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.