Discussing a rather ambiguous question: “Is Malta a tax haven?”

Often, incorporating a legal entity in Malta as a limited liability company is said to be the most tax-efficient solution within the EU. And, indeed those who meet the necessary requirements can benefit from an effective Maltese taxation.

The imperative baseline requirement is  the clean tax management of a Maltese company, and this can generally only be realized through an active de facto business operation on site.

Malta’s tax system, to be efficient at a 360-degree level, generally ought to operate the concept of “economic substance,” which means that companies should have a real presence in Malta, including physical offices, employees, and activities. And be assured, international tax authorities tend to scrutinize companies that are deemed to be set up solely for the purpose of tax avoidance without conducting substantial business operations.

Consequently, merely establishing a shell or mailbox company without actual substance and economic activity may not be considered a legitimate business for tax purposes.

→    The Controlled Foreign Company or Corporation (CFC) rules, that indicate how a company can and may be established and operated abroad. The key CFC concept is to attribute the income of a foreign corporation to its controlling shareholders for tax purposes, that helps prevent individuals or entities from using offshore entities to defer or avoid tax obligations.

In the context of this article, an investor or founder residing in a country with CFC rules*, should know that these rules may impact the tax treatment of their overseas entities, including a company established in Malta. If the CFC rules apply, the investor or founder may need to ensure that the Maltese company has sufficient substance to avoid adverse tax consequences. The level of substance typically involves having real economic activities, a physical presence, employees, and genuine business operations in Malta. Simply having a shell company or a mailbox entity may not meet the requirements of economic substance. It is crucial to carefully consider the specific requirements and thresholds of the CFC rules in the investor or founder’s country of residence and comply with them to prevent any adverse tax implications.

→   BEPS guidance of the Organization for Economic Co-operation and Development (OECD). BEPS stands for Base Erosion and Profit Shifting, refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. OECD has developed guidelines and recommendations to address BEPS issues with the aim to ensure that profits are taxed where economic activities take place and to prevent the artificial shifting of profits to low-tax jurisdictions.

And according BEPS rules a clean tax management of a Maltese company can only be realized through an active business operation on site.

Summarizing up the above, we would like to reiterate that tax motivation alone is not enough to set up company in Malta; an interested party who does not reside in Malta and does not intend to move to Malta in the foreseeable future should give sufficient thought to why incorporating in Malta makes sense without the tax aspects. And this is subject for our next article.

* Some countries (this is not an exhaustive list) that have implemented CFC rules & part of the BEPS Framework: US, UK, Germany, France, Australia, Canada, Netherlands, Switzerland, Japan, Sweden, Finland, Norway, Denmark, Italy, Malta, Spain, Belgium, Luxembourg, Ireland, Austria, New Zealand, South Africa, Singapore, India, China, Brazil.