Malta company: three mistakes that will become tax traps in 2021 & how you should do it instead

Unfortunately, I have noticed again and again in my consultations with clients that false expectations of a company in Malta are stirred up by various blogs and forums on the Internet. Recently I had an appointment with a potential client who came to me with the expectation that he can establish a company in Malta and continue his business in and out of Germany.

It may be that some ‚consultants‘ support such ventures, but legally it is not. No reputable advisor will support you in this.

Therefore, I am taking yesterday’s phone call as an opportunity to list the three most fatal mistakes made when setting up a company in Malta. Fatal in the sense that they are punished as tax evasion. Afterward, I will explain to you how you should proceed instead when setting up a company.

These 3 mistakes you should not make with a company in Malta

Malta Tax Trap 1: Company without substance

„Substance“ is the magic word of today – without it, the Malta company quickly ends up at the wrong tax office. Substance means, for example, having your own physical office, employees and a real director (not a trustee or lawyer) and real, value-added activity – all in Malta. But substance also means being able to show a genuine, commercial reason why you are setting up a company in Malta in the first place. Forget about the freedom of establishment, the tax authorities demand solid evidence that you are not only founding the company in Malta because of the tax advantages (we will gladly give you a few examples).

Tax trap 2: Artificially calculating or shifting profits to Malta

The tax authorities have fully ratified the Malta model. Invoicing your own company, lending money or charging royalties must be done according to a strict method and therefore not in any amount. The tax authorities require that in case of such offsetting, documentation is prepared in advance according to special procedures, which must be presented upon request. It must not only be ensured that the offsetting is in line with market practice (withstands third-party comparison), but also whether the „customer“ (the own company in the high-tax country) needs the service, the license or the loan at all and would also obtain it under normal circumstances. If not, the tax authorities will not accept the offset.

Malta Tax Trap 3: Following dangerous half-knowledge

The „classical“ (international) tax law (before the BEPS agreement) is, to put it casually, a „kindergarten“ against the laws, rules, regulations and directives that become more complex week by week. Not only is the legislation itself changing, but so are the interpretations of tax administrations, organizations such as the OECD, the courts, the media and the public. Thus, many of the „old“ rules and issues are still important, but enjoy nowhere near the clout they did just a few years ago. There is now so much diversification that even with the best of intentions, one can fall into a tax trap. Due to the new legal and interpretational situation, it is now much easier for parts of the profits not to be taxed exclusively in Malta, but e.g. also in a country outside, because there may be a taxable „nexus“ there.

Company formation in Malta – this is how it works properly

So now that you have read the 3 most fatal company when incorporating in Malta, read below the most important factors, in my opinion, when incorporating a company in Malta.

1. Emigrate Malta: Put the tax advantages in the background

Consider whether and how Malta can make economic sense for you. If you cannot find an economic reason why you would like to incorporate a company in Malta of all places, we do not recommend incorporation. There are several reasons, which we would like to explain to you in more detail. If you move to Malta, then you already have the best reason at hand: you form the company where you live. The tax advantages are an important and valid reason for Malta, but they must not be the only reason.

2. Create active, substantial and physical value in Malta

If you can show economic reasons for Malta, as described in 1. above, you must now follow up with action. To build a real business base in Malta and operate exactly as you would otherwise. If you cannot detach the value creation from your person and you cannot do this e.g. via employees, then as a consequence you will either have to physically work in Malta yourself or run the risk of triggering a permanent establishment outside Malta, wherever you do your business.

3. Consider relocation to Malta

By far the most effective method of not having to deal with a non-Maltese tax administration at all, or only to a very limited extent, is to move to Malta. Not only because it gives you a valid reason to incorporate in Malta. You can also assume that the creation of value will then mainly take place in Malta and you can also answer the substance question more easily and much more favorably. Consequently, you can achieve effective total taxation for the company and for yourself of 5-10%.

4. Get professional advice in Malta

Expert advice is more urgently recommended than ever in this day and age, so that the „big picture“ is analyzed and not just the Malta section. While this is important, it is only one piece of the puzzle. Often even we call in external advice, experience and expertise – from Malta, from Germany or from other international colleagues. With modern, expert advice, it is not a matter of what answers you get. What matters is what questions you ask.

5. Taxes: get ready for transparency and compliance

The world in which we operate is glassy. Whether you or we like it or not, as regulated providers we must comply with all legal requirements. And those requirements dictate that – whether it’s for a company formation, an account opening, an advisory or a licensing – we must request a wide range of information, records and documents about the business case and the people acting on it. This means effort for us, but also for you – administratively and in terms of time. Please prepare for changing processes and requirements. Please prepare yourself for the fact that you or your company will be completely transparent before us, before banks and before authorities.

I hope that this small overview has helped you. If you are still considering moving to Malta, please feel free to contact me – my team and I will be happy to answer any questions you may have.

About Philipp M. Sauerborn

Philipp Maria Sauerborn is a certified tax advisor and expert in International Tax & Blockchain. As CEO of Dr. Werner & Partner in Malta, he has already advised over 3000 clients on their tax situation.

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The above-mentioned article is simply based on independent research carried out by Philipp Sauerborn and cannot constitute any form of legal advice. If you would like to receive further information, please contact us for an appointment.

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