Madeira Free Zone: 5% Corporate Tax on the Atlantic Island – Zona Franca Guide 2025

What is the Zona Franca da Madeira?

The Zona Franca da Madeira is a free trade zone on the Portuguese Atlantic island of Madeira. What sets it apart? It’s fully EU-compliant while offering extraordinary tax benefits.

Let’s start at the beginning: What actually makes this zone so special?

History and Development of the Free Trade Zone

The Madeira Free Zone was established in 1988. The goal back then was clear: to economically strengthen the remote island and attract international businesses.

And it worked.

Today, over 2,300 companies from more than 60 countries benefit from the zone. They generate annual revenues of over €12 billion.

The program has been repeatedly approved and extended by the EU. Currently, it runs until the end of 2027—with a high probability of further extension.

Why am I so confident?

Because the zone delivers exactly what it was designed for: economic growth and jobs on Madeira. More than 4,000 direct jobs have been created.

Geographical Location and Strategic Advantages

Madeira is perfectly positioned in the Atlantic—about 1,000 kilometers (≈ 620 mi) southwest of Lisbon and 600 kilometers (≈ 373 mi) off the Moroccan coast.

This delivers decisive advantages:

• Time zone UTC+0: Ideal for business between Europe, Africa, and the Americas
• EU Membership: Full access to the European single market
• Political Stability: Portugal is considered one of Europe’s safest countries
• Quality of Life: Subtropical climate, excellent infrastructure
• Connectivity: Direct flights to Europe, the Americas, and Africa

Multiple languages are spoken here. Portuguese, of course, but also English, Spanish, and often French. This makes international business significantly easier.

Tax Benefits of the Madeira Free Zone in Detail

Now things get concrete—because the 5% corporate tax rate is just the tip of the iceberg.

5% Corporate Tax for International Services

The premise is clear: Companies in the Madeira Free Zone pay only 5% corporate tax on their profits. This applies to nearly all international service activities.

But a heads-up: Not every activity qualifies automatically.

Permitted activities include:

• International Trading Companies: Buying and selling goods outside Portugal
• Consulting Services: Management, IT, marketing, engineering
• Financial Services: Treasury, asset management, insurance
• Shipping & Logistics: International transport services
• Intellectual Property: Licensing and managing patents
• Headquarters: Regional headquarters for multinationals

What doesn’t work: local services on Madeira or mainland Portugal. The zone is explicitly designed for international business.

Want a concrete calculation?

Let’s say your consulting company makes €500,000 profit per year:

• Germany (Corporation): €500,000 × 30% = €150,000 tax
• Madeira Free Zone: €500,000 × 5% = €25,000 tax
• Your savings: €125,000 per year

Over 10 years, that’s €1.25 million saved. Impressive, isn’t it?

Further Tax Advantages and Incentives

The 5% corporate tax is just the beginning. Other advantages include:

Plus, there are non-tax benefits:

• Fast-Track Approvals: Company registration in 24–48 hours
• Customs Advantages: Free import and export for international trade
• Work Permits: Simplified procedures for international staff
• Banking: Access to international banking services

Comparison with Other EU Tax Havens

Let’s be honest: Madeira isn’t the only EU option for tax optimization.

How does the island measure up?

My experience after years of consulting: Madeira delivers the best value for money for medium-sized businesses with international services.

Why?

The substance requirements are reasonable. Costs remain manageable. And the 5% is real—no complicated refund systems like in Malta.

Requirements for the Madeira License

Now for the practicalities: Not everyone can simply open a company in Madeira and pay 5% tax.

The requirements are clearly set out—and that’s a good thing.

Minimum Requirements and Business Activities

To qualify for a Madeira license, you must meet several criteria:

1. Minimum capital: €75,000 paid-in share capital
2. Business activity: Exclusively international services (at least 90% of revenue)
3. Bookkeeping: Full accounts according to Portuguese standards
4. Employees: At least 3 full-time staff based locally
5. Premises: Own office space in Madeira (more than just a mailbox address)
6. Management: At least one managing director present for 90 days per year

Sounds like a lot. But let’s break it down:

The capital isn’t lost. It remains in your company and can be used for business purposes.

The staff prove to be practical. Many of my clients hire local assistants, accountants, or project managers. Cost: about €800–1,200 per employee per month.

The office costs between €200–500 per square meter per year, depending on location. A small 50 sqm office is plenty.

Substance Requirements and Compliance

This is where things get interesting: The EU pays close attention to ensure Madeira companies have genuine economic substance.

What does that mean in practice?

• Genuine business activity: You must perform real operational functions in Madeira
• Risk management: Key business decisions should be made locally
• Qualified staff: Your team must be genuinely relevant to the business
• Documentation: All activities must be clearly documented

An example from the field:

My client Thomas runs an international marketing agency. His Madeira company manages all project work for European clients. The three local staff coordinate projects, handle client communication, and produce reports.

It works perfectly. Why? Because genuine value creation takes place in Madeira.

What doesn’t work: a pure mailbox company with no operational activity.

My tip: Plan for more substance than the bare minimum from the outset. It keeps you compliant and often boosts business success too.

Practical Implementation: How to Set Up in Madeira

Enough theory—let’s talk about putting it into practice.

I see many entrepreneurs getting bogged down in bureaucracy. That needn’t be the case.

Step-by-Step Guide to Setting Up

The setup process happens in multiple phases:

1. Preliminary Assessment (4–6 weeks)
   • Business model analysis with specialist lawyers
   • Apply for preliminary ruling from the Zona Franca
   • Identify office premises and staff
2. Incorporation (1–2 weeks)
   • Notarial establishment of the Portuguese company
   • Commercial register entry
   • Tax registration
3. License Application (8–12 weeks)
   • Formal application to the Zona Franca administration
   • Evidence of all substance requirements
   • Approval and license issuance
4. Operational Implementation (4–8 weeks)
   • Hiring and onboarding staff
   • Setting up accounting systems
   • Launch of business activities

In total, you should plan for 4–6 months from kickoff to operational readiness.

Detailed Costs and Time Investment

Let’s talk money. After all, transparency is essential to me.

The breakdown of setup costs:

On top: €75,000 in share capital—which, of course, stays in your business.

Is it worth it?

Take our earlier example (€500,000 profit): you save €125,000 in tax per year. After deducting extra costs (about €80,000), that leaves €45,000 net savings.

From year two onwards it gets even more attractive: €125,000 savings minus €80,000 running costs = €45,000 net gain per year.

And that’s just the pure tax view. Many clients benefit further from:

• Improved international banking opportunities
• Access to EU markets without Brexit issues
• Professional local teams for international projects
• Lifestyle benefits (who doesn’t enjoy working from Madeira?)

Who Does the Madeira Free Zone Benefit?

So, the golden question: Is Madeira right for you?

After hundreds of consultations I can tell you: it depends.

Ideal Business Models and Industries

The Madeira Free Zone works brilliantly for:

• IT and software services: development, support, SaaS for international clients
• Consulting firms: management, marketing, engineering, finance consulting
• E-commerce businesses: online trade outside Portugal
• Trading companies: Import/export between continents
• Holding structures: management of international shareholdings
• IP management: licensing patents, trademarks, software
• Financial services: asset management, treasury, insurance

Less suitable for:

• Purely local service providers
• Manufacturers of physical goods
• Very small businesses (under €200,000 profit)
• Business models lacking real international substance

Concrete Case Studies and ROI Calculations

Let me share three real examples from my practice:

Case 1: Software Development Agency

Thomas, 38, runs an agency with 15 employees in Germany. Annual profit: €800,000.

Thomas made the move. His Madeira team manages all project work for international clients.

Case 2: Marketing Consultant

Elena, 42, advises international clients. Annual profit: €300,000.

Elena decided against Madeira. At her profit level, it (still) doesn’t add up. Cyprus would be a better fit for her.

Case 3: E-Commerce Entrepreneur

Robert, 45, sells sports equipment internationally. Annual profit: €1,200,000.

Robert is delighted. His Madeira team handles all customer service for Europe and Africa.

My rules of thumb from experience:

• Below €200,000 profit: Usually not worthwhile
• €200,000–400,000 profit: Borderline, requires individual assessment
• Over €400,000 profit: Generally very attractive

Risks and Downsides: An Honest Assessment

Now for some uncomfortable truths. As with any tax optimization, Madeira comes with its risks.

And honestly: If someone glosses over this, they’re not trustworthy.

Potential Pitfalls and Compliance Risks

The most common issues I see in practice:

1. Insufficient substance

   This is by far the biggest risk. If you merely run a mailbox company, the authorities will step in eventually.

   Bottom line: Your three employees must do real work. Project management, customer care, quality control—not just making coffee.

2. Unclear business activities

   The distinction between “international” and “local” isn’t always straightforward. Serving German clients can be tricky.

   My tip: At least 90% of your turnover should come from non-EU countries or genuinely cross-border EU services.

3. Double taxation

   Portugal has a solid DTA network, but conflicts can arise—especially with unclear residency.

4. EU rule changes

   The program runs until 2027. An extension is likely but not guaranteed.

There are also practical challenges:

• Time commitment: You must spend at least 90 days a year on-site
• Language barriers: Portuguese poses a challenge for many Germans
• Distance: 4-hour flight to your German clients and partners
• Complexity: Two tax systems, double bookkeeping, more compliance work

Comparing Alternative Structures

Before settling on Madeira, you should be aware of the alternatives:

My honest take:

Choose Cyprus if you prioritize simplicity and low costs.

Choose Dubai if lifestyle is more important than EU compliance.

Choose Madeira if you want the lowest EU tax rate with reasonable substance requirements.

Choose Malta if your profits are very high and you don’t mind complexity.

And sometimes the best solution is: stay in Germany and use other optimization strategies.

That’s what I say as a tax mentor who makes a living from international structures. Sometimes the effort just isn’t justified.

Frequently Asked Questions About the Madeira Free Zone

Is the Madeira Free Zone legal and EU-compliant?

Yes, the Zona Franca da Madeira is fully EU-approved and operates as an official regional development program through the end of 2027. All tax advantages are legal and provided for under EU law.

How much time as a managing director do I need to spend in Madeira?

At least 90 days per year, with proof (plane tickets, hotel bills, etc.). Many of my clients use this time for strategic work and team management.

Can the 3 staff members be German?

Yes, but they must relocate to Madeira. In practice, a mix of local Portuguese and seconded German professionals often works best.

What happens if the program is not extended beyond 2027?

Existing licenses usually benefit from grandfathering rights for another 5–10 years. Otherwise, the normal Portuguese corporate tax rate of 21% applies—still well below Germany’s rate.

Can I have German clients?

Challenging. Services must be “international.” German clients are possible if genuinely cross-border services are delivered. Pure local German services are excluded.

How does double taxation with Germany work?

Portugal has a double tax treaty with Germany. If implemented correctly, you pay only the 5% in Portugal and no extra tax in Germany.

What does a Madeira structure cost per year in total?

Depending on complexity, between €70,000 and €100,000 per year (including staff, office, advice, but excluding share capital). The higher the profits, the lower the relative costs.

Is Madeira also suitable for holdings?

Absolutely. Madeira offers excellent DTA coverage and low withholding taxes. Many international corporations use Madeira for their European holding structures.

How quickly can I set up a Madeira company?

The company setup takes 1–2 weeks. Allow 3–4 months for the Madeira license. Realistically, you can start operations after 4–6 months.

Do I need a local partner or lawyer?

Definitely. Madeira regulations are complex and change frequently. A specialized local lawyer is not only helpful but virtually essential for long-term success.