Table of Contents Why Maltese Companies Are Suddenly Under Scrutiny Understanding CFC Rules: What Is Antecedent Taxation? Malta in the Spotlight: Why Tax Authorities Are Taking a Closer Look Substance Verification in Malta: The Requirements You Must Meet Concrete Risks: Where Things Can Get Expensive Avoiding Antecedent Taxation: Proven Strategies from Practice Checklist: How to Review Your Malta Structure Frequently Asked Questions about CFC Taxation Imagine this: three years ago, you proudly set up your Maltese company. The 5% rule sounded irresistible, EU membership was reassuring, and your tax advisor had everything meticulously calculated. Then, suddenly, a letter from the tax office arrives: Antecedent Taxation in bold letters. Wait, what? Welcome to the reality of international tax structuring in 2025. The days when a Maltese company automatically meant tax advantages are over. German tax authorities now examine very closely whether your Malta-based company actually conducts genuine business, or is just a fancy mailbox sign. In this article, I’ll explain what CFC rules (Controlled Foreign Company Rules) are, why Malta is especially in focus, and—most importantly—how to structure your setup so you don’t fall into the trap of antecedent taxation. One thing is clear: ignorance is no excuse when it comes to back taxes. Understanding CFC Rules: What Is Antecedent Taxation? Before we dive into the specifics of Malta, let’s clarify the basic concept. Antecedent taxation (or CFC rules) is the legal mechanism Germany uses to prevent you from setting up a company in a low-tax country and just “parking” your profits there. The Basic Principle: When the Subsidiary Becomes the Parent The logic is actually simple: If you are tax resident in Germany and hold more than 50% in a foreign company that primarily generates passive income (interest, royalties, dividends), the German tax office treats those earnings as if you had earned them directly. A real-life example: Your Maltese company owns real estate and earns €100,000 in rental income. Usually, in Malta you’d pay only 5% tax (€5,000). But the German tax office says: “Stop! You must add this €100,000 to your German income.” And suddenly, you’re paying German income tax on the full amount. When Does Antecedent Taxation Apply? Under §8 of the German Foreign Tax Act (AStG), three requirements must be met: Ownership requirement: You directly or indirectly hold more than 50% in the foreign company Low taxation: The foreign company is subject to a tax burden of less than 25% Passive income: The company primarily earns passive income (interest, rent, royalties) If all three apply, it’s a problem. And here’s where Malta enters the scene: With Malta’s tax refund system, the effective tax rate is often below 25%—sometimes as low as 5%. The Substance Requirement as a Lifeline The good news: You can escape antecedent taxation if you can prove that your Maltese company actually carries out real business operations. This is called the “substance requirement.” What does this mean for you? Your Maltese company has to prove it’s more than just a mailbox—it must engage in genuine business activity. That includes having staff, its own office space, and making independent business decisions. Malta in the Spotlight: Why Tax Authorities Are Taking a Closer Look In recent years, Malta has established a reputation as the EU Singapore. Malta’s tax refund system is enticing, but that’s exactly why it’s become suspicious in the eyes of German tax authorities. How the Maltese Tax Refund System Works Taxation in Malta works differently than in Germany. Every company pays 35% corporate income tax at first. All standard so far. Here’s the trick: When the company distributes dividends, it can reclaim between 6/7 and 5/7 of the paid tax, depending on the type of income. Example calculation: €100,000 profit Corporate income tax: €35,000 (35%) Distribution: €65,000 Tax refund: €30,000 (6/7 of €35,000) Effective tax burden: €5,000 (5%) This sounds fantastic, but it’s precisely why German tax authorities are alert. An effective tax rate of 5% is well below the 25% CFC threshold. Why Malta Is Under Special Surveillance German authorities have realized that, despite EU membership, Malta is often used as a tax haven. Areas of particular concern include: Holding structures: Maltese companies that solely manage equity interests IP boxes: License income from intellectual property Real estate holdings: Companies owning only real estate Trading companies without staff: Trading companies with no employees of their own Practical tip: I know of an entrepreneur who transferred his software licensing rights to his Maltese company. On paper, everything seemed legal. The catch? The Maltese company had no developers, no servers, not even its own office. The tax office classified the entire setup as tax avoidance. The New EU ATAD Directive and Its Effects Since 2019, stricter CFC rules have applied in the EU under the Anti-Tax Avoidance Directive (ATAD). Malta had to implement these into national law, which increased scrutiny of foreign interests. The key change: Malta now also actively checks whether foreign companies (including your German company) are correctly declaring their Maltese holdings. Information exchange between tax authorities now happens automatically. Substance Verification in Malta: The Requirements You Must Meet The substance requirement is your life insurance policy against antecedent taxation. But what does “substance” actually mean? Here are the main criteria German tax authorities use. Staff: More than Just a Managing Director Most important: Your Maltese company needs qualified personnel of its own. A nominee managing director isn’t enough. Employees must: Be employed full-time or substantively part-time (at least 20 hours/week) Have the necessary qualifications for their roles Be able to make independent decisions Be resident in Malta (or at least work there regularly) Rule of thumb: For every €500,000 in annual turnover, you should have at least one qualified full-time employee. For more complex businesses, more accordingly. Office Space: More than Just a Mailbox Your Maltese company needs real business premises. That means: Requirement Minimum Standard Recommendation Office space At least 20sqm (≈ 215 sq ft) 50sqm (≈ 538 sq ft) or more Furnishings Workstations, IT equipment Fully equipped office Lease term At least 12 months 3+ years for stability Usage Regular business activity Used daily Important: The office must not be shared with other companies owned by the same beneficial owner. Otherwise, it will look like a sham arrangement. Independent Business Activity: The Heart of Substance This is the critical point: Your Maltese company must engage in independent, economically meaningful activities. The main criteria: Independent business decisions: Management in Malta must make independent decisions on contracts, investments, and strategy Operational control: Day-to-day operations are managed from Malta Risk assumption: The Maltese company bears genuine entrepreneurial risks Value creation: Real value is generated in Malta, not just managed Documentation: Evidence Without Gaps Without proper documentation, even the best substance won’t count. You’ll need: Lease agreements for office space Employment contracts for Maltese staff Minutes from shareholders’ and board meetings Receipts for operating expenses (rent, salaries, IT, etc.) Business correspondence from Maltese email addresses Bank statements from Maltese business accounts Pro tip: Keep a “substance diary.” Regularly record which transactions are processed from Malta, what decisions are made there and which employees handle what. The Cost-Benefit Analysis A realistic example of the costs of a substantial Maltese company: Managing director (full-time): €40,000–€60,000/year Clerical staff: €25,000–€35,000/year Office space (50sqm): €12,000–€20,000/year Office equipment and IT: €5,000–€10,000/year Compliance and consulting: €10,000–€15,000/year Total cost: €90,000–€140,000 per year The takeaway: Your Malta structure only makes economic sense from a certain turnover threshold. Rule of thumb: at least €500,000 in annual turnover, preferably €1 million or more. Concrete Risks: Where Things Can Get Expensive Here’s where it gets serious. I’ll show you the most common mistakes that can lead to painful antecedent taxation. One thing’s certain: if the tax office takes action, it gets really expensive. Risk 1: The Mailbox Trap The classic: You set up a Maltese company but use a standard nominee service without real substance. Business is still conducted from Germany, only invoices go through Malta. Red flags for the tax office: Managing director is only a nominee without real authority All major decisions are made in Germany No staff of your own in Malta Office space is shared with other companies Bank accounts are mostly operated from Germany A real case: A German IT entrepreneur shifted his software licenses to Malta. Problem: The Maltese “managing director” was a lawyer overseeing 20 companies. The software was still developed in Germany, servers hosted there, and customers supported from Germany. The tax office added three years of license revenue (over €800,000) to German taxation. Back taxes and interest: €280,000. Risk 2: The Holding Trap Many think a pure holding company is harmless. After all, it “just” manages investments. Wrong! Holding companies are especially at risk as they generally generate only passive income (dividends). Highly risky if: The holding owns only one participation The participation is managed operationally from Germany No independent investment decisions are made in Malta No treasury management of its own Risk 3: The IP Box Trap Malta offers attractive rules for intellectual property (patents, licenses, know-how). But beware: German authorities keep an especially close eye here. Critical points: The intellectual property was not developed in Malta No R&D activities in Malta License income without commensurate value creation Non-arm’s length transfer pricing The Financial Consequences of Antecedent Taxation If the tax office intervenes, the costs can skyrocket. Here’s a realistic calculation: Example: €200,000 Malta profit Without Antecedent Taxation With Antecedent Taxation Malta tax (5%) €10,000 €10,000 German income tax (42%) €0 €84,000 Credit for Malta tax €0 -€10,000 Interest on back taxes (6%/year) €0 €15,000 (3 years) Total burden €10,000 €99,000 On top of that: Legal fees for your defense Time spent dealing with audits Potential fines for gross negligence Damage to your reputation Limitation and Assessment Period Another unpleasant surprise: The assessment period for antecedent taxation is 10 years! That means the tax office can come after you for up to 10 years retroactively. For normal tax returns, it’s only 4 years. Why 10 years? Because antecedent taxation is assessed via separate determination notices, which are subject to the extended time limit. Avoiding Antecedent Taxation: Proven Strategies from Practice Enough horror stories. Here’s how to build your Malta structure so that it really works—legally compliant and tax-optimized. Strategy 1: Plan Real Substance from Day One The most important advice: Plan the substance from the get-go. Many make the mistake of first setting up a mailbox company and trying to add substance later. That won’t work. My 4-step plan for real substance: Define the business model: What should your Maltese company actually do? Simply “redirecting” invoices is not enough. Plan your staff: What qualifications do you need? How will you find suitable employees in Malta? Build your infrastructure: Office, IT, processes—all must be professional. Establish documentation: Keep thorough documentation from day one. Strategy 2: Choose the Right Business Model Not all business models are equally suited to Malta. Here’s my assessment: Business Model Substance Effort Risk Level Recommendation Online Retail Medium Low ✅ Well suited Software Development High Low ✅ Very well suited Consulting Services Medium Medium ⚠️ Conditionally suitable Pure License Holding Very high High ❌ Not recommended Real Estate Holding High High ❌ Very risky Strategy 3: Apply Transfer Pricing Correctly If your German and Maltese companies do business together, you have to comply with transfer pricing. This means: all transactions between the companies must be at arm’s length prices. Typical transfer pricing pitfalls: Management fees from Malta to Germany are too high License fees for intellectual property are too low Unrealistic profit margins on sale of goods Missing documentation for price setting My tip: Have transfer pricing documentation prepared from the very beginning. It costs €5,000–€10,000, but could save you hundreds of thousands later. Strategy 4: Avoid the “Digital Nomad” Mistake Many digital nomads believe they can manage their Maltese company from anywhere. That’s a misconception! To meet the substance requirements, business must be managed from Malta. Practical solution: If you travel a lot yourself, hire a qualified managing director in Malta. However, they need to have real decision-making power—not just carry out your instructions. Strategy 5: Establish a Compliance System A professional Malta structure requires a professional compliance system. This includes: Monthly reporting: Regular reports on business activity and substance Quarterly self-audit: Are all substance criteria still met? Annual external review: Tax advisor or lawyer reviews the setup Ongoing documentation: Document all substance-related activities Strategy 6: Develop a Plan B Even the best Malta structure can fail—due to legislative changes, business challenges, or other unforeseen events. That’s why you need a Plan B. Possible alternatives: Relocation to Ireland or the Netherlands Conversion to a German corporation Liquidation and restart Sale of the business activity Plan B should be tax- and legally-ready before you actually need it. Checklist: How to Review Your Malta Structure Time for a reality check. Use this checklist to see if your Maltese company would stand up to the German tax office. Be honest—it’s your money on the line. Substance Check: The Most Important Criteria Self-test: Answer each question honestly with Yes or No. Fewer than 15 out of 20 “Yes” answers is a warning sign. Criterion Yes No Weighting Own managing director in Malta (at least 30h/week) □ □ Very important Additional qualified staff □ □ Important Own office space (at least 20sqm) □ □ Very important Office is used daily □ □ Important Independent business decisions made in Malta □ □ Very important Own bank accounts in Malta □ □ Important Separate IT infrastructure □ □ Medium Own email addresses (@malta-domain) □ □ Medium Regular board meetings in Malta □ □ Important Meeting minutes maintained in Malta □ □ Medium Genuine value creation in Malta □ □ Very important Transfer pricing documented □ □ Important Managing director has real decision-making power □ □ Very important Entrepreneurial risks borne in Malta □ □ Very important Clients are serviced from Malta □ □ Important Contracts negotiated from Malta □ □ Important Compliance system in place □ □ Medium External advice in Malta □ □ Medium Documentation is comprehensive □ □ Important Economic rationality of the structure □ □ Very important Warning Signs: When You Need to Take Action These warning signs should set alarm bells ringing: Red (Act immediately): Only nominee managing director with no real authority No employees of your own in Malta All business conducted entirely from Germany No own business premises Yellow (Monitor critically): Employees only work part-time Office space is shared Little genuine value creation in Malta High dependency on the German company Action Plan: What To Do About Critical Results If your Malta structure fails the test, here’s your action plan: Immediate actions (0–30 days): Consult a tax advisor with Malta expertise Have a risk assessment carried out Document past business activities Mid-term actions (1–6 months): Plan and implement substance build-up Recruit staff Rent and fit out office space Establish processes and compliance Long-term actions (6–12 months): Establish complete substance verification Examine alternative structures Develop Plan B Cost-Benefit Analysis: When Does Malta Still Make Sense? Finally, the key question: Is your Malta structure really worth it? Annual Revenue Substance Costs Tax Savings Net Benefit Recommendation €200,000 €120,000 €60,000 -€60,000 ❌ Unprofitable €500,000 €120,000 €150,000 +€30,000 ⚠️ Marginal €1,000,000 €140,000 €300,000 +€160,000 ✅ Profitable €2,000,000 €160,000 €600,000 +€440,000 ✅ Very profitable Rule of thumb: Below €500,000 annual turnover, a substantive Malta structure usually doesn’t pay off. Between €500,000 and €1 million, a detailed case-by-case review is needed. Above €1 million, Malta can be very attractive—provided the substance is real. Frequently Asked Questions about CFC Taxation Can I avoid antecedent taxation through a holding structure? No, quite the opposite. Holding companies are particularly at risk because they almost always generate only passive income. Adding more levels just makes things more complicated without solving the core problem. Is it enough if I personally hold under 50%? Careful! The law refers to “direct or indirect” ownership. Through relatives, trustees, or other arrangements, you can easily reach 50%. The tax office looks at economic realities, not just legal structures. How often do I need to be in Malta myself? There’s no fixed rule, but you should be onsite regularly—at least once per quarter for several days. More important is that operational decisions are made by your Maltese staff, not you from Germany. What happens if Malta changes its tax laws? That’s a real risk. Malta is under EU pressure to reduce its tax advantages. That’s why a Plan B is essential. Most professional setups already have alternative jurisdictions (Ireland, Netherlands) prepared. Can I “repair” an existing mailbox structure? Theoretically yes, but in practice it’s difficult. The tax office will look at your entire history. If there was no substance for years, it’s hard to argue that genuine business activity has suddenly appeared. Better: Do it right from the beginning. How do I find qualified staff in Malta? Malta has a well-educated, English-speaking labor market, especially in finance, IT, and gaming. Recruitment through local headhunters or online platforms like JobsPlus Malta. Expect 6–12 weeks to hire. What does a legally compliant Malta structure really cost? For a substantial structure: at least €100,000–€150,000 a year (personnel, office, compliance). Plus set-up costs of €20,000–€50,000. Below this, a legally compliant structure is not feasible. Do I pay Maltese tax on German income? If you become a Maltese tax resident, yes. Malta taxes worldwide income in that case—which can wipe out any tax savings. So usually, you should remain a German tax resident and only relocate the company to Malta. How do I spot reputable advisors in Malta? Look for local law firms or Big Four consultancies with a Malta office. Avoid anyone promising “guaranteed tax savings” or downplaying substance requirements. Good advisors will inform you of the risks and explain the necessary investments transparently. What happens during a tax audit in Germany? The German tax office will examine your Malta structure in detail. You must provide all evidence of substance: employment contracts, lease agreements, meeting minutes, receipts for operating expenses. Without watertight documentation, things get costly. The audit can drag on for 1–2 years.