Setting Up a Malta Limited: How the 5% Tax Setup Actually Works

Most people probably know by now that you only pay 5% tax in Malta. But how exactly is that achieved? That is something I need to address again this year, because there has indeed been a significant development.

I am not going to make any false promises here.

The setup in Malta is neither uncomplicated nor cheap. But one thing is clear:

Once set up correctly, you pay 5% tax. Full stop.

So let's tackle the subject—no frills, just the honest truth.

Let's start with a brief look back.

Back Then: The Tax Refund in Malta, the 6/7 Reimbursement

On paper, Malta has one of the highest corporate tax rates in the world: 35%. However, as a "foreign" shareholder in such a Malta company, you were entitled to a refund of 6/7ths of the tax paid.

This is initially a simple calculation:

35% divided by 7 is 5%. One-seventh tax, six-sevenths no tax (refund) makes exactly 5%.

I can tell you right now:

Today, you simply pay 5%. Basta.

No refund. No cashflow problem. But you do need the right setup—I will explain that further below. But first, let's look at how this all fits together and how it came about.

Malta before Legal Notice 110 in 2019

Before this Legal Notice was issued, companies indeed had to pay 35%, and the SHAREHOLDER received the aforementioned 30% back upon application. And since Malta was relatively successful with its model, the administration and processing became a very long and bureaucratic process.

Malta became a victim of its own success.

For applicants, this often meant long waiting times, sometimes over 2 years.

Which was naturally a problem for cashflow.

The Malta model seemed attractive, but leaving your money with the tax authorities for 2 years of bureaucracy seemed unsafe and unappealing. The great advantage had found its nemesis: Malta's refund application.

But the real danger came from somewhere else—from Brussels. Because:

The tax refund, due to the back-and-forth payments (from taxpayer to tax office and back), also became a tool for money launderers. And yes, the system produced some black sheep. I don't want to sugarcoat anything there.

In short:

The Malta refund suddenly wasn't just unattractive; it had also become a tool for criminals.

EU Applies Pressure on Malta Limited's 5% Refund

The pressure came from Brussels. Obviously.

And the solution, which has now been in force for several years and has solved the problem once and for all, is called LN110.2019. This is a Legal Notice passed by the Parliament of Malta that makes the whole thing much simpler.

I don't want to dive too deep into the weeds of tax legislation, but with this Legal Notice, the refund was practically abolished. Technically and legally it still takes place, but:

Anyone who is entitled to such a refund for any reason can immediately offset it against the tax due.

5% directly. No more refund application. No more waiting 2 years.

As I mentioned above, the cashflow problem is thus solved for "normal" taxpayers. And the problem with money launderers too. Calculate with 5%. In terms of cashflow and in total. I also mentioned the "right structure" above.

I will get to that now. Once for everyone who does not live in Malta as an owner, and once for everyone who does live in Malta (the better way).

The Malta Holding Model Enables 5% with a Company in Malta

Anyone incorporating in Malta must also set up at least one holding company.

But why?

The Malta Holding Model has an effective tax law background, which I would like to explain below.

Malta Holding Model: A Tax Law Trick

The Malta Holding Model protects you from two things in terms of tax law:

1. Immediate taxation of dividends – See below "The Issue with Dividends"
2. Full taxation of the refund – See below "The Issue with the Refund"

Specifically, with the Malta Holding Model, the full corporate tax becomes due and is deducted in the books. At the exact same moment, the tax refund—remember, 6/7ths—is booked as income in the holding company.

You might rightly ask: Why? No money is actually flowing.

And that is exactly what happens: In terms of tax law.

Company in Malta: The Issue with Dividends

Only the shareholder who actually draws their dividend—i.e., has it distributed by their company—is entitled to the tax refund.

In many countries, capital gains tax or dividend tax applies at such a moment; in Malta, it is the same tax of 35%.

But here comes the all-important exception achieved with a holding in Malta:

The law in Malta prohibits double taxation.

This means: Since 35% has already been paid at the level of the operating company—don't forget: only in the books!—the dividend is tax-free at the level of the Maltese holding company. This initially has nothing to do with the refund, but explains why you need the Maltese holding company.

In many countries, like the UK, this is similar: If you use a holding company, you generally don't have to pay tax on the dividends received. In the UK, for example, dividends received by a company are largely exempt from Corporation Tax. This means the dividend arrives tax-free.

So, the dividend is tax-free for now.

But how must the refund be taxed?

That's what we're coming to now.

Malta Limited Formation: The Issue with the Tax Refund

Per se, the refund is subject to tax. In Malta, this would be the personal income tax rate if you don't have a holding company.

So up to 35%!

This is because the refund is not classified as capital gain, but is a hybrid.

And therefore, this refund is not taxed at the more favourable rate for capital gains, but fully with income tax.

But here is the key:

For limited liability companies, the refund is also tax-free.

This explains why the Maltese holding company is placed in between.

Attention Malta Holding: No 5% Tax if Resident Abroad

So the holding receives the dividend AND the holding receives the tax refund.

What happens then?

From the Malta Holding, you then distribute a dividend at a time of your choosing.

And then?

Well, then we have reached the top level and your country of residence asks for its share.

You then pay tax on the difference at the dividend tax rate of your country of residence.

This tax varies from country to country. You should compare how much tax you effectively pay at the end of the day, depending on which country you live in. Always in comparison to if you move your residence to Malta (because then it is 5% in total, and not just at the company level).

Dividend Taxation: Comparing Effective Tax Burden

Compare how high your tax burden for the dividend of your Malta companies would be—once if you keep your current residence, and once if you move to Malta. The calculation takes into account the corporate tax in Malta (5%) and the tax on capital gains in your country of residence on the profit remaining after Maltese tax. Specifically: The taxes incurred until the profit lands in your private account.

The fact that there is so little tax to pay when you live in Malta is thanks to another tax trick. But for that, another holding is needed.

I'll get to that now.

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Setting up a Malta Limited with Two Holdings

Moving to Malta and then setting up Malta companies there is, from a tax perspective, the gold standard for me, and just as much for hundreds of clients.

Why that is the case is covered in many other articles here on my blog.

In this case, the Malta Holding Model looks a little different, expanded by another holding company.

You read that right.

Another holding is placed on top of the holding, i.e., a double holding.

The difference:

Here, a Maltese company is no longer used, but a company outside of Malta.

The idea behind it:

The mechanism described above only works if you, as the ultimate shareholder of the Malta companies, are not tax resident in Malta.

However, to benefit from a minimal tax burden on a personal level as well—meaning paying no capital gains tax either—moving to Malta helps. Because as explained earlier, dividends in Malta are only tax-free if they flow to a limited company.

Exception: The dividend comes from abroad. Then it can be tax-efficient for individuals under the remittance basis of taxation.

This is exactly where the additional holding comes in. A holding in another country is placed on top of the Malta Holding. And of course, one chooses a country for this that also treats foreign income attractively (= tax-free) for tax purposes.

And whose dividend is then in turn tax-free for you as a private individual in Malta (if not remitted or if it qualifies as capital).

And lo and behold: That's how you end up with 5% effective tax on profits generated by your company, which land in your private account after 5% tax. It hardly gets any lower.

Why a Company in Malta is a Legal Solution for Tax Optimization

Now I have written a lot about how the setup works. But how can it be that such a low tax rate is possible? After all, accusations of tax evasion arise quickly.

And I think I know the reason.

Cayman Islands – small country, big companies, tax evasion.

Panama – small country, big companies, tax evasion.

Barbados – small country, big companies, tax evasion.

Malta – small country, big companies... Well?

Tax evasion?

You might think so. But that is not the case.

In Malta, the situation is different.

Malta's Tax Advantages are Intentional

The many small tax havens all had in common that a big secret was made about who actually owned a company there.

Things were covered up as much as possible.

Many companies were happy:

Corporate structures were built, tax loopholes exploited, and in the end, there was minimal tax liability.

Tricking the tax authorities by exploiting tax loopholes was always a dark grey or black zone.

Now comes the big difference in Malta:

No tax loopholes, no secrets, and everything compliant with the law.

The reason? The Maltese state provides for tax relief and has anchored this firmly in its laws.

And as is well known, every state in the world possesses the sovereignty to define its own tax legislation.

The question now, of course, is what distinguishes Malta from other states that also sovereignly pursue a special tax policy.

The crucial point regarding this follows now.

Company in Malta thanks to the Free Internal Market and Freedom of Establishment – Malta Rocks EU

As mentioned at the beginning, Malta has been an EU member since 2004. This brings certain advantages.

The two most important ones in the context of company formation in Malta:

1. Freedom of Establishment
2. Free Internal Market

The Freedom of Establishment in the EU ensures that every entrepreneur can settle comparatively unbureaucratically anywhere in the EU and pursue their business activities there. Here is the wording:

Self-employed persons and providers of services or legal persons within the meaning of Article 54 TFEU who are legally operating in one Member State may: (i) carry on an economic activity in another Member State on a stable and continuous basis (freedom of establishment: Article 49 TFEU); or (ii) offer and provide their services in other Member States on a temporary basis while remaining in their country of origin (freedom to provide services: Article 56 TFEU).

Furthermore, the EU has established the free internal market.

Access to the Single Market enables member states to trade directly with other EU member states—without cumbersome bureaucracy.

Here too, the wording:

The Single European Act of 1986 included the objective of the internal market in the EEC Treaty, defining it as "an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured".

The combination of both makes the formation of a Malta Limited possible.