Introduction

Portugal is consistently growing as a reliable and modern flag state. The number of vessels flying the Portuguese flag continues to grow every year and the outlook is that this trend will remain. Through the International Shipping Register of Madeira (MAR), Portugal reached a prominent place within the shipping industry at a worldwide level. As a European flag state, Portugal offers confidence and consistency, while embracing a competitive operational regime.

Furthermore, through the Madeira International Business Centre (MIBC), Portugal offers a set of tax advantages that, when combined with those of MAR, embody a very attractive framework for ship-owners who wish to conduct business based in Europe.

The synergy between a high standard flag state and a business-friendly environment seems to be the key factor for the success of Portugal in shipping, with Madeira playing an important role. Madeira is one of two autonomous regions of Portugal and is an outermost region of the European Union (EU). The creation of the MIBC in 1980 and of the MAR in 1989, under the umbrella of the EU, represented important tools towards the development and diversification of the Madeira (emerging) economy.

With the main goal of attracting foreign investment, the MIBC and the MAR soon contributed to energise the regional economy and revitalise industries that were somehow dormant. The shipping industry, that once was paramount in Portugal, was almost non-existent at the time

the MIBC and the MAR were created. Both these regimes underwent various and substantial improvements over the years aimed at implementing international and European standards and reforming concepts and procedures.

In compliance with European regimes, the MIBC and the MAR demand transparency, substance and commitment. Although the MIBC allows for the incorporation (and operation) of companies in industry sectors other than shipping, the regime fits particularly well the shipping industry.

The MIBC Regime

As the major tax advantage, the MIBC regime allows companies to benefit from a corporate income tax of 5%. The access to this reduced rate requires companies to meet specific criteria. Indeed, companies are required to meet one of the following substance requirements:

  • hire one to five local employees in the first six months of activity and make an investment of, at least, EUR 75,000 in tangible or intangible fixed assets in the first two years of activity; or
  • hire six or more local employees in the first six months of activity.

The 5% corporate income tax rate is limited up to ceilings placed upon the annual taxable income, depending on the number of local employees created by the company, as follows:

  • 1 to 2 employees: EUR2,730,000;
  • 3 to 5 employees: EUR3,550,000;
  • 6 to 30 employees: EUR21,870,000;
  • 31 to 50 employees: EUR35,540,000;
  • 51 to 100 employees: EUR54,680,000;
  • more than 100 employees: EUR205,500,000;

Higher benefits will be awarded to companies with higher involvement with local communities.

The creation of local employment is the result of the policies of a regime designed at boosting the local economy. The underlying idea is to encourage local employment by creating wealth and minimising the risk of migration of young people.

Today, the law expressly states that the number of employees is determined by reference to the number of people earning income from related employment (ie, under an employment contract), paid by the company, provided that they are (i) tax residents in Madeira or (ii) employees or seafarers on board vessels or recreational yachts registered with the MAR. The law also establishes that part-time or intermittent employees are considered proportionally to the full-time employees in a comparable situation, measured in number of annual work units.

From a shipping company perspective – owning vessels registered with the MAR and employing seafarers directly – the compliance of the above-mentioned criteria is inherent to the regular activity of the company. Moreover, as part of the set of advantages linked to the MIBC and the MAR regimes, special tax advantages are granted to the seafarers in terms of personal income tax (IRS) and social security.

The MIBC regime provides for a full exemption of IRS in what concerns wages received by seafarers on board vessels registered with the MAR. On the other hand, the MAR regime provides for a particular social security regime, according to which:

  • Portuguese seafarers or seafarers residing in Portuguese territory must be (mandatorily) covered by the general social security system for employed workers, being the contribution rate of 2.7% (2% to be paid by the employer and 0.7% by the employee); and
  • eign/non-resident seafarers may be covered by any social security scheme (either in Portugal or abroad).

Considering this legal framework, Madeira presents itself as a competitive jurisdiction for shipping-related business, offering a comprehensive set of tax incentives.

As a generic background requirement, access to tax incentives depends on the creation of an effective and consistent (physical and human) structure in Madeira. Although the need for substance is intrinsic and traditionally associated with the regular development of any business activity, the MIBC regime expressly requires companies to develop their activity in and from Madeira, through a dedicated and proper structure established in the Region.

As such, only gains and income arising from the activity developed in Madeira, through an appropriate structure, can benefit from the reduced corporate income tax rate. From a shipping company perspective, this means, regardless of the number of (eligible) employees on board on vessels registered with the MAR, the company must establish a proper structure in Madeira, from which business is conducted.

Finally, as ancillary tax benefits (but no less important in the context of an operational shipping company), the MIBC regime comprises the following main benefits:

  • exemption from withholding tax on dividends and interest paid to non-resident shareholders – either individuals or corporations (exception made to entities resident in low tax jurisdictions); and
  • exemption from withholding tax on interest paid to non-resident lenders, provided that the loans are intended for the normal functioning of the company

For entitlement to the above tax benefits, proof of the non-resident status of the above-mentioned entities (shareholders and lenders) must be provided to the tax authorities, if and when requested.

The MAR Regime

In spite of the advantages linked to the incorporation of a company within the MIBC seeming clear, registration of a vessel with the MAR does not require incorporating a company within the MIBC. Any non-resident entity can register an (eligible) vessel with the MAR, provided that (i) it appoints a local representative to ensure full representation before the state authorities, the regional authorities and third parties, and (ii) it chooses a special private domicile for these purposes.

The MAR regime defines vessel as any commercial or recreational vessel operating at sea, including fixed or floating platforms, auxiliary boats and towing vessels. As such, excluding fishing vessels, all types of vessels are, by law, eligible for registration. However, when assessing eligibility, the Technical Commission of the MAR – a body forming part of the maritime administration responsible for the fleet registered with the MAR – takes into consideration certain criteria, namely: the vessel's age, the Port State Control performance, and the performance of the International Safety Management Company.

Documents and procedures underlying the registration of a vessel with the MAR are in line with those internationally practised. Considering that, in most cases, the documents submitted for registration with the MAR are produced abroad, they must comply with certain formal requirements, such as notarisation and legalisation.

MAR accepts provisional registration based on copies of the relevant documents. Provisional registration is valid for a period of 90 days, during which time the ship-owner must submit with MAR the original documents to accomplish permanent registration. MAR also allows for bareboat charter in and bareboat charter out registration.

Proof of registration is provided by means of an Ownership Registration Certificate in e-format. MAR is a paperless Ship Register based on a swift, efficient and cost-effective system, where e-certificates are provided as a standard approach. Hard copies of some certificates may be available upon request, if needed for specific routes or port calls.

As part of the tax incentives linked to the MAR, no registration fees are due upon registering a vessel or other facts subject to commercial registration, namely mortgages. Likewise, no notarial fees apply provided that deeds are executed at the MAR's dedicated Notary's Office. Fees are, however, due to the Regulator of the MAR – the Sociedade de Desenvolvimento da Madeira S.A. (SDM) – calculated according to the net tonnage of the vessels.

MAR is a 24/7 service register, permanently available for any matters concerning: (i) maritime emergencies, (ii) seafarers matters and (iii) registration of vessels, mortgages and other liens.

Crew Requirements

The MIBC section above addressed the role of seafarers in the context of the employment requirement imposed under the MIBC regime and the tax incentives granted. As a summary, seafarers on board vessels registered with the MAR, when employed by a shipping company operating within the MIBC, are deemed eligible employees for the purpose of the employment requirement. Also, those seafarers qualify for exemptions in terms of tax and social security.

The MAR regime establishes certain conditions in respect to the nationality of the crew, whereby at least 30% of the crew must be European citizens (EU or non-EU countries), or from Portuguesespeaking countries, such as Angola, Brazil, Cape Verde, Guinea Bissau, Mozambique, São Tome and Principe, East Timor and Equatorial Guinea.

To cater for the unfortunate but continuous lack of crew in Europe, MAR created an exception to the above rule, based on which a “nationality exemption statement” can be obtained in duly justified cases. The exemption is valid for one year and is renewable on an annual basis, provided the reasons underlying the exemption remain.

The lack of seafarers is a serious problem across Europe. Portugal, with a continuous growing fleet, is committed to playing a role in attracting young people to the shipping industry in order to support the growing demand. The Regional Government of Madeira launched a pilot project named “Maritime Education – Thrive with the Sea” aimed at (i) encouraging the young generation to embrace the maritime industry, (ii) creating awareness of professional opportunities, and (iii) stressing the contribution of seafarers to the global economy. The project also aims to enhance maritime education and training in Portugal.

Maritime Arbitration Centre

The MAR has been working as a catalyst for maritime disputes. The set of (potentially conflicting) legal situations triggered by the registration of a vessel is vast and quite differentiated from a legal point of view.

Maritime dispute resolution in Portugal is mostly referred to the Maritime Court seated in Lisbon – the only court with jurisdiction on maritime trade disputes in Portugal. The increasing number of lawsuits running with the Maritime Court inevitably determine the delivery of a slow justice. The need for an institutionalised maritime arbitration centre in Portugal is, therefore, urgent. Associação Concórdia – a non-profit association established in 2003 by experienced lawyers and other legal experts promoting and managing alternative dispute resolution centres – was aware of this need and, at the end of 2021, launched a project for the creation of an arbitration centre focused on maritime disputes.

After completing all the necessary preparatory work and procedures, the formal request to authorise the creation of the CAM – Centro de Arbitragem Marítima de Lisboa (CAM) was submitted to the Ministry of Justice in September 2022 and it is expected that the CAM will be fully operational in the near future. Besides managing maritime arbitrations, the CAM also aims to instigate legal knowledge within the field of maritime law, by promoting seminars and congresses and publishing periodicals on maritime legal topics.

Maritime arbitration is widely defined as that in which the dispute somehow involves a vessel. Disputes may, therefore, involve myriad situations ranging from the “birth” of the vess “death”. During its lifetime, a vessel is subject to transactions (eg, sale and purchase) and operates under contracts (eg, charter) that enhance, per se, a set of potential disputes.

The advantages linked to arbitration are clear and unquestionable. From a procedural to a speed perspective, arbitration offers a system that clearly better meets the needs of international trade. The level of expertise, the lower costs and the high confidentiality level of specialised arbitration centres are key elements underlying the success of arbitration, as an alternative dispute resolution system. The creation of the CAM is an important achievement for shipping in Portugal and promises to be a strong tool in the context of MAR's competitiveness.

Conclusion

Portugal has a competitive jurisdiction for shipping-related business. The country developed and consolidated regimes which offer significant tax and operational advantages, without neglecting the certainty and security that all (conscious) investors pursue in their business. The MAR continues to position itself at the centre of shipping industry in Portugal, appealing to various shipping players.

Recent data provided by SDM show that the number of vessels registered in 2022 grew by approximately 8%, to a total of 894 vessels registered as of 31 December 2022, of which 776 are commercial vessels. This performance is the result of the political and legislative measures implemented throughout the years in conjunction with the promotional actions developed by SDM, as the concessionaire of the MIBC and the MAR, with particular emphasis on the strategic partnership entered into with Euromar in December 2014 for the promotion and development of the MAR.

From the Portuguese strategic point of view, it is crucial that national and regional governments co-operate to maintain and improve the current MIBC and MAR regimes in order to meet the ever demanding and sophisticated shipping industry.

Originally published by Chambers And Partners

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