Legal Framework and Formation Rules and Fees
Madeira is a civil law jurisdiction, subject in general to Portuguese law, and the trust thus does not exist as such. Portugal has not ratified the Hague Convention on the law applicable to trusts and their recognition. Nonetheless when the Free Trade Zone Legislation of Madeira was enacted provision was made for the creation of offshore trusts.
Decree Law No 352/88 & Decree Law No 149/94 deal with the registration and management of offshore trusts whereas Decree Law 264/90 concerns authorization by Government of trust corporations and branches. There are no unit trusts in Portugal or Madeira.
Portuguese residents cannot use Madeira offshore trusts. The law forbids a trust to hold immovable property situate in Portugal and to have either a settlor or a beneficiary who is a Portuguese resident. All trust property should be based outside Portugal and all trust income should be derived from non-Portuguese sources if the favorable taxation regime governing entities licensed to operate under the Free Trade Zone Legislation of Madeira is to apply.
For a Madeira trust to be valid it must satisfy the following criteria:
The trust must pass the 3 tests of certainty of intention, certainty of objects and certainty and identification of the beneficiaries;
The settlor, the trustees, the beneficiaries and the assets settled by the trust must all be identified in the trust deed;
The trust period must be specified.
A power to accumulate income must be specified in the deed;
The trust deed must stipulate a foreign proper law governing the validity, interpretation and administration of the settlement;
The trust deed must set out the trustees powers of investment, the rights and obligations of trustees and the relationships between trustees and beneficiaries including any personal liability arising.
Trusts that are created in or transferred to Madeira may emigrate without prior authorization by exchanging the law governing the trust with the law of the foreign jurisdiction to which the trust is going to migrate. The trust deed can reserve the right to change the proper law governing the validity, interpretation & administration of the trust at any future point in time. A Madeira offshore trust is brought into existence by the execution of a notarial trust deed in front of a public notary.
There are a number of provisions that protect trust confidentiality:
Although an offshore trust must be registered in the private Trust registry located in the Madeira free trade zone neither the trust deed nor the names of beneficiaries and settlor need be registered;
A trustee who is opening a bank account on behalf of a trust does not need to disclose the names of the beneficiaries to the bank although the bank may require such details for the purposes of its internal controls;
The exchange of information agreements contained in double taxation treaties only allow for the disclosure of information relating to drugs or weapons trafficking;
European Union directives as transposed on the Islands do require the local authorities to co-operate in matters relating to drug trafficking, weapons trafficking and money laundering but do not require the local authorities to cooperate with foreign investigators in matters of tax evasion;
Disclosure of the details of a trust is only allowed pursuant to a court order (See Article 11 of Decree Law No 264/90). An unauthorized breach of the confidentiality provisions contained in article 11 will result in criminal sanctions.
Trust companies must be audited annually and must retain a statutory auditor on their board of directors. They must keep books of account relating to the trusts being administered.
A trustee company pays an annual license fee of around EUR2,400, at the time of writing.
Where trust income arises in Portugal it is taxable in the hands of the trustees as if the trustees were both legally and beneficially entitled to the income. The reasoning behind this principle is that Portuguese law does not recognize the concept of a trust and so does not recognize the distinction between legal and beneficial ownership for the purposes of taxation. By way of exception income arising through investments made through companies licensed to operate under the Free Trade Zone Legislation of Madeira is not considered to have arisen within Portugal for tax purposes.