Table of Contents What Is a Permanent Establishment and Why Should You Care? The Malta Trap: Why So Many Entrepreneurs Slip Up Identifying Permanent Establishment Risks: The Critical Factors Economic Substance Requirements: What Malta Really Demands Practical Steps to Avoid a Permanent Establishment Common Mistakes and How to Avoid Them Checklist: How to Stay on the Safe Side Frequently Asked Questions Picture this: You’re sitting comfortably in your Munich office, managing your Malta company over Zoom and thinking you’ve landed the perfect tax-saving setup. Then a letter from the German tax office arrives: Permanent establishment in Germany confirmed. Tax back payment: €50,000. Welcome to the reality of international tax planning, where a single misunderstood concept can bring your entire structure crashing down. I’ve heard these stories more times than I care to count. In my two years in Malta, I’ve met countless entrepreneurs who talked excitedly about tax savings—until the subject of permanent establishments came up. The problem: Many don’t realize how quickly a Malta company can become subject to German tax rules, faster than the bus from Valletta to Sliema. Today, I’ll show you how to sidestep these pitfalls. No technical jargon—just the depth you need to know exactly where you stand. When it comes to permanent establishments, it’s not about theoretical advice; it’s about real-world risks that can seriously threaten your business. What Is a Permanent Establishment and Why Should You Care? Simplified, a permanent establishment is any place where a business has ongoing commercial activity—even if it’s officially registered elsewhere. That may sound simple, but in practice it’s one of the most challenging aspects of international tax law. Why? Because every country has its own rules, and these rules decide where your company has to pay taxes. The Basics of the Permanent Establishment Definition According to the OECD Model Convention (2017), a permanent establishment exists when three criteria are met: Local Business Activity: You’re carrying out business operations Fixed Place of Business: You have a specific location for this purpose Permanence: The activity occurs on a regular or ongoing basis Sound clear? It’s not. The devil is in the details. Even a desk regularly used in your home office could theoretically create a permanent establishment. All the more so if you’re making operational decisions for your Malta company from there. Why Malta Companies Are Particularly Affected Malta is famous as an EU tax haven—and that makes it a prime target for stricter audits. The German tax office scrutinizes Malta structures in particular, since the effective corporate tax can be as low as 5% (using the Maltese imputation system). The logic: If you live in Germany and manage your Malta company from here, Germany should also collect the tax. Fair enough, right? The problem arises if you ignore this reality and assume your Maltese registration automatically protects you. Practical Tip: I’ve seen entrepreneurs who thought a Maltese director on paper was enough. Spoiler: It isn’t. What matters is where management actually takes place. What does this mean for you? You need to understand that tax residency and permanent establishment risks are two completely different issues. Your Malta company can be taxed in Malta—and still have a permanent establishment in Germany. The Malta Trap: Why So Many Entrepreneurs Slip Up Let me tell you a story I’ve heard dozens of times, in one form or another. Marcus, a German IT consultant, sets up a Malta company in 2022. He lives in Hamburg, works from home, holds client calls via Zoom, and thinks he’s safe since contracts run through Malta. The rude awakening comes with the first tax audit. The Hamburg tax office determines: Marcus is effectively managing his company from Germany. The result: Permanent establishment in Germany, and full German taxation on profits earned there. Common Malta Traps in Detail Trap Description Risk Level Home Office Management Running the company from a German home address Very high Nominee Director Maltese director without real authority High German Client Contact Handling sales and consulting from Germany Medium Servers in Germany IT infrastructure mainly in Germany Medium The Substance Problem: Why Mailbox Companies Don’t Work This is where things get tricky. Since the EU Anti-Tax Avoidance Directives (ATAD, 2019), Malta requires all companies to have adequate economic substance. In practice, that means: Qualified employees on-site Appropriate office space Genuine business activity in Malta Substantial decision-making processes locally At the same time, Germany’s permanent establishment risk is lurking. You’re caught between two stools: Malta demands substance, Germany insists no management happens from German soil. Sounds impossible? It’s not—but it takes strategy. Why Many Advisors Underestimate the Problem Honestly, many tax and business consultants sell Malta structures without properly considering the permanent establishment issue. Why? Because it’s complex, and clients prefer to hear simple solutions. The truth is: A functional Malta setup takes time, money, and meaningful operational change. If someone tells you that you can just set up a company and carry on as usual, you’re being misled. Reality Check: A proper Malta setup will cost at least €15,000–25,000 a year—just for the required local substance. Spend less, and you’re risking tax disadvantages rather than benefits. What does this mean for you? Don’t be swayed by cheap offers. A Malta company isn’t a tax hack—it’s a serious business setup that requires real changes to how you run your company. Identifying Permanent Establishment Risks: The Critical Factors Let’s get practical. Here’s what the tax authorities actually look for when deciding if you have a permanent establishment. Spoiler: It’s not about formalities, it’s about real economic activity. Place of Management: The Decisive Factor The German tax office always asks: Where are the key management decisions made? And I don’t just mean where the shareholder meeting minutes get signed, but where the real business decisions take place. Key indicators for a German management location: Strategy Decisions: Are investments, HR, or business strategies decided in Germany? Customer Communication: Is the main client contact via German phone numbers or email addresses? Contract Negotiations: Are important contracts negotiated and closed from Germany? Financial Decisions: Who approves loans, investments, or profit distributions? The 183-Day Rule: A Dangerous Myth Many believe they’re safe as long as they spend less than 183 days in Germany. This is a myth. The 183-day rule applies to personal tax residency, not to permanent establishments. For permanent establishments: Even a few days of intensive business activity can be enough if these are recurring and sufficiently permanent. Digital Permanent Establishments: The New Minefield This is especially relevant for digital business models. The OECD has been working for years on new rules for digital permanent establishments. As of 2024, there’s no universal definition yet, but the tendency is clear—even virtual business activities can trigger a permanent establishment. Digital Activity Risk of Permanent Establishment Preventive Measure E-commerce Administration High Relocate to Malta Content Creation Medium Freelancer Structure Customer Support High Maltese Call Center Marketing Campaigns Medium External Agencies Employees as Permanent Establishment Creators This is where it gets detailed. Even a single employee can, under certain conditions, trigger a permanent establishment. The criteria are: Dependent Agent: The employee regularly acts for the company Authority to Conclude Contracts: They can sign contracts on behalf of the company Regular Exercise: These activities occur permanently Practical example: Your German sales staff not only finds clients, but also signs contracts. Even if he’s formally working for the Malta company, this can establish a permanent establishment in Germany. Insider Tip: Many overlook that shareholder-directors can also count as dependent agents. If you, as a shareholder, run your own company from Germany, you’re legally a dependent agent for your Malta company. What does this mean for you? You need to scrutinize every aspect of your business for where activities occur and who carries them out. The permanent establishment audit is like taking an X-ray of your entire business. Economic Substance Requirements: What Malta Really Demands While Germany is on one side, Malta has tightened its own rules. The Economic Substance Requirements (ESR) have been Malta’s weapon against mailbox companies since 2019. Don’t get me wrong—that’s a good thing. But it means your Malta structure genuinely needs local substance. What “Economic Substance” Actually Means Malta requires all companies carrying out relevant activities to have sufficient substance in Malta. Core Activities in Malta: Main income-generating activities must happen locally Qualified Staff: Sufficient personnel with the necessary qualifications Appropriate Expenses: Operating costs that match the business activities Physical Presence: Offices and infrastructure on site Relevant Activities and Their Substance Requirements Not all business activities fall under the ESR. Here’s an overview of which are considered relevant: Relevant Activity Minimum Substance Typical Costs/Year Holding Activities Board meetings in Malta, local director €8,000 – 15,000 Intellectual Property R&D staff, IP management locally €25,000 – 50,000 Fund Management Licensed managers, compliance team €50,000 – 100,000 Trading/Distribution Sales team, warehouse/office €30,000 – 60,000 The Proportionality Rule: More Profit = More Substance Here’s the catch: Malta applies a proportionality rule. The higher your profit, the more substance is expected. It makes sense—a company with €5 million in annual profits can’t get by with a 10-square-meter office and a part-timer. The Maltese rule of thumb: Up to €500,000 annual profit: Minimum substance is enough €500,000 – 2M: Increased demands for staff and facilities Over €2M: Comprehensive local organization needed Substance vs. Permanent Establishment Risk: The Balancing Act Here’s the thing: You need to meet Malta’s substance requirements and avoid German permanent establishment risks at the same time. It’s like playing chess on two boards at once. The solution is smart task allocation: Strategic Decisions: Must be made in Malta Operational Execution: Can partially be done externally Administrative Tasks: Can be outsourced Customer Relationships: A critical area—needs clear rules Practical Example: A German e-commerce entrepreneur runs his Malta company like this: Strategic decisions (product range, pricing, investments) are made during monthly board meetings in Malta. Operations (customer service, logistics, marketing) are handled by external service providers. He lives in Malta for 8 months of the year, 4 months in Germany—but he doesn’t work for the Malta company while in Germany. What does this mean for you? You need a detailed operational plan that meets both Malta’s substance rules and minimizes German permanent establishment risks. This isn’t something you can improvise. Practical Steps to Avoid a Permanent Establishment Enough theory. Here’s how to set up your Malta structure to satisfy both countries. Spoiler: It’s more work than most expect—but it’s doable. Step 1: Choose the Right Company Structure Not all Malta companies are the same. The following are best suited for avoiding permanent establishments: Private Limited Company (Ltd.): The standard option, flexible setup Malta Holding Company: Best for holding structures Branch Office: Only makes sense for very specific cases The key is not the legal form, but the actual operations. A Ltd. can be just as problematic as a complex holding structure if run incorrectly. Step 2: Systematically Build Local Substance Now it’s time to invest. A legitimate Malta setup requires: Substance Element Minimum Requirement Cost/Year Office Space 20–50 sqm, depending on business size €6,000 – 18,000 Local Director Qualified, with real authority €24,000 – 60,000 Administrative Support Bookkeeping, compliance, secretarial €12,000 – 25,000 IT Infrastructure Server, software licenses, backup €3,000 – 8,000 Step 3: Establish Governance Structures This is the crucial part: You must set up real decision-making structures in Malta. A systematic governance plan helps: Board Meetings in Malta: At least quarterly, with documented decisions Delegation Matrix: Clearly define who can decide what Reporting Structures: Regular reports from the Maltese management Documentation: All key decisions must clearly be made in Malta Step 4: Neutralizing the German Side At the same time, structure your activities in Germany so they don’t trigger a permanent establishment: No operational management: From Germany, do only support activities Consultancy contracts rather than employment: If you do work for your Malta company, do it as an external consultant Strict separation of communications: Company emails and calls only via Maltese infrastructure Documentation hygiene: All business decisions need to be provably documented in Malta Step 5: Compliance and Monitoring A Malta structure isn’t “set and forget.” Ongoing monitoring is essential: Monthly compliance checks: Fulfillment of all substance requirements Quarterly risk assessment: Review current permanent establishment risks Annual structure reviews: Adapt to changes in business or legal requirements Professional advice: Regular updates from specialist tax advisors Reality Check: I know entrepreneurs who spend €80,000 a year on a solid Malta setup—yet still save money because the tax savings are greater. But I also know some who gave up, frustrated, after three years because the workload was too high. What does this mean for you? A Malta structure is a long-term strategy, not a tactical tax optimization. If you’re not ready for genuine operational change, don’t do it. Common Mistakes and How to Avoid Them After two years’ Malta experience and countless conversations with entrepreneurs, I know the classic pitfalls. Here are the biggest mistakes—and how to avoid them from day one. Mistake #1: Belief in the Nominee Director The Mistake: Many believe having a Maltese director on paper is enough to avoid permanent establishment risks. The Reality: Shell directors are the first thing tax authorities see through. If your Maltese director doesn’t actually make decisions, they are irrelevant for tax purposes. The Solution: Invest in a qualified, experienced director Give them real authority (e.g., up to €50,000 without approval) Document all their decisions meticulously Hold regular strategic meetings with them Mistake #2: The “I’ll Do Everything from Germany” Trap The Mistake: You think that as long as the company is registered in Malta, you can run it from Germany as if it were a German company. The Reality: This is the surest way to a German permanent establishment. Every operational decision made from Germany increases your risk. The Solution: Define your role: In Germany, you’re at most a consultant, not a manager Redirect communication: All business correspondence runs through Malta Shift decision-making: Major resolutions only in Malta or via the Malta board Adjust documentation: All records and decisions indicate Maltese management Mistake #3: Underestimating Substance Requirements The Mistake: A small office and a mailbox are enough. The Reality: Malta now closely examines whether local substance matches the business activities. Too little substance = loss of tax benefits. The Solution: Business Volume Minimum Substance Recommended Substance 1 FTE employee, 20 sqm office 1.5 FTE employees, 30 sqm office €500k – 2M 2 FTE employees, 40 sqm office 3 FTE employees, 60 sqm office > €2M 3+ FTE employees, 60+ sqm 5+ FTE employees, 100+ sqm Mistake #4: Careless Communication The Mistake: Using German email addresses, phone numbers, and IPs for Malta business. The Reality: Modern tax audits analyze digital footprints. German IPs on Malta emails are a red flag. The Solution: Maltese email infrastructure: Business emails only via Malta servers Use VPN: Always use Maltese IPs when working remotely Separate channels: Strictly separate private and business communication Documentation hygiene: All business documents show Maltese origin Mistake #5: One-Size-Fits-All Thinking The Mistake: You copy someone else’s Malta setup exactly, without considering your individual situation. The Reality: Every business faces a different permanent establishment risk. An e-commerce seller’s risks are different from a software developer’s or consultant’s. The Solution: Individual analysis: Have your specific business activity assessed Risk mapping: Identify your biggest permanent establishment risks Tailored structure: Develop a solution designed for your business Regular adjustments: Make sure your structure grows with your business From the field: I had a client who thought he was safe because he’d copied the structure from a successful YouTuber. Problem: He was a software developer, not a content creator. The permanent establishment risks were totally different. After an expensive fix, it’s now working—but it could have been right from the start. What does this mean for you? Learn from others’ mistakes, but develop your own tailored solution. Malta setups are not plug-and-play. Checklist: How to Stay on the Safe Side To finish, here’s a practical checklist you should work through regularly. I use this myself for my annual structure reviews. Monthly Checks (5 Minutes) □ All business decisions are documented in Malta □ No operational emails sent from German IP addresses □ Maltese director has made at least one documented decision □ All contracts handled through the Malta company □ No client meetings or negotiations conducted from Germany Quarterly Checks (30 Minutes) □ Board meeting held and minuted in Malta □ Substance still matches current business size? □ All Maltese employees have real responsibilities □ Offices are genuinely used for business □ Compliance reports of the Maltese company are complete □ No new permanent establishment risks from business expansion? Annual Structure Review (2–3 Hours) Analyze business development: Has the nature of the business changed? Are there new markets or client groups? Does the current substance still match business volume? Check legal situation: Were there changes in German permanent establishment law? New Maltese substance requirements? Relevant OECD developments or EU directives? Review documentation: Are all board minutes complete and transparent? Do the records clearly show Maltese management? No conflicting documents or emails? Assess cost-benefit: Do the tax savings still justify the effort? Are there more efficient alternative structures? Is the Malta structure still strategically sensible? Red Flags: When You Must Act Immediately These warning signs mean an acute permanent establishment risk: You regularly make operational decisions from Germany Your Maltese director is only a figurehead The local substance no longer matches the business volume Clients don’t know they’re doing business with a Malta company You use German infrastructure for Malta business Emergency Plan: What to Do in Case of a Tax Audit? If the German tax office comes knocking: Stay calm: Tax audits are normal—don’t panic Contact your lawyer: Immediately involve a specialist tax lawyer Secure documentation: Provide all Malta documents in full Cooperate: Be transparent, but only share what’s necessary Don’t change structure: Don’t make hasty changes during the audit My tip: Keep a digital Malta diary where you record all business activities, decisions, and their location. In a tax audit, spotless documentation is worth its weight in gold. What does this mean for you? Avoiding a permanent establishment is a continuous process, not a one-off setup. With systematic monitoring, you’ll stay safe. Frequently Asked Questions Can I manage my Malta company fully remotely? No, that’s one of the most common misconceptions. Malta requires real local substance, and German tax authorities check where actual management decisions are made. A company managed entirely remotely from abroad meets neither Malta’s substance requirements nor avoids German permanent establishment risks. Is a Maltese nominee director enough? Definitely not. Nominee directors without genuine decision-making power are quickly spotted by tax offices. You need a qualified director with demonstrable authority and real business activity in Malta. How much do I need to invest in Malta, at a minimum? For a credible setup, allow at least €15,000–25,000 a year (office, staff, compliance). Requirements rise proportionally with higher profits. Cheaper options usually entail serious tax risks. What happens if a German permanent establishment is found? You’ll have to pay German corporate tax (about 30%) on profits earned in Germany, plus possible back taxes and interest. The Malta company continues, but the tax advantage disappears. In severe cases, tax evasion charges may follow. Can I, as a German citizen, easily move to Malta? Yes, as an EU citizen you have freedom of movement. For tax purposes, you must have real economic interests in Malta and spend at least 183 days there. A purely pro-forma move isn’t enough. How often do I need to be personally in Malta? There’s no set legal minimum, but the more operational decisions you make from Germany, the higher your permanent establishment risk. Quarterly board meetings in Malta plus regular presence for critical business decisions is a workable approach. What business models best suit Malta structures? Especially suitable: holding companies, IP exploitation, international consulting, and digital services. Less suitable: local services in Germany or businesses with intensive German client ties. Do I have to hire Maltese employees? Not necessarily Maltese nationals, but you need qualified staff on-site. EU citizens can work in Malta without issue. What matters is that staff have real roles—not just on paper. How do I recognize a reputable Malta advisor? Good advisors explain risks and requirements up front, not just the benefits. They’re transparent about costs, have verifiable Malta experience, and work with local Maltese partners. Beware cheap deals and unrealistic promises. Can I transfer my existing German company to Malta? Theoretically, yes, but it’s usually more complicated and expensive than founding anew. If you have an existing German permanent establishment, the risk is especially high. Often it’s better to set up a new Malta structure and gradually transition your German business.
