A comprehensive guide to Malta's effective corporate tax rate of 5% | John Galea (2023)

Malta is an attractive destination for starting a business due to its unique tax regime that offers several advantages for non-residents and non-residents alike.

I've researched the subject of tax optimization extensively over the years, and if you haven't already, I recommend starting withmy article on tax reduction strategies in Europe, where I cover the basics and also suggest some different setups involving countries other than Malta.

In this article, I will discuss Malta's total imputation system, how it affects resident and non-resident shareholders, and how companies can be structured for maximum tax efficiency.

Malta's complete credit system

Malta is theonly country in Europewhich operates a complete credit system for corporate taxation. This means that the company's profits are taxed at a rate of 35% by the company.

However, when dividends are paid to individuals from taxable profits, a credit will be made against the tax paid by the Company on the profits so distributed.

This system essentially eliminates the economic double taxation that arises in the classical regime.

Implications for Resident Shareholders

In Malta, taxation of natural persons is based on a progressive system with rates between 15% and 35%.

As the current corporate income tax rate is 35% and the maximum rate applicable to individuals is also 35%, receipt of a dividend from these tax accounts can never result in a shareholder having to pay additional tax on receipt of the dividend to a Malta resident shareholder.

Implications for Non-Resident Shareholders

Non-resident shareholders, on the other hand, are not taxed on their dividends in Malta, but would still have to declare receipt of dividends in their country of residence and pay tax there.

This creates a situation where it would be very disadvantageous to incorporate a company in Malta if you are a non-resident shareholder as you would have to pay corporation tax at 35% plus tax on dividends in your country.

To solve this problem, Malta offers a 6/7 refund of corporate tax paid in Malta if the shareholder is non-resident and non-resident. This reduces the effective corporate tax rate in Malta to 5%.

Who is this setting suitable for?

With this basic understanding of how the full credit system works and how it affects resident and non-resident shareholders, let's take a closer look at who the Maltese setup is ideal for. I will list some eligibility criteria for establishing in Malta.

1. ownership structure: The company may be owned by natural or legal persons, resident or non-resident. It is important to understand the tax implications for shareholders in their country of residence, as they may be subject to additional tax on dividends received from the Maltese company.
2. business activity: The company must be engaged in a genuine commercial activity, whether commercial, holding company or a combination of both. Pure counterfeit or substanceless paper companies do not qualify for the effective 5% rate.
3. tax residence: To benefit from the Maltese tax system, the company must be considered a tax resident in Malta. This usually means that the company was incorporated in Malta or, if incorporated elsewhere, managed and controlled in Malta.
4. Compliance with Maltese regulations: The company must comply with all relevant Maltese regulations, including corporate laws, tax laws and anti-money laundering regulations. This includes timely filing of tax returns, financial statements and other required documents.

Optimization of the corporate structure in Malta

To make the most of Malta's tax system, I recommend the following structure with two companies based in Malta:

1. Incorporate a Maltese trading company that generates income from your trading activities.
2. Maltese trading company pays 35% Maltese corporate income tax on net profit.
3. If dividends are paid to the Maltese holding company, the latter can claim a refund of 6/7 of the Maltese corporation tax paid by the Maltese trading company.
4. Dividend income and tax refunds received from the Maltese Holding Company are not subject to any additional taxation in Malta.
5. The Maltese holding company can fully distribute both the tax refund and the dividend income received to its foreign shareholder.
6. No withholding tax is levied on dividends paid to foreign shareholders.

This structure results in a 5% net tax rate on corporate profits in Malta (after receiving the 6/7 tax refund) plus taxation on dividends received in the shareholder's country of residence.

Keep in mind that as a shareholder you will still have to pay taxes on dividends in your country of tax residence.

For example, if the shareholder is a resident of Spain, he would pay between 19% and 26% tax on dividends received from the Maltese company, as there is no withholding tax in Malta. As another example, if the shareholder resides in France, he will pay 30% (fixed interest rate in France) on the net amount of dividends received from the Maltese company.

For this reason, I think that combining a corporate structure in Malta with living in Portugal is the perfect combination, as under the NHR scheme you would be exempt from paying dividend taxes for 10 years.

Can you have your holding company in another country?

It is not essential that the holding company is also based in Malta. There are many cases where it makes more sense to have the holding company in another country.

The two main reasons for not having the holding company in Malta would be the following:

• The setup is a large company that has had its holding company in another country for many years. Relocating this holding company would be a major hassle, not to mention the potential to attract the ire of local tax authorities and unwanted attention.
• The ultimate beneficial owner may wish to establish a multi-country presence (perhaps due to their theoretical flag preferences) or may wish to make other holding company investments that are easier to make when the holding company is headquartered elsewhere than Malta.

If you structure your company in this way, the Maltese trading company would operate and generate income from its activities, while the holding company in the other country would own the shares of the Maltese trading company.

Consider the following factors to determine the most appropriate country for the holding company:

1. double taxation treaty: Make sure your selected country has a double taxation treaty with Malta, as these treaties often help to reduce or eliminate withholding taxes on dividends, interest and royalties. This can improve tax efficiency in distributing profits from the Maltese trading company to the holding company.
2. tax regulations: Evaluate the tax regime of the country of residence of the holding company, including tax on dividends received from the Malta trading company, tax on capital gains on the sale of shares and other relevant taxes. Ideally, choose a jurisdiction with little or no tax on that income.
3. Requirements for a holding company: Some countries have specific legal and regulatory requirements for holding companies, such as Be aware of these requirements and ensure they align with your business plans and capabilities.
4. substance requirements: Consider economic substance requirements in the holding company's jurisdiction. Some countries may require physical presence or a minimum level of economic activity to claim their tax benefits. Make sure you can meet these requirements to remain tax efficient.
5. Confidentiality and Data Protection: Assess the level of confidentiality and privacy guaranteed in the chosen jurisdiction. Some countries offer higher levels of privacy for shareholders and corporate property information.

Some popular holding company jurisdictions are Cyprus, the Netherlands, Luxembourg and Singapore. Each jurisdiction has its own benefits, and choosing the most appropriate one depends on your specific business objectives, tax planning goals, and the relationship between the jurisdictions involved.

Additional benefits

There are two other major benefits of operating a corporate structure in Malta, one of which is relatively new. Let's take a look at them.

tax deferral

In Malta, companies that derive most of their income outside Malta can benefit from a tax deferral mechanism, allowing them to defer their tax payments for up to 18 months. This provision can offer significant cash flow and flexibility benefits to companies, especially those that rely on reinvestment or are in a growth phase.

Here is an overview of the tax deferral mechanism in Malta:

1. authorization: To qualify for tax deferral, the majority of a company's income must come from outside Malta. The business must also meet all other tax compliance requirements, including filing accurate and timely tax returns and providing the necessary documentation.
2. tax deferral period: Tax deferral allows companies to defer tax payments up to 18 months after the end of the accounting period in which the income was earned. This means that if a company's tax year ends on December 31st, tax payments can be made by June 30th at the earliest. be postponed to the following year.
3. application process: To benefit from the tax deferral mechanism, companies must register with the Maltese Tax Authorities and provide details of their sources of income and the reasons for requesting the deferral. Tax authorities may request additional documentation to substantiate the request.
4. Benefits of Cash Flow: Tax deferral can offer companies significant cash flow benefits, allowing them to use funds that would otherwise be paid as taxes for other business purposes, such as B. for reinvestment, expansion or working capital management.
5. interest and fines: It's important to note that deferring paying taxes doesn't mean avoiding them entirely. Finally, companies must pay deferred taxes together with any interest or penalties they may incur if the tax payment is not made within the allowable deferral period.

The tax deferral mechanism in Malta can be an attractive option for companies whose income comes mainly from abroad.

Consolidated accounts for holding companies and trading companies

As of 2021, Malta has introduced new regulations allowing consolidated tax returns to be filed by Maltese holding companies and commercial companies. This change brought about a significant improvement in the Maltese tax system, streamlining the process and giving some advantages to companies that operate under this structure.

Benefits of consolidated tax returns in Malta:

1. Simplified tax reporting: Under the new rules, holding companies and trading companies can file a single consolidated tax return instead of filing separate tax returns for each company. This simplifies the reporting process and reduces the administrative burden for companies.
2. Faster tax return: Previously, companies in Malta had to first pay the full 35% corporate tax and then wait for the 6/7 tax refund, which could take around a year. For consolidated tax returns, the effective 5% rate can be applied directly, eliminating the need to wait for a refund. This allows companies to access their funds more quickly, which can be particularly beneficial for reinvestment and cash flow management.
3. Reduced compliance risks: Consolidated tax returns reduce the risk of errors or discrepancies in tax reports between holding and trading companies. By submitting a single statement, companies can ensure that all relevant information is reported correctly and consistently across both entities.
4. improved transparency: Filing a consolidated income tax return provides a clearer picture of the overall financial performance and tax position of the holding company and trading company. This can help business owners, investors and other stakeholders to better understand the group's financial health.
5. Possible interest savings: Because companies no longer have to wait for a tax refund, they can save on the interest costs associated with borrowing to meet cash flow needs while they wait for the refund.

This legislative change further improves the tax efficiency of Maltese companies for non-residents.

Is Malta right for you?

While opening a branch in Malta is generally a good idea and I know of many companies that have successfully gone down this route, I would also like to make it clear that opening a branch is not for everyone.

There are certain situations where starting a business in Malta may not be a viable or advantageous option:

1. Limited Substance: If the company does not have enough substance in Malta, e.g. physical presence, employees or genuine economic activities, they may not be considered tax residents in Malta and may face challenges in benefiting from Malta's tax system or accessing double taxation treaties.
2. High Tax Jurisdictions: For individuals or entities residing in high tax jurisdictions with strict Controlled Foreign Corporation (CFC) rules, the benefits of Malta's tax regime may be limited. In some cases, Maltese company income may be attributed to shareholders and taxed in their country of residence.
3. unfavorable tax treaties: If the country of residence of the Company's shareholders or the countries from which the Company's income originates have unfavorable tax arrangements with Malta, this may lead to higher withholding taxes or limit the benefits of the Maltese tax system.
4. Regulatory Restrictions: In some industries or sectors, regulatory restrictions in Malta or the country where the company operates may make it difficult or even impossible to form a Maltese company. For example, certain financial services, gambling or cryptocurrency businesses may be subject to stricter licensing requirements or prohibitions.
5. Small business owner or individual entrepreneur: For small businesses or sole proprietors with limited profits, the added complexity and expense of starting and maintaining a business abroad can outweigh the possible tax benefits. Incorporating a company in Malta involves registration fees, annual expenses and fees for professional accounting, auditing and legal services. Additionally, managing international operations can be time-consuming and challenging. In these cases, it may be more beneficial to focus on growing the business internally before considering international expansion or tax planning strategies.

The most common mistake I see is point number 5, and it's not unique to Malta. I see many freelancers and small business owners trying to try this setup prematurely. You'll hear many stories of people and businesses paying low taxes because of the way they're built, but building these structures and keeping them running is no joke. You must be willing to spend money and deal with the additional complexities (cultural differences, language barriers, different laws, etc.) that working in another jurisdiction brings.

However, let's assume your case is ideal for exploring company formation in Malta. You should also be aware of some important disadvantages of incorporating a company in Malta:

1. Limited size and market: Malta is a small island nation with a limited domestic market that may not be ideal for businesses that rely heavily on local demand. However, the strategic location on the Mediterranean and EU membership can alleviate this problem for companies focused on international trade.
2. regulatory complexity: Navigating Malta's tax landscape can be complex, especially for companies unfamiliar with the country's tax laws and regulations. When opening a company in Malta, it is essential to seek professional advice and ensure that all relevant requirements are met.
3. reputational risks: In recent years, Malta has been criticized for problems related to money laundering, corruption and financial transparency. While the Maltese government has taken steps to address these concerns, companies operating in Malta must be mindful of potential reputational risks and maintain strong corporate governance practices.
4. Limited pool of local talent: Although Malta has a skilled workforce, its small population size may limit the availability of local talent in specialized fields. Companies in niche sectors may need to invest in training or recruit foreign talent to meet their staffing needs.
5. Increased reporting requirements: As a result of the country's efforts to improve its financial transparency, companies operating in Malta may face increased reporting and compliance requirements. This can lead to additional administrative work and costs for companies.
6. banking challenges:Opening a bank account in Maltahas become increasingly difficult, especially for non-residents and foreign companies. Due to stringent money laundering regulations and compliance requirements, Maltese banks have implemented stringent due diligence procedures, resulting in lengthy account opening processes and higher rejection rates. This can pose a significant challenge for companies looking to establish a presence in Malta, as access to banking services is essential for smooth operations. It may be necessary to explore alternative banking options such asinternational banks or fintech solutions, which can add complexity and cost to starting a business.

To conclude, let's recap the benefits of establishing an office in Malta.

1. attractive tax system: Malta's full credit system combined with the 6/7 refund mechanism for non-resident and non-resident shareholders results in an effective corporate tax rate of just 5%. This is one of the lowest tax rates in the European Union, making Malta an attractive destination for companies looking for tax efficiency.
2. Consolidated Tax Returns: Maltese holdings and trading companies can file consolidated tax returns, simplifying tax returns and allowing companies to apply the effective 5% rate directly without having to wait for a refund. This can greatly improve cash flow management for companies operating under this framework.
3. tax deferral mechanism: Companies that derive most of their income outside Malta can defer their tax payments for up to 18 months, providing additional cash flow benefits and flexibility for companies that need to reinvest or are in a growth phase.
4. EU membership: Malta is a member of the European Union, which means that Maltese companies can benefit from access to the European internal market, free movement of goods, services and capital, and reduced trade barriers with other EU member states.
5. skillful worker: Malta is home to a highly skilled, multilingual workforce, with many professionals fluent in English, Italian and other European languages. This can be beneficial for companies looking to break into the European market.
6. Membership in the eurozone: Malta's membership of the eurozone, which adopted the euro as its currency in 2008, offers additional benefits for businesses. Operating in a country that uses the euro eliminates currency risks and simplifies cross-border transactions within the eurozone. As a member of the European Union, Malta enjoys continued access to the EU's internal market, which facilitates trade with other EU countries and increases the company's credibility. This membership also offers companies the opportunity to access EU programs and grants, which can be particularly beneficial for start-ups and small and medium-sized enterprises seeking financial support.

I hope I have managed to paint a good picture of what the setup in Malta is like and who would benefit most.

If establishing a branch in Malta sounds interesting, I would recommend seeking professional advice early on to determine whether the structure is really appropriate for your specific circumstances. The tax landscape can be complex and it is important to understand the implications and compliance requirements before incorporating a company in Malta.

To help you navigate this process, I am happy to put you in touch with my lawyers in Malta for a free consultation.. Vonby filling out this form on my website,You can receive personalized advice on the potential benefits and challenges of starting a Maltese business, tailored to your specific situation.

I think Malta remains one of the best places in Europe to start a business, especially when the end beneficiary is able to do so.Moved to Portugal to use NHR setup. This offers the best of both worlds, with 5% corporate tax in Malta and 0% tax on dividends (in the first 10 years under NHR) received in Portugal by the Portuguese shareholder.

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