Table of Contents What Does an International Tax Audit Mean for Malta-Based Companies? When Is Your Malta Company Audited? The Most Common Triggers International Tax Audit in Malta: The Typical Process Preparing for a Tax Audit in Malta: Your Emergency Checklist Critical Audit Areas: Where Examiners Look Closely Common Mistakes in Malta Audits – and How to Avoid Them After the Audit: How to Deal with the Results Frequently Asked Questions You’ve finally got your Malta company up and running, enjoying the 5% rule, and think the hardest part is behind you? Let me give you a quick reality check: Sooner or later, its not just Maltese tax authorities who might come knocking — your home country could, too. And when they do, theyll want answers — detailed, well-documented, bulletproof answers. After three years of Malta experience and countless talks with entrepreneurs, I can tell you: an international audit is like a visit to the dentist – it’s uncomfortable, but with the right preparation, much less painful. Today, I’ll show you how to prepare properly, where the traps lie, and why good documentation is your best friend. What Does an International Tax Audit Mean for Malta-Based Companies? An international audit for Malta-based companies basically means: youre not only being scrutinized by Malta, but your home country as well. The Malta Enterprise Corporation (MEC) and the Inland Revenue Department (IRD) check your Maltese side, while the German tax office, the Austrian tax administration, or Swiss tax authorities focus on the cross-border aspects. Why International Audits Are on the Rise With the introduction of the Automatic Exchange of Information (AIA) between EU countries, tax authorities are systematically sharing data. What once flew under the radar now automatically lands on the desks of German, Austrian, or Swiss officials. Cross-border tax audits have increased significantly in recent years. The reason is simple: Malta structures are under the microscope. The combination of EU access, English law, and attractive tax regulations makes Malta appealing to entrepreneurs — and suspicious to tax authorities. Double-Entry Bookkeeping, Double Audit For an international tax audit, two countries are auditing in parallel: Malta: Local substance, proper bookkeeping, compliance with Malta regulations Home Country: Management, economic nexus, transfer pricing, CFC rules (Controlled Foreign Company — “Hinzurechnungsbesteuerung”) Coordination: Both authorities can exchange information and cooperate What does this mean for you? You have to meet not only Maltese requirements but also those of your home country. A Maltese tax adviser alone isn’t enough – you need cross-border expertise. When Is Your Malta Company Audited? The Most Common Triggers Automatic System Triggers Certain constellations almost automatically trigger an audit: Trigger Probability Typical Timing Turnover over €500,000 in the first year High Year 2–3 Foreign shareholders with >25% Medium Year 3–5 International transactions >€1 million Very high Year 1–2 Losses in the first three years Low Year 4–6 Reports from Third Parties External reports trigger more audits than you might think: Business Partner Audits: If your German client is audited and auditors find payments to your Malta company, you’ll automatically be added to their watchlist. Whistleblowers: Former employees, disgruntled business partners, or even competitors could tip off the authorities. Random Discoveries: Tax authorities sometimes stumble upon Malta connections during bank data reconciliations or other investigations. The Substance Trap Malta companies without clear substance are especially exposed. If your company: – Has no employees in Malta – Doesn’t use office space – Is just a mailbox company – Mainly conducts business abroad …then an audit is pretty much inevitable. The EU Commission has adopted stricter anti-abuse guidelines, with “letterbox” companies specifically in their sights. Understanding Timing International audits usually follow a typical pattern: – Year 1–2: Startup phase, mostly quiet – Year 3–4: First critical period, automatic data matching kicks in – Year 5–7: Highest-risk phase, established structures are questioned – From Year 8: Risk declines, except in the event of conspicuous changes What does this mean for you? Plan from the outset as if you’ll be audited from year three. That way, you’re on the safe side. International Tax Audit in Malta: The Typical Process Phase 1: Notification (4–8 Weeks Lead Time) The audit usually starts with an innocuous letter. Malta’s IRD writes in English, your home tax authority in your native language. Both want to “review some documents” — a euphemism for: “We’re dismantling your business model.” Recognize Typical Phrasing: – Routine compliance check = Standard audit – Transfer pricing review = Focus on transfer prices – Substance requirements verification = Checking for real local presence – CFC regulations assessment = Review of CFC (anti-avoidance) rules Phase 2: Document Requests (2–4 Weeks) Now it gets serious. Both authorities request documents at the same time: Malta Side: Local accounts, VAT returns, employment contracts, lease agreements Home Country: Proof of management, email correspondence, travel receipts, decision documentation Overlap: Contracts, invoices, bank statements — this is where it gets tricky Pro tip from my own experience: Prepare two separate document sets. Malta wants to see local activity. Your home country wants to know if real management happens in Malta. Phase 3: On-Site Audit (1–3 Days in Malta, 2–5 Days at Home) This is where the wheat is separated from the chaff. Maltese examiners inspect your office, talk to your employees, and check your local presence. Simultaneously or soon after, home-country auditors visit your German/Austrian/Swiss offices. Critical Questions in Malta: – “Where do you make business decisions?” – “Who has access to the bank account?” – “How often are you physically in Malta?” – “Who prepares your proposals and invoices?” Critical Questions at Home: – “From where do you actually run the company?” – “Where are key business records kept?” – “Where do client meetings take place?” – “Who makes strategic decisions?” Phase 4: Evaluation and Follow-Ups (4–12 Weeks) Both authorities evaluate in parallel and share findings. You’ll receive follow-up questions about discrepancies or unclear points. This phase determines the success or failure of the audit. Phase 5: Audit Report and Decision (8–16 Weeks) At the end, there are two reports — one from Malta, one from your home country. In the best case, both approve your structure. In the worst, both demand tax on the same income (double taxation), which you’ll need to resolve via mutual agreement procedures. Preparing for a Tax Audit in Malta: Your Emergency Checklist Documenting Malta Substance Without real substance in Malta, any audit is doomed from the start. Prepare the following proofs: Substance Proof Minimum Standard Better Optimal Office Space Rented office Own furnishings Multi-year lease + photos Staff 1 part-time employee 2+ qualified employees Local management team Business Activity Bookkeeping on site Operations on site Full value creation Decisions Board meetings in Malta Documented resolutions Minutes + attendance lists Applying the 90-Day Rule Properly Many Malta entrepreneurs believe that 90 days presence per year is enough. This is a dangerous misconception. The 90-day rule relates only to Maltese tax residency, not to corporate management. Proper Documentation of Presence: Collect flight tickets and boarding passes Keep hotel/accommodation receipts Document business appointments in Malta Photo evidence of meetings and office activity Email timestamps proving you worked from Malta Documenting Transfer Pricing If your Malta company does business with related parties, transfer pricing (prices charged between related entities) is under close scrutiny. Prepare: Comparability Analysis: Prices for similar services on the open market Function Analysis: What function does each company serve? Risk Allocation: Who bears which business risks? Documentation: Written agreements on transfer pricing Email Management for Audits Emails are the most common pitfall in international audits. Auditors will closely analyze where strategic decisions are made. Do’s: – Make and document important business decisions in Malta – Use Malta-based email addresses for official correspondence – Record decision processes in writing – Regularly document coordination between Malta and your home base Don’ts: – Make key decisions by email from Germany/Austria/Switzerland – Treat your Malta company as a mere “mailbox” entity – Negotiate important contracts solely from your home country – Use bank powers of attorney exclusively from home Preparing Legal Back-Up Arrange qualified legal advice well in advance: Malta lawyer: Specialist in Maltese tax and company law Home-country tax adviser: Expert in international structures Coordination: Both advisers should know and coordinate with each other Contingency Plan: Clearly identify contact persons for an audit A Maltese tax adviser will cost you around €150–300 per hour, an international specialist €250–500. Sounds expensive, but a poorly handled audit can result in five- or six-figure back payments. Critical Audit Areas: Where Examiners Look Closely Corporate Governance & Management The most important audit area: Where is your company actually managed? Auditors look at: Decision-Making: – Who makes strategic decisions? – Where do board meetings happen? – Who has signatory power? – From where are contracts negotiated? Operational Management: – Where does management actually work? – Who oversees day-to-day operations? – Where is employee supervision conducted? – Where are important business records stored? Experienced auditors spot fake structures quickly. If your “Maltese CEO” is never in Malta and all major decisions are made via WhatsApp from Munich, you’ve already lost. Detailed Substance Audit Maltese auditors are increasingly critical when it comes to substance: Audit Aspect Weak Substance Strong Substance Office Space Shared office, occasional use Own office, daily presence Staff External service providers Own, qualified employees Bank Accounts Only one business account Multiple local banking relationships Business Activity Pure holding function Active operations Local Clients No Maltese customers Including local business relationships CFC Rules and Deemed Income Taxation CFC rules (Controlled Foreign Company rules) are a nightmare for many Malta entrepreneurs. Your home country can attribute Malta profits to you personally if: You control more than 50% of the Malta company The Malta company mainly earns passive income Taxation in Malta is significantly lower than at home The Malta company lacks real substance Typical CFC Pitfalls: – Pure licensing with no real development work – Holding structures with no operations – Interest income from group loans – Passive investment income Transfer Pricing Under the Microscope For related parties, authorities closely examine whether transfer prices are at arm’s length: Frequent Issues: – Management fees between Germany and Malta – Royalty payments for intellectual property – Interest on intercompany loans – Mark-ups on goods/services sales Arm’s Length Principle: All prices must be as if unrelated third parties were negotiating. Prices to Malta that are too low — or too high — will be flagged. VAT and Sales Tax Issues VAT can be especially complex. Malta companies often need to account for both Maltese VAT and German/Austrian/Swiss sales tax: Place of Service: Where is the service deemed to be supplied for tax purposes? B2B vs. B2C: Different rules depending on the client OSS Procedure: One-Stop Shop for EU-wide B2C sales Reverse Charge: Customer is liable for VAT A Maltese VAT specialist is worth their weight in gold here. Back payments for VAT often exceed income tax assessments. Common Mistakes in Malta Audits – and How to Avoid Them Mistake #1: Underestimating Substance Requirements Typical Mistake: A virtual office and an external accountant will do the trick. The Reality: Substance requirements have increased. The EU Anti-Tax Avoidance Directive (ATAD) requires “adequate economic substance” for tax recognition. How to Avoid the Mistake: Invest in real office space, not just a mailbox Hire qualified staff in Malta Relocate real business activity to Malta Document all measures that create substance Mistake #2: Poor Email Hygiene Typical Mistake: Making strategic decisions by email from Germany while claiming company management is in Malta. Why This Fails: Auditors systematically analyze email records. If all important decisions come from German IP addresses, your Malta structure is not credible. Proper Email Strategy: Make important decisions only from Malta Use Maltese email addresses for official correspondence Regular “Malta weeks” for strategic planning Document and justify decision processes Mistake #3: Transfer Pricing Chaos Typical Mistake: Setting transfer prices by gut feeling with no market comparison or documentation. The Problem: Inappropriate transfer prices lead to profit adjustments and back payments in both countries. Professional Transfer Pricing Documentation: Service Type Market Range Required Documentation Management Fees 3–8% of turnover Function analysis + benchmarking Licensing Fees 5–15% (industry dependent) IP valuation + comparability studies Loan Interest 1–6% above base rate Rating + interest rate comparisons Cost-Plus Mark-Up 5–20% on costs Function and risk analysis Mistake #4: Uncoordinated Advice Typical Mistake: Malta and home-country advisers don’t know each other and contradict one another during the audit. Why That’s a Disaster: Contradictory statements by your advisers look like an admission of guilt to auditors. Coordinated Advisory Strategy: Bring both advisers together before the audit Develop a joint strategy Prepare consistent arguments Regular updates during the audit Mistake #5: Poor Proof of Malta Presence Typical Mistake: “I’m regularly in Malta, but I can’t really prove it.” The Problem: No evidence means no auditor will believe your Malta activities. Comprehensive Evidence of Presence: Keep all flight tickets and boarding passes Save hotel invoices or lease receipts Document business meetings in Malta Take photos at Malta meetings Collect restaurant receipts from Malta Store mobile phone location data Mistake #6: Seeking Legal Advice Too Late Typical Mistake: Only contacting a lawyer after receiving the audit letter. Why That’s Too Late: During the audit, you can only react — not structure things preventively. Proactive Legal Advice: – Annual structure reviews with tax advisers – Regular updates on legal changes – Preventive optimization before problems arise – Emergency plans for different audit scenarios What does this mean for you? Plan your Malta structure from the start as if you’ll be audited next year. Youll sleep better — and be ready if it happens. After the Audit: How to Deal with the Results Making the Most of Positive Audit Results If both authorities approve your structure — congratulations! But dont rest on your laurels: Document Your Success: Keep audit reports safe Re-use successful arguments for future audits Maintain or improve your standards Regularly update your documentation A positive audit report is like a seal of approval — it offers protection in future audits. Dealing with Back Taxes If additional taxes are demanded, stay calm and act methodically: Immediate Actions When Taxes Are Owed Analyze the Report: What issues were raised? Review Options for Appeal: Are the allegations justified? Step Up Your Tax Advice: You need experts now Secure Liquidity: Tax payments can be substantial Avoiding Double Taxation The worst-case scenario: Both countries seek tax on the same income. Double taxation agreements (DTAs) apply here: Procedure Duration Success Rate Cost Mutual agreement procedure 12–36 months High if the law is clear €10,000–50,000 Arbitration 6–18 months Very high €25,000–100,000 National objection/lawsuit 6–24 months Medium €5,000–25,000 Optimizing Your Structure After the Audit Use the results to improve for the future: If Audit Was Successful: – Replicate the model – Make your documentation the standard – Further enhance your substance – Refine your compliance processes If Audit Was Partially Successful: – Address points of criticism – Adapt the structure as needed – Focus more advice on problem areas – Take preventive measures for the future If Audit Failed: – Completely rethink your structure – Consider alternative models – Develop exit strategies – Limit the damage Appeals as a Strategic Tool Not every appeal makes sense. Check carefully: An appeal is worth it if: – There are legal errors in the report – New evidence strengthens your position – There were procedural errors – The back tax bill is disproportionately high An appeal is risky if: – The law is clearly against you – It could trigger additional audit areas – Costs exceed the benefits – Delays cause more harm than good A skilled tax lawyer can make the crucial assessment here. Long-Term Compliance Strategy After each audit, review your compliance strategy: Increase Monitoring: Regular internal “mini-audits” Step Up Consulting: Quarterly updates with tax advisers Professionalize Documentation: Systematically record all relevant data Train Your Team: Raise employee awareness for compliance What does this mean for you? An audit isn’t the end of the world — it’s a chance to improve. With the right strategy, you’ll come out of an audit stronger. Frequently Asked Questions about International Audits in Malta How long does an international audit of a Malta company take? An international audit typically takes 6–12 months from the first notification letter to the final decision. Complex cases or appeals can stretch out to 18–24 months. The Maltese part is usually quicker (3–6 months), while German or Austrian audits take longer. Can I make changes to my structure during an ongoing audit? In principle, yes, but beware: Changes during an ongoing audit are often seen as an admission of guilt and can open up further areas of inquiry. Minor improvements (better documentation, increased Malta presence) are usually fine, but any major changes should always be coordinated with your tax adviser. How much does professional support for an international audit cost? Expect to pay €15,000–50,000 for full support throughout the audit. Maltese tax advisers charge €150–300 per hour, international specialists €250–500 per hour. It’s almost always worth the investment — audits without professional support often result in five- or six-figure back tax bills. Do I have to attend the audit in Malta in person as a managing director? Personal attendance isn’t mandatory but is highly recommended. Auditors assess your level of cooperation and commitment to your Malta structure. Absence without good reason can be seen in a negative light. If you truly can’t attend, make sure you have a competent local representative present. Which documents are most commonly requested during Malta audits? Standard requests include: Complete accounts for the past 3–5 years, all shareholder resolutions and board meeting minutes, contracts for Maltese employees, lease/purchase agreements for office space, bank authorizations and signatory rights, email correspondence on important decisions, travel receipts and proofs of presence, contracts with related parties, and transfer pricing documentation. Can German and Maltese auditors carry out a joint on-site audit? Yes, coordinated audits are increasingly common. Audit teams from both countries exchange information and can conduct their review at the same time or one after the other. These joint audits are especially thorough but have the advantage that conflicts between authorities are resolved more quickly. What happens if I didnt comply with the 90-day rule? The 90-day rule refers only to your personal Maltese tax residency, not company management. However, a regular Malta presence is important for the credibility of your structure. Spending less than 30 days per year in Malta is viewed critically. More important than the raw number of days is that key business decisions are made in Malta. Can I challenge negative audit findings? Yes, you have several legal remedies: Objection to the tax assessment (typically a 4-week deadline), appeal in the tax court (if the objection fails), mutual agreement procedure to avoid double taxation (no deadline), EU arbitration in cross-border disputes. Your chances depend heavily on the facts — qualified legal advice is essential. Should I request a preventive audit? This is possible, but usually not advisable. Voluntary disclosures can make sense if you’ve found errors and wish to correct them. Otherwise: don’t poke the bear. It’s better to have your tax adviser carry out regular internal compliance reviews. How do I recognize reputable advice for Malta structures? Look for: Years of Malta experience (at least 5 years), collaboration between Malta and home-country advisers, realistic advice instead of miracle promises, transparent fees, references from successful audits. Beware of advisers promising “100% safe” structures or downplaying substance requirements.
