Starting Fresh vs. Relocating: Why a New Malta Company Often Makes More Sense

Why go through the hassle of relocating an existing business to Malta when starting fresh could be simpler and more profitable?

Moving an existing corporate entity to Malta often attracts unnecessary scrutiny and can trigger complex tax liabilities in your home country. Instead, we generally advise clients to establish a new company (a Malta Limited) to fully benefit from the island's pro-business environment without the baggage.

When Does a New Malta Company Make Sense?

Starting fresh is particularly effective in these scenarios:

1. Outsourcing international operations: Moving specific global activities to a new entity.
2. Entering new markets: Targeting regions or sectors your current business hasn't touched yet.
3. Acting as a supplier: Setting up the Malta entity to supply services or goods to your existing business.
4. A clean slate: Launching an entirely new entrepreneurial venture on the island.

The Advantages of Starting Fresh in Malta

• Less Red Tape: Malta's business mentality is pragmatic and solution-oriented.
• Access to Talent: You gain access to an international workforce at competitive rates.
• Tax Efficiency: A highly competitive effective corporate tax rate of just 5%.

Why Malta?

Malta offers a compelling mix of Mediterranean lifestyle and a business culture rooted in British tradition. This is reflected in an efficient administration that actually wants you to succeed. The government and local authorities prioritize good service and actively support entrepreneurs and investors.

Here is a practical example of this pro-business attitude: If you want to rent office space as an expat in Malta, you won't face the endless credit checks or mountain of paperwork common in other countries. You agree on a price with the landlord, sign the contract, pay the first month's rent and deposit, and you're in. It's that straightforward.

The Tax Framework

Malta's tax structure is unique within the EU and highly attractive for international business. Here is how it works:

1. 5% Effective Tax Rate: On paper, Malta's corporate tax rate is 35%. However, international shareholders are entitled to a refund of 6/7ths of the tax paid. This results in an effective tax burden of just 5%.
2. Holding Companies: To streamline this process, we often recommend setting up a Malta Holding company. This structure allows the tax payment and the refund to be offset against each other, meaning the cash flow impact is minimized.
3. No Double Taxation: Malta has an extensive network of Double Tax Treaties (DTTs) with countries worldwide, including the UK and most EU states. This ensures income taxed in Malta isn't taxed again in your home country.

Solutions for Other Jurisdictions

For entrepreneurs moving to Italy, Portugal, or Spain, combining a local residence with a Malta corporate structure can offer significant advantages. If you are considering such a move, let's discuss how to structure it correctly. Book a consultation here: https://www.drwerner.com/en/contact/

The Trap of "Transfer of Functions" & Exit Taxes

If you are leaving a high-tax jurisdiction (like Germany, France, or the UK), you need to be careful about how you move your business.

What is a "Transfer of Functions"?

This occurs when a company moves an essential part of its operation abroad. These are organic parts of the business that create value—such as an R&D department, a marketing team, or a client base. Tax authorities view this as you taking a taxable asset out of their jurisdiction.

The Risk: Deemed Disposal / Exit Tax

If you simply move these functions to Malta, your home country's tax authority may apply an "Exit Tax" (or tax on deemed disposal). They will try to calculate the value of the function you moved and tax you on it as if you had sold it. This ensures they get their share of the potential future profits you are taking elsewhere.

The Valuation Problem

The biggest headache here is valuation. How much is a marketing department worth? Tax authorities often use formulas that result in unrealistically high valuations, leading to a massive tax bill before you've even started in Malta.

The Solution: Duplication of Functions

A smarter alternative is the "Duplication of Functions." Instead of moving the department, you build an identical, new function in Malta while the old one continues to exist (at least for a while). Because you haven't shut down the original operation, you haven't "transferred" it in the eyes of the taxman. For this to work, the parallel operation usually needs to exist for a specific period (often around five years) before the old one is wound down.

Navigating Exit Taxes for Individuals

It is not just companies that face exit taxes; individuals do too. Many EU countries have tightened their rules regarding "Wegzugsbesteuerung" (Exit Tax) to prevent wealthy individuals from leaving without paying tax on their unrealized capital gains.

The General Rule

If you hold substantial shares in a company (often 1% or more, depending on the country) and you move your tax residence abroad, your home country may pretend you sold those shares the day you left. They will tax you on the theoretical profit (the difference between what you paid and what they are worth now).

Recent Tightening of Rules

Across Europe, these rules are becoming stricter. For example, deferrals (paying the tax later or in installments) are becoming harder to secure, and often require providing security or bank guarantees. Moving to another EU country like Malta used to offer automatic protection against immediate payment, but many jurisdictions are closing these loopholes.

Strategies to Manage Exit Tax

If you are planning to relocate to Malta, you must plan ahead to mitigate these risks:

a. Start Early

Do not leave this until the last minute. Ideally, planning should begin 1-2 years before your move. This gives us time to analyze the specific exit tax rules of your current country.

b. Optimize Your Structure

Sometimes, restructuring your shareholdings before you leave can reduce the tax burden. This might involve transferring shares to family members or changing the holding structure, depending on local laws.

c. Use Double Tax Treaties

Malta's Double Tax Treaty with your home country is a crucial tool. We review these treaties to see if they offer protection or credit for taxes paid.

d. Prepare for Deferral Applications

If you are facing an exit tax bill, you may be able to apply to pay it in installments. This requires rigorous documentation. We help prepare the necessary paperwork to satisfy the tax authorities that the deferral is justified.

e. Ongoing Monitoring

Even after you move, the tax landscape changes. We keep an eye on legislative updates in both Malta and your previous home country to ensure you remain compliant and don't face unexpected clawbacks.

Get Up and Running Quickly

For most of our clients, speed is of the essence. You want your tax-optimized structure to be functional as soon as possible. We prioritize a fast, compliant setup so you can focus on what matters: growing your business.

Disclaimer: The above article is based on independent research by Dr. Werner & Partners and does not constitute legal or tax advice. Laws and regulations can change. If you would like to discuss your specific situation, please schedule an appointment with us.