The European Commission has opened an in-depth investigation to examine whether Portugal has applied the Madeira Free Zone regional aid scheme in conformity with the 2007 and 2013 Commission decisions approving it, reads an EC press release sent to newsrooms on July 6th.
In particular, the Commission has concerns that tax exemptions granted by Portugal to companies established in the Madeira Free Zone are not in line with the Commission decisions and EU State aid rules.
Commissioner Margrethe Vestager, in charge of competition policy, said:
"Our regional aid rules are particularly flexible when it comes to supporting the EU's outermost regions, including Madeira. Under these rules, fiscal aid can only be granted if it contributes to the creation of real economic activity and jobs in the assisted region. We will now investigate whether the Zona Franca Madeira fiscal aid scheme approved by the Commission in the past has been applied correctly by Portugal."
The Madeira Free Zone (Zona Franca da Madeira, “ZFM”) was created by Portugal in 1987 to support economic development in its outermost region Madeira. The ZFM's objective is to attract investment to and create jobs in Madeira.
In this context, Portugal put in place a regional aid scheme providing support to companies establishing themselves in the ZFM through corporate income tax reductions on profits resulting from activities performed in Madeira; and other tax reductions, such as an exemption from municipal and local taxes, as well as exemption from transfer tax payable on real estate for setting up a business in the ZFM.
The Commission approved successive versions of the ZFM regional aid scheme under EU State aid rules on several occasions between 1987 and 2014.
EU State aid rules provide ample scope for Member States to support the economic development of outermost regions, such as Madeira, and to address the structural challenges of companies active in such regions.
At the same time, in order for such measures to be fit for purpose, State aid must be granted exclusively to companies generating economic activity and real jobs in the outermost regions. That is why under the approved ZFM regional aid scheme, the amount of aid granted to companies through corporate income tax reductions or other tax reductions is linked to the number of jobs that they create in Madeira.
The Commission has carried out a preliminary assessment of how Portugal applied the ZFM aid scheme until its expiry at the end of 2014, taking into account the framework of the 2007 and 2013 Commission decisions approving the scheme.
At this stage, the Commission has concerns that the Portuguese authorities may have failed to respect some of the basic conditions under the 2007 and 2013 decisions. In particular, the Commission has doubts that Portugal complied with the requirements that the company profits benefitting from the income tax reductions originated exclusively from activities carried out in Madeira; and the beneficiary companies actually created and maintained jobs in Madeira.
The Commission will now investigate further to find out whether its initial concerns are confirmed. The opening of an in-depth investigation gives Portugal and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation.
See also, 'Brussels opens formal investigation into controversial Madeiran tax breaks'Brussels opens formal investigation into controversial Madeiran tax breaks' (portugalpress, July 06, 2018)
