Economic substance means that a company is not merely formally registered in Malta but actually carries on a real business there. This includes a physical place of business (not just a letterbox), qualified employees or at least a contractually engaged local workforce, and management decisions genuinely taken in Malta. The substance requirements vary with the company's activity: a holding company needs less operational substance than an active trading business, but must still demonstrate that strategic decisions are taken in Malta.
Substance is the central test applied by the home tax authority when deciding whether to recognise a Malta structure. For UK shareholders, HMRC looks first at central management and control: a company that is in fact managed from the UK is UK tax resident regardless of where it is incorporated. For corporate structures the CFC regime in Part 9A of TIOPA 2010 applies, and for individuals the Transfer of Assets Abroad rules can attribute the company's income to a UK resident. Comparable scrutiny is applied by the authorities in Germany, the Netherlands and France. If the company cannot demonstrate sufficient substance in Malta, its profits risk being taxed in the shareholder's home country.
In practice the tax authority examines typical substance indicators: dedicated office space (not a pure virtual office), local staff with relevant qualifications, bank accounts operated in Malta, board meetings held on the island with documented minutes, and local IT infrastructure. The bar rises with the complexity of the business. A company with EUR 2 million of revenue and a single part-time employee will be judged more critically than a holding company with little operational activity but demonstrable board meetings in Malta.
