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 Portugals Atlantic island of Madeira. What makes it special: Its fully EU-compliant and still offers exceptional tax advantages.

But lets start at the beginning: What 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 strengthen the isolated island economically and attract international businesses.

And it worked.

Today, more than 2,300 companies from over 60 countries take advantage of the zone’s benefits. Together, they generate annual revenues exceeding 12 billion euros.

The program has been repeatedly approved and extended by the EU. Its currently running until the end of 2027, with a high likelihood of further extension.

Why am I so optimistic?

Because the zone delivers exactly what it was created for: economic growth and jobs in Madeira. Over 4,000 direct jobs have been created.

Geographical Location and Strategic Advantages

Madeira is perfectly placed in the Atlantic: about 1,000 kilometers southwest of Lisbon and 600 kilometers off the Moroccan coast.

This brings 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 the safest countries in Europe
• Quality of Life: Subtropical climate, excellent infrastructure
• Connectivity: Direct flight connections to Europe, Americas, and Africa

Multiple languages are spoken here as well. Portuguese of course, but also English, Spanish, and often French. That makes international business much easier.

Tax Advantages of the Madeira Free Zone in Detail

Now lets get specific. The 5% corporate tax is just the tip of the iceberg.

5% Corporate Tax for International Services

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

But beware: Not every activity automatically qualifies.

Approved activities include:

• International trading companies: Buying and selling goods outside Portugal
• Consulting services: Management, IT, marketing, engineering
• Financial services: Treasury, asset management, insurance
• Shipping and logistics: International transport services
• Intellectual property: Licensing and management of patents
• Headquarters: Regional HQs for multinational corporations

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

Need an example calculation?

Suppose your consulting business earns 500,000 euros profit per year:

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

That’s a difference of 1.25 million euros over 10 years. Impressive, isn’t it?

Other Tax Advantages and Incentives

The 5% corporate tax is just the beginning. Further benefits include:

There are also non-tax advantages:

• Accelerated approval procedures: Company registration in 24-48 hours
• Customs advantages: Free import and export of goods for international trade
• Work permits: Simplified procedures for international employees
• 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 compare?

My conclusion after years of consulting: Madeira offers the best value for mid-sized companies with international services.

Why?

The substance requirements are reasonably manageable. Costs are predictable. And the 5% is real—without complicated refund systems like in Malta.

Requirements for the Madeira License

Now its getting practical. Not everyone can simply set up a company in Madeira and pay 5% tax.

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

Minimum Requirements and Business Activities

To obtain a Madeira license, you must meet several criteria:

1. Minimum capital: 75,000 euros paid-in share capital
2. Business activity: Exclusively international services (at least 90% of turnover)
3. Accounting: Full bookkeeping according to Portuguese standards
4. Employees: At least 3 full-time employees onsite
5. Business premises: Own office space in Madeira (not just a letterbox)
6. Management: At least one managing director with 90 days presence per year

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

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

The employees can make sense. Many of my clients employ local assistants, accountants or project managers. Costs: about 800-1,200 euros per employee per month.

The business premises cost, depending on location, 200-500 euros per square meter per year. A small office of 50sqm is sufficient.

Substance Requirements and Compliance

Heres where it gets interesting. The EU carefully checks that Madeira companies have real economic substance.

What does that mean specifically?

• Genuine business activity: You must actually perform operational functions in Madeira
• Risk management: Important business decisions should be taken locally
• Qualified staff: Your employees must be relevant to the business activity
• Documentation: All activities must be clearly documented

A practical example:

My client Thomas runs an international marketing agency. His Madeira company handles full project management for European clients. The three employees coordinate projects onsite, hold client meetings, and prepare reports.

That works perfectly. Why? Because real value is created in Madeira.

What doesnt work: A pure letterbox company with no operational activity.

My tip: Plan for more substance than the minimum from the start. That makes you not only compliant, but often more successful economically as well.

Practical Implementation: How to Set Up Business in Madeira

Enough theory. Let’s talk practicalities.

I often see entrepreneurs getting lost in bureaucracy. It doesn’t have to be that way.

Step-by-Step Guide to Incorporation

The incorporation process runs through several phases:

1. Preliminary Assessment (4-6 weeks)
   • Business model analysis with specialized lawyers
   • Request preliminary ruling from Zona Franca
   • Identify office space and staff
2. Company Incorporation (1-2 weeks)
   • Notarial incorporation of the Portuguese company
   • Registration in commercial register
   • Tax registration
3. License Application (8-12 weeks)
   • Formal application to the Zona Franca Administration
   • Proof of all substance requirements
   • Approval and license issuance
4. Operational Implementation (4-8 weeks)
   • Hiring and training of employees
   • Setting up accounting
   • Start of business activity

All in all, you should allow for 4-6 months from start to operational business activity.

Detailed Costs and Time

Lets talk money. I value transparency.

Breakdown of setup costs:

On top of that is the 75,000 euros share capital—but that remains in your company.

Does it pay off?

With our earlier example (500,000 euros profit), you save 125,000 euros in tax per year. After deducting additional costs (around 80,000 euros), you’re left with 45,000 euros in net savings.

From the second year, it gets really interesting: 125,000 euros saved minus 80,000 euros running costs = 45,000 euros extra.

But that’s just taxation. Many of my clients also benefit from:

• Improved international banking options
• Access to EU markets without Brexit issues
• Professional local team for international projects
• Lifestyle benefits (who doesn’t like to work from Madeira occasionally?)

Who Benefits from the Madeira Free Zone?

Now the key question: Is Madeira right for you?

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

Ideal Business Models and Sectors

The Madeira Free Zone works very well for:

• IT and software services: Development, support, SaaS for international clients
• Consulting companies: Management, marketing, engineering, financial consulting
• E-commerce businesses: Online sales outside Portugal
• Trading companies: Import/export between different continents
• Holding structures: Management of international holdings
• IP management: Licensing of patents, trademarks, software
• Financial services: Asset management, treasury, insurance

Less suitable for:

• Pure local service providers
• Manufacturing companies with physical goods
• Very small businesses (under 200,000 euros profit)
• Business models without real international substance

Concrete Case Studies and ROI Calculations

Let me show you 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 euros.

Thomas made the decision. His Madeira team now handles all project management for international clients.

Case 2: Marketing Consulting

Elena, 42, advises internationally active companies. Annual profit: 300,000 euros.

Elena opted against Madeira. At her profit level, it doesnt (yet) pay off. Cyprus would be a better choice for her.

Case 3: E-Commerce Business

Robert, 45, sells sporting goods internationally. Annual profit: 1,200,000 euros.

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

The rules of thumb from my experience:

• Under 200,000€ profit: Usually not worthwhile
• 200,000-400,000€ profit: Borderline, needs case-by-case check
• Over 400,000€ profit: Usually very attractive

Risks and Drawbacks Honestly Considered

Now its time for the uncomfortable truths. As with any tax optimization, there are risks in Madeira as well.

And honestly: Anyone who hides this from you is not trustworthy.

Possible Pitfalls and Compliance Risks

The most common issues I see in practice:

1. Insufficient substance

   The biggest risk of all. If you are just running a letterbox company, authorities will catch up with you sooner or later.

   Specifically: Your three employees must do real work. Project management, client support, quality control—not just making coffee.

2. Unclear business activities

   The line between international and local isn’t always clear. Serving German clients can be problematic.

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

3. Double taxation

   Portugal has a solid DTT network, but conflicts are possible—especially with unclear residency issues.

4. Changes in EU rules

   The program runs until 2027. Extension is likely, but not guaranteed.

There are also practical challenges:

• Time required: You must be onsite at least 90 days a year
• Language barriers: For many Germans, Portuguese is challenging
• Distance: 4-hour flight from your German clients and partners
• Complexity: Two tax systems, double accounting, more compliance

Alternative Structures Compared

Before deciding for Madeira, you should know your alternatives:

My honest assessment:

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 you have very high profits and dont mind complexity.

And sometimes, the best solution: stay in Germany and use other optimizations.

I say this as a tax mentor who makes a living from international structures. Sometimes, the effort is simply not worth it.

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 approved by the EU and runs as an official regional support program until the end of 2027. All tax benefits are legal and covered by EU law.

How long must I as a director spend in Madeira?

At least 90 days per year. You must be able to prove this (flight tickets, hotel bills, etc.). Many of my clients use this time for strategic work and team leadership.

Can the 3 employees be German?

Yes, but they must relocate their place of residence to Madeira. Often, a mix of local Portuguese staff and seconded German professionals is more practical.

What if the program is not extended after 2027?

Existing licenses usually have grandfathering for another 5-10 years. Otherwise, the normal Portuguese corporate tax rate of 21% applies—which is still much lower than in Germany.

Can I have German clients?

Challenging. The services have to be international. German clients are possible if genuine cross-border services are provided. Pure local services in Germany are excluded.

How does double taxation with Germany work?

Portugal has a double taxation agreement with Germany. If handled correctly, you only pay 5% in Portugal and no extra tax in Germany.

What does a Madeira structure cost per year?

Depending on complexity, between 70,000 and 100,000 euros annually (including staff, office, consulting, but excluding share capital). With higher profits, relative costs decrease.

Is Madeira also suitable for holdings?

Yes, very much so. Madeira has an excellent DTT network and low withholding taxes. Many international corporations use Madeira for their European holding structures.

How quickly can I set up a Madeira company?

Company formation alone takes 1-2 weeks. For the Madeira license, allow 3-4 months. Operational kickoff is realistic after 4-6 months.

Do I need a local partner or lawyer?

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