preparatory meetings with Brussels. He went on to say that: “The preparatory meetings with the European Commission have taken place and everyone is on the same page, including the AT. However, if the working group cannot reach a consensus the Government will give instructions to the Tax and Customs Authority to act unilaterally.”

In response to questions from several deputies about the progress of this process, António Mendonça Mendes said that the technical group is currently studying the situations in need of regularisation and that this work is proceeding but added that aid recovery processes are ‘complex’ and time consuming.

The Secretary of State also said that the first technical draft on the recovery plan for support granted to companies licensed in the ZFM will be presented to the European Commission on the 5th of April.

This hearing with the Secretary of State for Tax Affairs closed the round of hearings scheduled by the Budget and Finance Committee as part of the examination of the details of the Government’s proposal to amend tax benefits which includes clarification of the rules of the ZFM regime in order to prevent misuse of funding and ensure that the ZFM complies with Community law.

Along with the Government’s proposal, the PSD have also submitted a proposal on the ZFM regime which is also being considered.

Following an in-depth investigation launched in 2018, the community executive announced on the 4th of December that they had concluded that “the implementation of Regime III of the Madeira Free Trade Zone in Portugal is not in line with the Commission’s State aid decisions.”

In view of this outcome, Portugal will have to determine the amount to be recovered from each individual beneficiary and identify, among the beneficiaries, those who did not respect the conditions established in the Commission’s state aid decisions of 2007 and 2013. These approved regime III [of the ZFM], that is, the creation of jobs in the region and a link between profits and the establishment of an effective and legitimate commercial activity in Madeira.

The technical group, coordinated by the Director-General of AT, will be responsible for making the plan for the recovery of infractions that may originate in the non-conformities identified by Brussels.

During the hearing, António Mendonça Mendes stated that the government is not proposing an extension of the ZFM regime for another year – because it ends in 2027 – but trying to create rules that do not allow the circumstances that led to the situation being repeated. These changes include a rule that clarifies that companies licensed in the Madeira Free Trade Zone benefit from a reduced IRC rate of 5% on profits generated in the autonomous region provided their workforce is created and employed in Madeira.

Concluding he said, “only if we are aware that we have a problem can we tackle it. The problem is that there are some in the ZFM who believe that the rules do not apply to them!”

Brussels gave Portugal eight months (and not the usual four) to implement the decision to recover aid.

Samantha Gannon

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