State aid: Commission concludes that the Madeira Free Zone (“Zona Franca da Madeira”) scheme not implemented in line with approved conditions

The European Commission has found that the implementation of the Madeira Free Zone aid scheme (Regime III) in Portugal is not in line with the Commission’s State aid decisions of 2007 and 2013. The objective of the approved measure was to contribute to the economic development of the outermost region of Madeira through tax incentives. That is why the Commission decisions made the granting of tax reductions conditional on only benefitting companies that create jobs in Madeira and on applying the tax reductions to activities effectively and materially performed in Madeira.

However, the Commission’s investigation has shown that the tax reductions were applied to companies that have made no real contribution to the development of the region, including on jobs created outside Madeira (and even the EU), in breach of the conditions of the decisions and EU State aid rules. Portugal must now recover the incompatible aid, plus interest, from companies that did not meet the conditions.

Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “Outermost regions, such as Madeira, face specific challenges and therefore benefit from particularly flexible State aid rules to support their economic development. On this basis the Commission had approved support for the Madeira Free Zone, enabling tax advantages to be granted to those companies that contribute to the creation of real economic activity and jobs in the region. However, the scheme was not implemented in line with these fundamental compatibility conditions. This is in breach of EU State aid rules and therefore Portugal will now have to recover aid from relevant companies that did not create real economic activity and jobs in Madeira.

Without questioning the outermost region status of Madeira, nor its eligibility for regional aid, on 6 July 2018, the Commission opened an in-depth investigation to examine whether the Portuguese scheme in favour of companies established in the Zona Franca da Madeira had been implemented in compliance with the 2007 and 2013 Commission decisions and, more generally, with State aid rules. In its decisions, the Commission had explicitly linked the amount of aid that could be granted per beneficiary to the number of jobs created or maintained in Madeira. Moreover, the profits on which the income tax reduction could apply must derive from activities effectively and materially performed in Madeira.

In the course of the in-depth investigation, the Commission found that:

  • The number of jobs taken into account by Portugal for the calculation of the aid amount under the scheme included jobs created outside the Zona Franca da Madeira and even outside the EU. Furthermore, part-time jobs were taken into account as full time ones, and board members were counted as employees in more than one company benefitting from the scheme, without an adequate and objective method of calculation.
  • The profits benefiting from the tax reduction were not limited to those linked to activities effectively and materially performed in Madeira.

On this basis, the Commission concluded that the scheme, as implemented, did not comply with the Commission’s decisions of 2007 and 2013 and that such individual aids granted to beneficiaries was unlawful and cannot be considered compatible with the internal market on the basis of Article 107(3)(a) Treaty on the Functioning of the European Union (TFEU).

Recovery of incompatible aid

As a matter of principle, EU State aid rules require that incompatible State aid is recovered without delay in order to remove the distortion of competition created by the aid. There are no fines under EU State aid rules and recovery does not penalise the companies in question. It simply restores equal treatment with other companies.

Following today’s decision, the companies concerned by the recovery are those that (i) received more than €200 000 under the Madeira Free Zone aid scheme (Regime III) (see by analogy the de minimis Regulation); and (ii) cannot show that their taxable earnings or jobs created are linked to activities effectively performed in the region.

The Commission is well aware of the specific circumstances in which Madeira Free Zone operates and therefore the decision provides eight months for the implementation of the recovery decision instead of the usual four months period.

It is now for Portugal to determine the amount to be recovered from each individual beneficiary, in line with the methodology set out in the Commission decision adopted today. Portugal has to identify among the beneficiaries those who did not respect the conditions of the Commission State aid decisions of 2007 and 2013 approving Regime III (i.e. the creation of jobs in the region and the link of earnings to an activity effectively and materially performed in Madeira). Therefore, the final figures on the number of companies subject to recovery and on the total aid amount to be recovered cannot be known at this stage.


The outermost regions are a group of remote regions defined in Article 349 TFEU (they include Madeira, the Azores, the Canary islands, Guadeloupe, French Guiana, Martinique, Réunion, Saint-Barthélemy and Saint-Martin). To take into account their specific handicaps (remoteness, insularity, small size, difficult topography and climate, economic dependence on few products), Article 349 TFEU allows an exceptional treatment of these regions, including under EU State aid rules. In recognition of the serious nature of the structural disadvantages that the companies located in these regions face, the Commission has established specific State aid rules, within the Regional Aid Guidelines (RAG) and, as from 2014, in the General Block Exemption Regulation. In particular, these regions are all automatically given priority assisted area status (Article 107(3)(a) TFEU regions). Due to this status, all companies with economic activity in these areas may benefit from additional bonuses of up to 20% on top of the normal regional investment aid ceilings. Additionally, Member States can provide operating aid to companies located in these regions to compensate them for the additional costs they are facing in these remote regions.

Since 1987, the Commission approved on several occasions successive versions of a corporate income tax reduction scheme notified by Portugal for companies established in the Madeira Free Zone. The Regime III scheme, which was in place until 2014 and was followed by the Regime IV that is in force until end 2020, was approved as an aid measure aimed at compensating the structural handicaps that companies faced in the outermost region of Madeira.

The Madeira Free Zone scheme is a regional aid scheme providing operating aid in the form of corporate income tax reduction on profits resulting from activities performed in Madeira. Other tax reductions are included, such as exemptions from municipal and local taxes, as well as exemption from transfer tax payable on immovable property for setting up of a business in the Madeira Free Zone. The Regime III regional aid scheme was set up by Portugal in order to attract investments and create jobs in Madeira. In order to ensure that the aid scheme would indeed address the structural handicaps of companies in such regions, the Commission approval decisions required explicitly that the aid would be granted to companies generating economic activity and real jobs in the Madeira region itself.

Each year, the Commission selects a number of State aid measures in order to monitor whether Member States implement them in compliance with EU State aid rules. In this context, the Commission asked Portugal for information on the implementation of the Madeira Free Zone scheme in 2012 and 2013. The results of the monitoring exercise have led the Commission to open a formal investigation procedure on the Madeira Free Zone aid scheme in 2018.

The non-confidential version of the decision will be made available under the case number SA.21259 in the State aid register on the Commission’s competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.