Tax haven Malta – When is it a good idea to reside or register a business in Malta?

Malta is one of those countries that is always talked about whenever the subject of optimising taxes comes up. This is unsurprising, as it is an attractive country with a good standard of living, which also offers certain advantages to businessmen.

On the one hand it is in the EU, which brings with it several advantages if you want to offer your services or products within the common market. On the other hand, thanks to its non-dom system it offers better conditions to foreigners than other countries.

In todays article we will outline the options that Malta has to offer, whether you want to move there as a resident or just set up your company there. In both cases, the island offers very interesting tax opportunities.

Unfortunately though, there are many myths around Malta and that’s where you have to be careful.

Many agencies and law firms on the island try to attract foreign companies to move their business there with the promise of saving taxes. The solutions they propose may work for a while, but they are not always reliable from a legal point of view.

In other cases, the problem is more a matter of costs. The financial structures they propose are unnecessary and their high maintenance costs can be a major blow to the profitability and even sustainability of your business.

The Maltese tax system has several peculiarities that are often a cause of confusion; in fact, it is the country with both the highest and lowest levels of corporate taxes. Let me explain how this system works.

Starting up a company in Malta

Malta is one of the few states in the world with an imputation system for corporate taxes. This means that Malta levies a relatively high corporate tax, but most of it ends up being reimbursed later. Malta’s corporate tax rate is 35%.

However, given that the Maltese tax authority refunds 6/7% of this 35% within two weeks, the effective tax rate is among the lowest in the EU, at only 5% (with the exception of free trade zones and exemptions for small-business owners).

This sounds great in theory, but in practice it doesn’t always go so smoothly. Recently, there have been cases where the reimbursements never came or were very delayed. This tax reimbursement system hasn’t developed without difficulties, however smoothly it tries to portray itself (the Maltese corporate tax system is very confusing and stipulates there are many exceptions to reimbursement).

Finally, the biggest obstacle to reimbursement is the fact that the money isn’t transferred back to the company, but rather that 30% is put into another account that you choose. It’s not hard to imagine the problems that this can cause.

So, reimbursement isn’t received in the form of dividends, but rather as income.

If you’re subject to high taxes, your reimbursement will be assessed (when the money is transferred to a private account) for a progressive income tax, often exceeding the 26.8% withholding tax.

If, on the other hand, you live and operate your business in Malta as a non-dom, the tax refund is considered as national income and is taxed entirely according to a progressive system.

All this has meant that in recent years, the Mediterranean island of Malta has been in the shadow of its sister, Cyprus. Also as a result of our articles in Tax-Free Today, many businessmen discovered the advantages of founding companies and establishing their residence in Cyprus under a non-dom regime and understandably gave preference to Cyprus, to the detriment of Malta.

However, there are now more reasons to take an interest in Malta, which we will explain in this article.

There is no doubt that Cyprus remains one of the most attractive places to establish a residence within the European Union. But it is precisely in the field of company formation that Malta is currently offering even better opportunities than Cyprus. However, there is no need to choose between one and the other, as a residence in Cyprus with a company in Malta could be an ideal combination.

As previously mentioned, Malta has always had the lowest and at the same time, the highest corporate tax in the European Union. The initial corporation tax rate is 35%, but the effective tax is 5%, a rate reached after a tax refund procedure. The Maltese state receives 35%, which it then withholds for at least two weeks. Without the right tax advisers, these two weeks could quickly turn into more than two months, and in some cases these taxes are never refunded.

Because of this, the 5% effective tax rate for Maltese companies was not very popular, although this was not the only reason. On top of this, the 30% tax refund (in the form of income from active business) was not transferred back to the company itself, but directly to the owners of the company. This meant that in many cases this refund was taxed according to the personal income tax rate in the country where they had their own tax residences. This was also a problem for residents of Malta, users of the non-dom regime, because it meant having national income and having therefore to pay taxes accordingly. The same was true for owners living in other high tax countries in the EU. Only for owners of Maltese companies with a personal tax domicile in tax havens, territorial or other special regime countries was it appealing to have a single company in Malta.

Fortunately, there is a solution to the problem we have just described, but it always requires the formation and maintenance of a second company, with the additional costs that this entails. Since tax refunds always go to the owners, the solution is to have a parent company that acts as a holding company. Quite astutely, Malta added to the law that a Maltese holding company can collect tax refunds from its subsidiaries tax-free after a certain waiting time. This solved the problem for non-residents of Malta.

The latest innovation: the Tax Integration Scheme in Malta

From mid 2019 it has been possible, under certain conditions, to avoid this tax refund system altogether and to directly pay the 5% corporate tax rate. This tax consolidation now makes Malta much more attractive, although, as before, it is still necessary to have two companies. Both companies form a tax integration regime, i.e. they are treated as a single company for tax purposes. This requires two of the following conditions to be met:

• the parent company holds at least 95% of the voting rights of the subsidiary
• the parent company has the right to receive at least 95% of the subsidiary’s profits
• the parent company would be entitled to at least 95% of the subsidiary’s assets in case of its dissolution

In addition, it is necessary for the accounting periods of the two companies to coincide and for authorisation to be obtained from all the minority companies. As both companies are managed as one tax unit, accounting and annual statement costs are lower than for two independent companies.

Therefore, with its effective tax rate of 5%, Malta has the lowest corporate tax in the EU regardless of the volume of turnover or profits. Since there are no withholding taxes on dividends and VAT is fairly low (18%), Malta’s companies are ideal for an international tax strategy. And since international payment service providers such as Stripe now accept Maltese companies, the island has become very interesting for online companies as well.

As both are former colonies of the United Kingdom, Malta and Cyprus are relatively similar. The administration of the companies follows similar patterns and accounting standards. However, a Maltese Limited requires €1,250 of share capital, whereas in Cyprus it is only €1.

Despite the fact that both countries have the same currency, Malta provides better banking and a much more stable financial system. With a share of sovereign debt of only 40%, Malta is one of the least indebted countries in the EU. The flight time from most Central European countries is considerably shorter than that to Cyprus, thus it tends to be more attractive for those who want to build economic substance there and still remain in their home country.

English is more widely spoken in Malta than in Cyprus. It is actually also an official language in the administrative and day-to-day life there. In the judicial sector, the official language is Maltese, which sounds rather exotic, as it is a mixture of Arabic, Italian and English. This has important advantages for company managers in Malta, as it is difficult to be sued or even sanctioned there.

While structural and other costs in Malta are somewhat higher than in Eastern Europe, the tax savings are clearly greater. Compared to Cyprus, you could benefit from savings of 7.5%, with only slightly higher costs.

That’s why it may be convenient, even if you have a non-dom residence in Cyprus, to run the business through Malta, even if only to avoid the disastrous Cypriot banks.

How to obtain tax residence in Malta as an EU citizen

To obtain a non-dom status in Cyprus you have to open a company there, whereas in Malta any foreigner can become a non-dom without even applying for it.

Thanks to the freedom of establishment within the EU, the requirements are minimal. Among them are the following:

• you must spend at least 6 months a year in Malta
• you must pay year-round rent or own a house (the value of the house is irrelevant)
• you must have a valid healthcare insurance
• you must be financially independent (14,000 EUR per year or 84.95 EUR per week. An employment contract is also valid.)

The only requirement that could be a problem for someone who wants to set up his/her company or move his/her tax residence to Malta could be the minimum stay requirement of 6 months in Malta. Despite the island’s beauty, its small size can make 6 months in Malta seem considerably longer than one would like.

Non-dom residence in Malta

Non-dom residents in Malta can also use the Maltese tax integration regime, but they will need a third foreign company (holding company) to own the Maltese holding company in order to maximise the tax advantages.

Malta’s non-dom regime has existed for much longer than that of Cyprus and is inspired by the classic English non-dom status. Thus, income earned abroad will only be tax-free, so long as it is not introduced to the country.

Unlike Cyprus, which exempts dividends and interest from tax regardless of their origin and use, Malta exempts all income not generated or used within the country from tax. All income used for personal expenses is considered money “used” in Malta.

Compared to the very similar non-dom status of Ireland and England, Malta has long had fewer restrictions. Whereas in the UK and Ireland you had (and still have) to declare all your global income even if they were not all taxed, in Malta you only have to declare the amount you intend to use in Malta. “Use” here means not only making bank transfers to Malta, but potentially also payments or withdrawals with a credit card.

Since this is rather difficult to control and was repeatedly abused, in 2018 Malta imposed a minimum tax for all those who wanted to use the non-dom status. Since then, in order to qualify for non-dom status in Malta, you must pay a minimum flat tax of €5,000.

The good thing is that this offsets a considerable amount (about €2,000 per month), which can be brought into Malta to cover the cost of living. Since the introduction of the minimum tax, the tax situation, which was generally unclear before, has become more solid. Anyone who does not exactly lead a life of debauchery doesn’t need to worry about having their spending controlled in Malta. And of course, all income spent or invested outside Malta will be tax-free.

The problem for Maltese non-dom residents is that if they receive their income through the Maltese business structure, all dividend distributions will be considered as national taxable income.

To avoid this, you can set up a foreign parent company, which either receives the tax refund and/or, in the case of a tax integration regime, the dividends. Here you can theoretically opt for any type of offshore company, although in general English Limited Partnerships are used. An English LTD could also be used, as under double taxation agreements, they do not have to pay corporate taxes on a tax refund from Malta.

However, the path through a partnership is preferable, since the income can be distributed directly, without formal agreements, to private accounts outside Malta.

Of course it is also possible to use the Maltese non-dom status without operating through a Maltese company. However, Malta pays attention to the actual place of effective management of the company. A shell company, with no substance will be acceptable if it is merely a holding company being used for tax refunds, but not if it is an operating company.

Anyone wishing to legally manage a foreign company, whilst remaining a resident in Malta, should aim to have a minimum of economic substance, comprised at the very least of an office and a local director. This way, it will be possible to lead a potentially tax-free life in Malta, except for the aforementioned minimum flat-rate tax of €5,000.

Incidentally, in addition to the taxes, you have to take into the account the compulsory social security contributions, which are calculated according to various aspects, but, in any case, for self-employed and businessmen, it is a maximum of €53.08 per week for an income of €18,500. This implies an additional annual tax burden of around €2,700. For incomes of less than €18,400, 15% is applied on net income, that is 0.15×€1,020 = €153 per month extra, almost €1,850 per year.

What many people do not understand about the non-dom system

Essentially, non-dom status means that income generated abroad will be exempt from tax as long as it is not brought into the country. Foreign income that remains in a foreign account will be truly tax-free.

When it comes to repatriating foreign income, many non-doms are usually unaware of what this means.

Bringing money into the country not only involves making wire transfers to an account in the country, but also withdrawing money from ATMs in the country; making credit or debit card payments there; bringing cash from abroad (although this is very difficult to detect), etc.

In the end, all the money you use in Malta is actually ‘repatriated’ money; money you bring into the country. Thus, all expenses arising in situ in Malta must also be fully taxed.

In reality, many non-doms hide certain expenses they have in Malta. Specifically, introducing large amounts of cash from neighbouring countries is common practice and almost impossible to detect, but in theory it is considered as tax fraud in Malta.

Malta, ideal for capital investors (non-professionals)

Unlike in Cyprus, in Malta there is no minimum stay requirement in order to obtain the non-dom status. Since Malta is within the Schengen area, it is not so easy to keep track of people entering and leaving the country, despite being an island. For example, there are ferries to Sicily.

However, in order to obtain a tax certificate with the normal non-dom status, you must officially stay a minimum of 183 days in the country. Although, it is not technically necessary for you to be there, you must be able to prove regular payments with your credit card in Malta. There are, of course, multiple ways to take advantage of this loophole, but how to do so is up to the reader’s imagination.

In any case, it remains that in general you do not need a tax certificate. You only need it to take advantage of certain benefits of double taxation agreements, in some cases to withdraw as a taxpayer or if you intend to return to your country of origin.

Be that as it may, for tax-certified residents engaged in investment or trading, Malta can be very interesting, as it has many very good double taxation agreements that can reduce withholding taxes on dividends and interest.

For investors, there is another key regulation in the Maltese non-dom regime: capital gains obtained abroad can be transferred to Malta tax-free. These do not fall within the “Remittance Base” tax (taxation of income that is used in or transferred to the country), but are tax-free even if transferred to Malta.

Due to this tax exemption on stock exchange profits – and potentially also on dividends – and its many good double taxation treaties, Malta is, like Cyprus, particularly suitable for private stock market investors. They can also take advantage of a special, little-known programme in Malta, which, although considerably more expensive than that in Cyprus, it can offer greater benefits.

HNWI status in Malta

HNWI status refers to the High Net Worth Individual programme for EU citizens. There is also a more accessible version for pensioners.

This status, designed for wealthy people, has a higher overall tax rate than the normal non-dom status in Malta, but does not require a minimum stay in order to obtain the tax certificate, although of course you should avoid becoming a tax resident in another country. This means that you cannot spend more than 183 days in another country.

The HNWI allows you to prove your tax residence in Malta with a tax residence certificate without having to spend time there. Instead of needing a company there, obliged to make social security contributions, as is the case in Cyprus, residents in Malta have to pay a higher fixed tax and make an investment of a certain value.

Normally, to be admitted as a non-dom with HNWI status, you must own a property worth €400,000 or rent one for at least €20,000 per year. This property must remain as the primary residence, thus it cannot be sublet for short or long term periods.

Aside from this, there are no other requirements with regard to assets or income, only a due diligence check on the applicant’s banking and other history. A valid Maltese private health insurance must also be taken out.

As an HNWI you will pay a fixed annual fee of €20,000 rather than the standard €5,000. You pay an additional €2,500 for each dependent family member.

The main advantage of this status, apart from there being no minimum stay requirement, is a fixed tax rate of 15% on income brought into the country, instead of progressive taxes of up to 35%.

However, the HNWI status is not much use for those who if you don’t wish to spend time in Malta. If you have to pay €20,000 in global taxes and another €20,000 for the rent of a property that is barely used, you would undoubtedly be better off in Cyprus, which requires only two months of stay in the country and has lower fixed costs.

The application fee for the HNWI status in Malta is about €6,000.

Specific programme for pensioners in Malta

The HNWI programme is more interesting for EU pensioners. The flat-rate tax for this programme remains at an affordable €7,500. The minimum rent is only €9,600 per year (€8,750 in Gozo) or if you own a property, it must be worth at least €275,000 to qualify. This can be a very attractive option, particularly if you want to spend a few weeks a year in Malta.

Incidentally, at least 75% of the pensioner’s income must actually come from his pension, and only a maximum of 25% from capital gains are allowed. Naturally, this considerably limits the number of pensioners who can access this scheme.

Applying for the HNWI status for pensioners costs about €2,500. In general, the normal non-dom status “Ordinary Residency Scheme” is more attractive for pensioners.

Golden Visa and citizenship

Incidentally, Malta offers the same programmes as mentioned above, for citizens outside of the EU/EEA. Of course they also need to obtain a residence permit, which is obtained through the so-called “Golden Visa”.

Unlike in other Mediterranean countries, in order to obtain a Golden Visa, it is not necessarily essential to buy a property in the country. In Malta, a 5-year investment in government bonds worth €250,000, as well as a €30,000 donation is sufficient. In addition, you must purchase or rent a property. This totals about €40,000, but in return you get a residence permit for an indefinite period in the whole Schengen area and Maltese nationality after five years.

Needless to say, there is the alternative of buying Maltese nationality directly, but to do so you must make a donation of €650,000; an investment in government bonds of €150,000; and buy a house for €350,000 or pay a minimum annual rent of €16,000. With this option, nationality is granted after just one year of residence in Malta.

For non-EU citizens wanting to obtain HNWI status, a fixed tax rate of €25,000 must also be paid. This seems quite expensive, but an EU passport opens many doors.

Exemptions for non-doms in Malta

To conclude, we can say that there are two positive exemptions.

Firstly, you can transfer all your existing assets to Malta tax-free if you can prove that the assets existed before you registered in Malta.

Thus, moving the assets to a private account in Malta and living off the transferred money for a period of time is a legitimate possibility.

Secondly, as previously mentioned, capital gains are exempt from taxes in Malta, even if you use them in Malta.

However, don’t be too quick to rejoice, some countries, including Germany and Switzerland, have stipulated double taxation agreements with Malta for their own benefit (you can see the treaties signed by Malta here). Since Malta waives taxation, a tax at source is imposed on the capital gains for the full amount in the respective countries.

On the other hand, professional traders (unlike private investors) who do not want to trade through companies should look to Cyprus rather than Malta. This is because the Maltese tax authorities classify stock market and trading businesses as domestic income, provided that they are conducted from Malta on a largely professional basis. Capital gains are only exempt from tax in Malta for retail investors.

Concluding remarks on Malta from 2020 and 2021

There is no doubt that Malta is a great alternative to Cyprus, but deciding on one or the other is a matter of taste and of the concrete situation and objectives.

If you want to choose, it is advisable to visit the two former British colonies and see how compatible they are with your needs. This article is only intended to provide a brief overview of the current tax situation.

As you can see, Malta has a lot to offer even beyond all the tax advantages. English as an official language, a lot of history and culture, a great standard of living, good climate and acceptable prices, as well as safety and accessibility. All of this makes Malta a great destination as long as you get the right information.

If you would like us to help you register your residence in Malta, set up your business there or get your Golden Visa, you can contact us.

If you have doubts, are not clear what to do and want a consultation to decide between Malta and the many other options in terms of companies, residence and so on, you can book a consultation.