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Companies Flee Portugal’s Madeira Island to Escape Rising Taxes

April 18 (Bloomberg) -- About 1,000 companies left the Portuguese island of Madeira between the start of 2011 and the first quarter this year after the government said it would end some tax incentives.

“Billions of euros are now being relocated to other low-tax jurisdictions,” said Francisco Costa, president of Madeira’s International Business Center, a program that seeks to attract investors to the semi-autonomous Atlantic Ocean archipelago.

Most left after the Portuguese government said it would increase corporate and dividend taxes for IBC companies. More recently, the government has announced that banks will start paying taxes on interest earned from deposits, said Costa.

“These measures will continue to push companies to move elsewhere,” he told reporters in Lisbon today.

Since the 1980s, banks and other companies have enjoyed preferential tax treatment by registering through the Madeira IBC.

Cia. Siderurgica Nacional SA, Brazil’s third-largest steelmaker by output, and Swatch Group AG were among the companies to close their offices on the island, said Costa.

About 2,000 companies still operate from the IBC, compared with about 6,000 in 2000, said Costa. The IBC is responsible for about a fifth of the regional government’s tax take, he said.

The survival of the IBC is at stake if “the government continues to make Madeira less attractive to foreign companies by allowing certain tax incentives to be scrapped,” said Costa.

The Portuguese government is in talks with the European Commission about a rule that establishes corporate tax discount ceilings for IBC companies based on the number of jobs they create, said Costa.

Madeira, known for its fortified wine and as the birthplace for Real Madrid soccer star Cristiano Ronaldo, runs an independent budget and has its own government and parliament, though the region cannot override the authority of the government in Lisbon.

Portugal said last year that Madeira’s debt had risen to an unsustainable 6.3 billion euros ($5.2 billion), prompting the government to grant the region 1.5 billion euros in aid in exchange for a pledge to increase taxes and cut spending.

To contact the reporter on this story: Henrique Almeida in Lisbon at halmeida5@bloomberg.net

To contact the editor responsible for this story: Jerrold Colten at jcolten@bloomberg.net

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