Controlled Foreign Corporate Taxation of Maltese Companies in Germany

Ques­tions as to which tax­es and inter­na­tion­al­ly oper­at­ing com­pa­ny must pay in which coun­tries are not easy to answer. In our dai­ly work at the law offices of Dr. Wern­er & Part­ner, an increas­ing num­ber of com­pa­ny own­ers are approach­ing us with the desire to move their com­pa­nies to Mal­ta in order to save tax­es. Often­times, we decline. Why? Because the world of inter­na­tion­al tax­a­tion and tax laws has become exceed­ing­ly com­pli­cat­ed and there are no more sim­ple solu­tions. In the fol­low­ing, I wish to pro­vide a few relat­ed expe­ri­ences that we have had dur­ing the past year as well as the role played by for­eign com­pa­ny tax­a­tion.

When can a Malta Limited Qualify as a Limited Risk Distributor?

Any­one who assumes that the law is always clear is wrong. Many cur­rent reg­u­la­tions allow for sig­nif­i­cant lee­way depend­ing on how indi­vid­ual norms are con­strued and inter­pret­ed. This becomes par­tic­u­lar­ly clear in regard to the top­ic of Lim­it­ed Risk Dis­trib­u­tors, which when deemed giv­en can lead to for­eign cor­po­ra­tion tax­a­tion in Ger­many. A Lim­it­ed Risk Dis­trib­u­tor is assumed when a for­eign com­pa­ny, for exam­ple in Mal­ta, comes to enjoy cer­tain priv­i­leges (such as, e.g., prepara­to­ry or pre­lim­i­nary work or cus­tomer con­tacts) pro­vid­ed for exam­ple by a par­ent com­pa­ny while not bear­ing the risks that attach to any busi­ness mod­el.

What are the Results for a Limited Risk Distributor in Regard to Corporate Taxation?

If we assume that a Mal­ta Lim­it­ed enjoys advan­tages through a par­ent com­pa­ny or a com­pa­ny that was for­mer­ly estab­lished in Ger­many, the basic tax­a­tion prin­ci­ples change. In such a case, the Ger­man rev­enue author­i­ties may deter­mine that prof­its accrued in Mal­ta are tax­able in Ger­many. The result is that cor­po­rate prof­its that the Mal­tese com­pa­ny gen­er­ates in the years fol­low­ing its for­ma­tion may also be deemed tax­able in Ger­many. We are famil­iar with cor­po­rate con­stel­la­tions where the Ger­man Finan­zamt claimed EUR 40,000,000 in tax­es based on four years’ of prof­its amount­ing to EUR 80,000,000. The ques­tion, there­fore, is which cri­te­ria allow for such for­eign cor­po­rate tax­a­tion in regard to Mal­ta.

How is Limited Risk Distributor Status Determined?

This ques­tion is one that not only the law offices of Dr. Wern­er & Part­ner must deal with but large inter­na­tion­al con­sul­tan­cies such as Ernst & Young or Price Water House Coop­ers, as well. In regard to this ques­tion, many small details will deter­mine the answer. When exact­ly was the for­eign com­pa­ny formed? More impor­tant­ly, which advan­tages did the com­pa­ny enjoy through the par­ent com­pa­ny or pri­or exist­ing com­pa­ny? Were exist­ing dis­tri­b­u­tion chan­nels used? Were financ­ing risks “out­sourced” to the par­ent? Were devel­op­ments or advan­tages gained dur­ing the exis­tence of a Ger­man com­pa­ny used as the basis for the company’s ensu­ing suc­cess? In detail, for exam­ple, this may include pro­grammed soft­ware that is lat­er re-used for re-devel­op­ment and thus involves high­ly tech­ni­cal ques­tions. A Ger­man rev­enue offi­cer will hard­ly be able to deter­mine how impor­tant a code seg­ment is for an entire set of soft­ware. In prac­tice, there­fore, com­pa­nies will often com­mis­sion an expert to pro­vide a well-found­ed opin­ion. The amount of tax­es due is then based on that opin­ion.

The Danger of Tax Evasion

If a Mal­tese com­pa­ny oper­ates like a Lim­it­ed Risk Dis­trib­u­tor and does not com­pen­sate the par­ent com­pa­ny for advan­tages it receives, it runs the risk of being liable in terms of the offense of tax eva­sion. If a one-time advan­tage is com­pen­sat­ed by a one-time pay­ment, the sit­u­a­tion then changes and must be new­ly eval­u­at­ed.

Why the Substance of a Company in Malta is so Important

On our blog, I have often cov­ered this impor­tant top­ic and now come back to it again in the con­text of for­eign cor­po­rate tax­a­tion: the rel­e­vance of sub­stance in regard to com­pa­nies locat­ed in Mal­ta.  In inter­na­tion­al jurispru­dence that finan­cial and rev­enue author­i­ties rely on in rela­tion to inter­na­tion­al tax­a­tion mat­ters, it strong­ly depends which sub­stance the com­pa­ny has in Mal­ta. Based on sub­stance, it is deter­mined how active the com­pa­ny actu­al­ly is and, there­fore, for a com­pa­ny in Mal­ta much depends on its sub­stance.

How Exactly is Substance Created for Companies in Malta?

At the out­set, we can clear­ly answer one reoc­cur­ring ques­tion: estab­lish real busi­ness activ­i­ty and oper­a­tions in Mal­ta. Rent an office, employ employ­ees and con­clud­ed actu­al busi­ness through Mal­ta. Do not sim­ply try to cre­ate an impres­sion that does not com­port with real­i­ty. Rather, new reg­u­la­to­ry and leg­isla­tive impuls­es such as BEPS have result­ed in the fact that dum­my con­structs with no sus­tain­able busi­ness no longer func­tion. Tax­es can still be saved. Nev­er­the­less, this does require some effort. Only those who are will­ing to make that effort will be prop­er­ly served by a com­pa­ny in Mal­ta.

What then do the Law Offices of Dr. Werner & Partner advise everyone to do?

For all of our clients’ queries, we fol­low the same clear prin­ci­ple: do it right from the out­set. What does that mean? Take a close look at the island and ask your­self the fol­low­ing ques­tion: Can I live here? The best argu­ment for a com­pa­ny hav­ing sub­stance in Mal­ta is when its prin­ci­pals have estab­lished the cen­ter of their lives here on the island. Why is that? Because any arti­fi­cial cor­po­rate struc­ture remains arti­fi­cial and is there­fore always assail­able. You can nev­er be sure whether or not at the end of the day a branch office in anoth­er coun­try will be trig­gered. Fur­ther­more, a clear sep­a­ra­tion between for­mer and cur­rent com­pa­nies is also help­ful. How that can best be achieved is a mat­ter to be reviewed on a case-by-case basis.

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