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Nº 1 June 2007

VAT and electronically supplied services: the IBCM as a business gateway to Europe The International Business Centre of Madeira (the “IBCM”) is internationally recognised as one of the main business centres in the world. During the past few years it has also been gaining reputation as a platform for companies engaged in electronically supplied services, due to the highly competitive Value Added Tax (the “VAT”) rates. One of the measures adopted by the Portuguese government to counteract Portugal’s excessive budget deficit was to increase the standard VAT rate by 2% with effect from July 1st, 2005. Accordingly, the standard VAT rate in Madeira is currently 15%, instead of the previous 13%, which was then the lowest standard VAT rate in the European Union. A 15% standard VAT rate is, however, still one of the lowest standard VAT rates in European Union and, therefore, the comparative advantage of Madeira, although shacked, has not been jeopardized by the increase. What are the benefits of this? Consider the example of the Council Directive 2002/38/ EC of 7 May 2002 on the value added tax arrangements applicable to radio and television broadcasting services and certain electronically supplied services (the “Directive”). The Directive has established new rules that have created important business opportunities within the IBCM. Specifically, the Directive introduced new VAT localization rules and created a special scheme for non-EU VAT taxable persons who provide electronically supplied

services to non-taxable persons resident within the European Union. If the electronically supplied services are provided by a non-established taxable person located in Madeira (by means of a fixed establishment) to non-taxable persons or entities resident in Portugal or any other Member State, the operation is deemed to be located in Madeira and subject to the standard VAT rate of 15%. The Council of the European Union has approved, on December 19th, 2006, Directive 2006/138/CE which extends the period of application of the Directive. This means that the regime currently in force will remain fully applicable at least for two more years, until December 31st, 2008. Although the IBCM has initially been conceived to be an industrial centre and at a later stage to attract financial services,

currently, there are undoubtedly non-financial reasons that are capable of attracting investors to the IBCM. The future development of the IBCM is in straight-line with the encouragement of investment in activities of a non-financial nature, such as those linked to information technology, electronic (or) e-business and e-commerce, which can conciliate both the benefits of the direct tax incentives available, as well as one of the lowest standard VAT rates in the European Union.

Rui Nascimento

Lawyer and tax advisor, International Tax Services Department, Landwell-PricewaterhouseCoopers, Madrid rui.nascimento@es.landwellglobal.com.


Case study

Orange Madeira In 2002, the Internet Service Provider Freeserve, bought two years earlier by France

Recent News

Telecom-owned company Wanadoo, set up its operations in the International Business Centre of Madeira to provide broadband services to its UK clients.

•European Union extends VAT Directive 2002/38/CE until 31st December 2008: The Council of the European Union has approved, on the 19th of December 2006, Directive 2006/138/CE which extends the period of application of Directive 2002/38/ CE in what concerns the VAT regime applicable to radio and television broadcasting services and certain electronically suplied services. The present regime will therefore remain in force at least for two more years, until the 31st of December 2008. Further information at http://www. ibc-madeira.com/Activities/ICTsAndeBusiness/.

In 2004, Freeserve changed its name to Wanadoo and later in June 2006 the company was rebranded to Orange Madeira, as a result of the strategy of France Telecom to extend the use of the brand Orange (which had also been acquired by France Telecom in 2000) to both mobile telecommunications and internet services. Orange Madeira is part of the “Home” Division of Orange-ft offering internet and home telephony services to around 1,000,000 customers in the UK. The Head Office is located in Funchal and employs twelve permanent employees as well as other temporary staff. As well as the finance function, the Head Office also controls marketing activities, supplier relationships and third party network provisioning. The key drivers behind the decision to expand operations in January 2006 were the support from the International Business Centre of Madeira and the Regional Government of Madeira, as well as the high quality of the professional staff that could be found in Madeira. The Orange-ft Group is one of the largest European Telecom Operators. It has revenues in excess of €50bn per annum, over 55 million customers and more than 200.000 employees.

•Guides for investment in the IBC of Madeira now available on-line: These guides provide full information on the incorporation of companies, the applicable tax regime and the registration of vessels and yachts in the IBC of Madeira. Guides are available at www.ibc-madeira.com/documentlibrary/. •MAR participates in the NOR-Shipping fair in Oslo: The International Shipping Register of Madeira – MAR will be represented at NOR-Shipping, one of the biggest shipping fairs in the world, which will take place in Oslo between the 12th and 15th of June. This will be the first presence of MAR in this event, which takes place every two years. To consult the official NOR-Shipping web site, please visit http://messe.no/en/ntf/Projects/NorShipping/. •Portuguese Government approves the embarkation of spanish speaking crew aboard vessels registered in MAR and owned by spanish shipowners: This authorization, to be granted on a case-bycase basis and upon the request from the shipowner, will allow spanish shipowners to hire crew members, duly certified, from countries such as Argentina, Chile, Cuba, Mexico and Peru, which may represent a substancial reduction in the operational costs involved in the management of their ships. Further information at http://www. ibc-madeira.com/shipping/.

E-business and Telecommunications activities in Madeira In recent years, the IBC of Madeira has observed a substantial increase in the number of telecom, e-business and e-commerce companies setting up in Madeira. In the end of 2006, there were already 45 companies operating in Madeira in various areas such as e-learning, ISP’s, development and marketing of software, telecommunications, pre-paid international calling cards,

Fact sheet Name:

Orange Madeira

Date of Incorporation:

2002

Activity:

ISP and mobile telecommunications provider

Origin:

UK/ France

“We originally set up our business here in 2002 encouraged by its unique on-shore status within Europe and by the positive, internationally minded, approach of SDM and the management company which supported our start-up. Once established however, we found that the calibre of professional staff here and the “can do” attitude of the Portuguese Government made for a very conducive operating business environment – so much so that in 2006, with excellent support from SDM – we decided to increase our business by a factor of 5. We now employ a Madeiran Workforce who are professional, eager to learn and a pleasure to lead” Sagheer Ahmed – Managing Director, Orange Madeira

call centers and several other activities. The countries of origin of these companies are quite diverse, led by the UK and followed by the US, Denmark, Portugal and Sweden. Other countries of origin include Ireland, Spain and France. These type of companies are of a great importance for the local economy. In fact, they often employ local qualified and technical staff and make a significant contribution to the local revenues through the collection of VAT charged in their international operations.


IBC News Issue 1 - June 2007