Horst WickinghoffMany countries within the EU and beyond are applying increasingly strict regulations based on CFC Rules (Controlled Foreign Corporation rules). Even where specific CFC rules don't apply, Malta has concluded Double Tax Treaties with numerous states that address the same core issue: the requirement for genuine economic substance and the definition of a permanent establishment when setting up a company in Malta.
Taxing Profits Where the Permanent Establishment Exists
The underlying principle is straightforward and, in my view, both logical and fair: taxes should be levied where the company's actual permanent establishment is located. Some businesses naturally have a physical footprint—such as a production facility, an office, a retail store, or a restaurant. Regardless of where the holding company for these examples is registered, the lion's share of the profits must be taxed exactly where that permanent establishment operates.
If a company cannot demonstrate an obvious physical establishment (like a factory or shop), tax authorities will look for the "place of effective management" or the center of vital economic interests.
The Importance of Genuine Business Operations in Malta
If you are a majority shareholder (exercising controlling influence) living outside Malta but running a Malta Limited, you must ensure that genuine business operations are established within Malta. This is typically achieved by renting physical office space, employing a local director and staff, conducting active marketing, and engaging local service providers.
It is worth noting that certain outdated practices still circulate which are simply not sustainable in today's regulatory environment. These include appointing a classic "nominee director" or merely setting up call forwarding. To ensure your setup is robust, the actual existence of substance for a company in Malta must be verifiable to withstand tax scrutiny.
For international entrepreneurs, particularly those moving assets or functions from high-tax jurisdictions, there are additional factors to consider. This includes regulations regarding the "transfer of functions" (often triggering exit taxation on projected future profits). Under these rules, even a "real" setup in Malta can be challenged if it lacks sufficient functionality compared to what was left behind. This requires careful advance planning. There is no "one-size-fits-all" template that applies to every business model.
Relocating the Investor to Malta
Another—often superior—option is for the investor to relocate to Malta personally. While this sounds like a major step, it is often straightforward to implement if key points are observed. In many cases, especially for high-revenue companies with lean structures, the relocation of the main shareholder is an extremely effective strategy.
If the investor moves to Malta and maintains no other permanent establishment elsewhere, this move alone usually creates sufficient substance. You generally do not need additional local directors or extra employees, as you hold the sole authority and control regarding the corporate structure and management. In this scenario, the standard registered office (provided by Dr. Werner & Partners, for example) is sufficient.
Why? Firstly, because the investor becomes fully tax-resident in Malta. Secondly, because the "place of effective management" is indisputably in Malta. With the correct structuring, relocating to Malta also allows the investor to claim a tax refund of 30% (resulting in a highly efficient net tax rate). Consequently, alongside the operational simplifications mentioned above, this approach offers significant personal tax advantages which we are happy to explain in a private consultation.
Moving to Malta can therefore make excellent sense for tax reasons, though personal factors must naturally align. In our opinion, life on a sunny Mediterranean island is a compelling personal argument in itself. Ultimately, for the right candidate, relocation to Malta can represent the "gold standard" solution. We guide our clients through every aspect of this journey.
