Portugal's Madeira tax scheme breached EU state aid rules

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FILE PHOTO: Cable cars pass on Funchal

LISBON (Reuters) - Companies on the island of Madeira have illegally benefitted from tax cuts under Portugal's Madeira Free Trade Zone scheme as they failed to meet the key requirement of contributing to the region's growth, the European Commission said on Friday.

Portugal, which first established the regional aid scheme in 1987, will now have to recover aid deemed incompatible with EU state aid rules, plus interest, from companies that failed to meet the conditions, the Commission said in a statement.

It gave Portugal eight months to do so. It is not known how many companies could be affected or the total aid amount to be recovered.

Critics have long claimed the programme converted Madeira into a tax haven for wealthy individuals and companies that have received billions of euros in tax benefits.

The scheme to attract companies by reducing corporate taxes and providing exemptions from other levies was approved by the Commission in 2007 and 2013.

But the rules were clear: it could only benefit firms that created jobs in Madeira and applied to activities "effectively and materially performed" on the island.

After a two-year investigation, the Commission found tax reductions were handed out to companies that had made "no real contribution" to the region, with jobs often created outside Madeira and even the European Union, and activities not based on the island.

"The scheme was not implemented in line with these fundamental compatibility conditions," Competition Commissioner Margrethe Vestager said in a statement. "This is in breach of EU state aid rules."

Portugal's Finance Ministry told Reuters in an emailed response "the government will analyse the conclusions of the EC audit and share the review with the Regional Government of Madeira". It did not elaborate. The government has previously said the scheme did benefit the island.

(Reporting by Catarina Demony and Patricia Rua; Editing by Andrei Khalip, Kirsten Donovan)