Tax Audit in Your Home Country: Your Rights Regarding Maltese Companies – Audit Defense Strategies

What happens during a tax audit of your Malta company?

A tax audit of your Malta company works differently than with a typical German GmbH. That’s because your local tax office must first check whether, and how, it can access your Maltese company at all.

The reason for the audit: Why you?

Often, audits are random or focus on certain industries. But for Malta companies, there are usually specific triggers as well:

• Substance concerns: The tax office doubts whether your company is truly operating in Malta
• Change of managing director: You are suddenly registered as managing director
• Suspicious transactions: Large money flows between Germany and Malta
• Third-party tips: Business partners or former employees come forward
• Automatic information exchange: Malta automatically reports your company to Germany

Types of audits: What to expect

For Malta companies, there are three types of audits I regularly see in practice:

The initial shock: What does the audit order mean?

The audit order (Außenprüfungsordnung – AO) is like a court order: legally binding and non-negotiable. It typically includes:

1. The audit period (usually 3-5 years retroactively)
2. The types of taxes being audited
3. The name of the auditor
4. The legal basis for the audit

For Malta companies, the order often also mentions audit for CFC taxation under §§ 7-14 AStG (the German Foreign Tax Act). This is the legal way of saying: We are checking whether your Malta company is just a shell.

Your rights during a tax audit: What you need to know

Many entrepreneurs think they are helpless against the tax authorities. That is not true. You have concrete rights, which I will explain in detail.

Right to procedural fairness: Your basic protection

The tax office must follow strict procedural rules. With Malta companies, these are especially important, given the complexity of international matters:

• Duty to provide information: The auditor must explain what is being audited and why
• Right to be heard: You can respond to all allegations
• Right of file inspection: You can review all audit documents
• Right to consulting: You may involve a tax advisor

Practice tip: Insist from the very beginning that all conversations are documented in writing. In international cases, auditors tend to forget what was said.

Right to reasonable time for the audit

This one’s important: With Malta companies, you often need more time because documents have to be obtained from Malta. The tax office must grant you reasonable deadlines (§ 200 AO).

In practice this means:

• At least 2 weeks for German documents
• 4-6 weeks for Maltese documents
• Extensions if translation is required
• Consideration of Maltese holidays and summer breaks

Your right to protection of legitimate expectations

This is a powerful tool that many are unaware of. If you have complied with applicable laws and the legal position then changes, you can invoke this right.

For Malta companies, this is relevant for example when:

• Requirements for substance change
• New interpretations of the double tax treaty arise
• Rules for CFC taxation are tightened

Limits to the tax office’s powers: What they cannot do

The German tax office also faces boundaries, especially with Malta companies:

Audit defense strategies: How to prepare yourself

The best defense is good preparation. In 15 years of practice, I have seen: those who prepare systematically almost always achieve better outcomes in the end.

The 48-hour rule: Immediate steps after the audit order

When you receive the audit order, you usually have only a few days to act. Here is my immediate checklist:

1. Analyze the audit order carefully: What exactly is being audited?
2. Contact your tax advisor: Immediately, not when you have time
3. Review all documents: What is available, what is missing?
4. Inform Malta partners: Lawyer, tax advisor, company secretary in Malta
5. Establish a communication strategy: Who will talk to the auditor?

Document strategy: What you need to have ready

From experience, auditors for Malta companies almost always request these documents. Prepare them in advance:

• Corporate documents: Incorporation deeds, shareholders agreements, meeting minutes
• Proof of substance: Lease agreements, employment contracts, director contracts
• Operational documents: Invoices, contracts, correspondence
• Financial documents: Annual accounts, bank statements, tax returns
• Control documents: Board minutes, director resolutions, transfer pricing documentation

Pro tip: Create an Excel list of all documents with date, storage location, and responsible person in Malta. It can save you hours during the audit.

Substance defense: Your key element

The core of every Malta audit is the substance question: Does your company have real economic substance in Malta? This is usually decisive.

The three pillars of substance defense:

Communication strategy: How to deal with the auditor

Your interaction with the auditor often determines your success. Here are rules Ive found effective:

• Polite but assertive: Courtesy helps, subservience hurts
• Stay factual: No emotional outbursts, even under provocation
• Document everything: Have all conversations minuted
• Set boundaries: Politely refuse to answer inadmissible questions
• Delegate professionally: Refer complex questions to your tax advisor

Making use of the Germany-Malta double taxation treaty: Your shield of protection

The double taxation agreement (DTA) between Germany and Malta is your strongest legal tool. Yet many entrepreneurs are either unaware of it or use it incorrectly.

The most important DTA provisions for your defense

The Germany-Malta DTA from 2001 (last amended in 2018) makes it clear who is entitled to tax what. The most relevant articles for you:

• Article 4 (Residence): Where is your company tax resident?
• Article 7 (Business profits): Who has the right to tax the profits?
• Article 26 (Exchange of information): What information can Germany request?
• Article 27 (Assistance in tax collection): How far does cooperation go?

The tie-breaker test: When both countries claim taxing rights

Sometimes both Germany and Malta claim taxing rights over your company. That’s when the tie-breaker test under Article 4(3) DTA applies:

A company is considered resident in the state where its place of effective management is located.

In practice, this means: Where are major business decisions made? The tax authorities will check:

1. Where do board meetings take place?
2. Where are strategic decisions made?
3. Where do key decision-makers live?
4. Where are contracts negotiated and signed?

Understanding information exchange

Many Malta entrepreneurs fear the automatic exchange of information. But the DTA lays out exactly what Germany may request—and what it may not:

Mutual Agreement Procedure: When there’s a dispute

If Germany and Malta cannot agree, you can request a Mutual Agreement Procedure (MAP). This arbitration process takes place between the two tax administrations.

The MAP can make sense for:

• Double taxation despite the DTA
• Disputes over residence
• Permanent establishment disputes
• Transfer pricing disagreements

The request must be filed within 3 years after the first action that leads to double taxation.

Common audit focus areas for Malta companies

From hundreds of audit cases, I know the favorite pain points of the German tax authorities. If you know these, you can prepare strategically.

Focus area #1: False self-employment and permanent establishment

The classic: You work from Germany for your Malta company, and the tax office alleges false self-employment or claims there is a German permanent establishment.

The critical factors:

• Place of work: Where do you actually work?
• Subordination: Who decides what you do?
• Entrepreneurial risk: Do you bear real business risk?
• Assets and equipment: Who owns computers, offices, etc.?

My advice: Work no more than 50% of the time in Germany, and meticulously document every stay in Malta. This avoids 80% of permanent establishment issues.

Focus area #2: Transfer pricing and arm’s length principle

If your Malta company does business with German companies (even your own), the tax office reviews the prices. Are they at arm’s length—or artificially high/low?

The most common points of contention:

• Management fees between German and Maltese entities
• Licence fees for IP rights
• Loan contracts and interest rates
• Service agreements between the companies

Focus area #3: Substance and economic reality

This is the big boss: Does your Malta company engage in genuine business activity or is it just a tax-saving vehicle?

The substance review happens on three levels:

Focus area #4: CFC Rules (Hinzurechnungsbesteuerung)

The German CFC rules (§§ 7-14 AStG) are the tax office’s sharpest sword against Malta companies. They apply when:

1. You hold more than 50% of the Malta company AND
2. The Malta company earns passive income AND
3. Malta taxes the income at less than 25%

Examples of passive income:

• Interest and dividends
• Licence fees without substantial development
• Real estate income
• Capital gains

The three most common auditor mistakes with Malta companies

Yes, auditors make mistakes too. Know them—and use them to your advantage:

1. Maltese law is ignored: Auditors apply only German law to Maltese matters
2. DTA provisions are overlooked: Auditors forget treaty benefits
3. Substance review is superficial: Auditors only look at Germany, not Malta

When things get serious: How to organize professional defense

Sometimes, taking matters into your own hands isn’t enough. When the audit escalates or complex legal issues crop up, you need professionals. Here, I’ll explain who you need, and when.

The ideal advisor team for Malta audits

A successful Malta audit defense requires at least three experts:

When do you need a lawyer?

Not every audit requires a lawyer. But get one immediately in these situations:

• Criminal charges looming: If tax evasion is suspected
• Large back payments: Disputed amounts over €100,000
• DTA disputes: Germany and Malta cannot agree
• Procedural errors: The tax office is violating rules
• EU law involved: EU fundamental rights may be infringed

Coordinating between Germany and Malta

The hardest part of Malta audits is managing two countries. Here is my checklist for seamless coordination:

1. Develop a joint strategy: German and Maltese advisors must present a united front
2. Synchronize documents: All documents must be consistent
3. Control communication: Designate one contact person per country
4. Coordinate timelines: Align deadlines in Malta and Germany

Cost-benefit analysis: What is good defense worth?

Professional audit defense costs between €15,000 and €50,000, depending on complexity. That sounds like a lot, but it usually pays off:

Example from practice: A client was supposed to pay €180,000 in back taxes. After 18 months of proceedings and €35,000 in advisor fees, he ended up paying €25,000. Savings: €155,000 minus €35,000 = €120,000 net.

The most common advisor mistakes in Malta audits

Unfortunately, not all advisors are created equal. Watch out for these red flags:

• Only German perspective: Advisor ignores Maltese law
• No Malta experience: Advisor lacks Malta expertise
• Sweeping statements: Malta companies are always problematic
• No strategy: Advisor only reacts, doesn’t plan ahead
• Poor communication: You don’t understand what’s happening

After the audit: Handling back taxes and appeals

The audit is over, the audit report is on your desk. Now comes the second half: How do you deal with the outcome?

How to read the audit report

The audit report is often 50-100 pages long and full of legalese. But only a few points really matter:

• Total additional taxes: How much are you supposed to pay?
• Legal justification: Why is this payment demanded?
• Findings of fact: What did the auditor determine?
• Assessment: How does the auditor evaluate the facts?

The 30-day deadline: Your response to the audit report

After the audit report, you have 30 days to submit a statement. Make full use of this time, as the tax office is often open to arguments at this stage.

Here is my structure for an effective response:

1. Correct the facts: What did the auditor misunderstand?
2. Legal objections: Which laws were misapplied?
3. New arguments: What has changed since the audit?
4. Compromise proposal: What does a practical solution look like?

How to use the appeal process strategically

If the tax office sticks to its position, you will get a tax assessment. You then have one month to file an appeal. For Malta companies, this is often worthwhile because:

• Appeal caseworkers are often better qualified
• You have more time to develop detailed legal arguments
• New legal precedents may be recognized
• An out-of-court settlement is possible

Different appeal strategies

Depending on your situation, different appeal strategies make sense:

Fiscal court litigation: The last resort

If your appeal is unsuccessful, you can file a lawsuit in the fiscal court. For Malta companies, this can make sense because:

• Judges are often more internationally minded
• DTA issues are handled more competently
• EU law is better considered
• Precedent can be established

However, be warned: Fiscal court cases last 2-4 years and cost €20,000-100,000. It’s usually only worthwhile for disputed amounts over €250,000.

Deferral of enforcement: Buy yourself time

Even if you lodge an appeal, you usually have to pay first—unless you successfully apply for deferral of enforcement. This is granted if:

• There are serious doubts about the legality
• Immediate enforcement would cause undue hardship
• You provide security (usually 110% of the back taxes)

For Malta companies, this often works well, as the legal situation is complex and disputed.

Frequently Asked Questions

Can the German tax office actually audit my Malta company?

Yes, the German tax office can audit your Malta company if there is a German tax event—for example, if you are a German national acting as managing director or the company earns German-source income. The tax office uses the double taxation agreement for this and can request administrative assistance from Malta.

How long does a tax audit of a Malta company take?

A tax audit of a Malta company takes longer than average because international matters are complex. Regular external audits run 6-12 months, but for Malta companies it is often 12-24 months. If administrative assistance is required, it can even take 2-3 years.

How much does professional defense cost in a Malta tax audit?

The costs for professional defense are between €15,000 and €50,000, depending on the case’s complexity. That seems like a lot, but with typical audit dispute values of €100,000 to €500,000, a good defense almost always pays for itself. Plan for at least 200 hours of advisory work.

What documents do I have to submit to the German tax office?

You must submit all documents relevant for tax purposes in Germany. This includes shareholder agreements, annual accounts, director contracts, lease agreements for Maltese offices, and evidence of substance in Malta. Purely internal Maltese documents need only be submitted if specifically requested.

Can I move the audit to Malta?

No, you cannot transfer the audit to Malta. Germany audits German tax matters, and the audit takes place in Germany by default. But you can require that Maltese documents are given due consideration, and translations can be provided at the tax office’s expense if necessary.

What happens if I refuse to cooperate?

If you completely refuse to cooperate, the tax office can make estimates—usually to your disadvantage. For Malta companies, tax offices may estimate the entire profits as German income. It’s better to cooperate while standing your ground regarding your rights.

When should I consult a lawyer?

You should involve a lawyer if criminal proceedings are likely, massive back taxes over €100,000 are at stake, or complex DTA issues arise. Legal counsel is also advisable in case of procedural errors by the tax office. A specialized lawyer costs €200-500 per hour but can prevent much higher back taxes.

How likely are criminal proceedings for Malta companies?

Criminal proceedings are less common than feared for Malta companies. Some audits do result in proceedings, usually only in cases of blatant abuse or if documents were intentionally withheld. If your documentation is complete and you cooperate transparently, the risk is low.

Can I make corrections during the audit?

Yes, you can still submit voluntary disclosures or corrections during the audit. This demonstrates your willingness to cooperate and can mitigate penalties. For Malta companies, this often covers retroactive improvements to substance or corrections to transfer pricing arrangements.

How far back can the tax office audit?

Generally, the tax office can audit the last 4 years (statute of limitations). In cases of gross negligence, this period is extended to 5 years, and up to 10 years if tax evasion is suspected. For Malta companies, tax offices tend to make use of the maximum possible period, as they often suspect tax abuse.