Table of Contents What does an international tax audit mean for Malta companies? When is your Malta company audited? The most common triggers International tax audit Malta: The typical process Preparing for a tax audit in Malta: Your checklist for the worst-case scenario The critical audit fields: Where auditors take a closer look Common mistakes in Malta tax audits – and how to avoid them After the audit: How to handle the result Frequently asked questions Youve finally got your Malta company up and running, enjoying the 5% rule, and think the worst is behind you? Let me give you a small reality check: sooner or later, its not only the Maltese tax authority that may knock on your door, but potentially your home country as well. And when they do, theyll want answers—detailed, substantiated, watertight answers. With three years of Malta experience and countless conversations with entrepreneurs under my belt, I can assure you: an international tax audit is like a visit to the dentist—unpleasant, but with the right preparation, considerably less painful. Today, Ill show you how to prepare optimally, what traps to watch out for, and why good documentation is your best friend. What does an international tax audit mean for Malta companies? An international tax audit for Malta companies simply means: not only Malta is watching you closely, but also your country of origin. The Malta Enterprise Corporation (MEC) and the Inland Revenue Department (IRD) scrutinize your Maltese side, while the German tax office, the Austrian tax authorities, or the Swiss tax authorities examine all cross-border aspects. Why international audits are on the rise Since the start of Automatic Information Exchange (AIA) between EU countries, tax authorities systematically exchange data. What previously slipped under the radar now lands automatically on German, Austrian, or Swiss desks. Cross-border tax audits have increased significantly in recent years. The reason is simple: Malta structures are in the spotlight. The combination of EU access, English law, and attractive tax regulations makes Malta appealing for entrepreneurs—and suspicious for tax authorities. Double-entry bookkeeping, double audit In an international tax audit, two countries audit in parallel: Malta: Local substance, proper bookkeeping, compliance with Malta rules Country of origin: Management, economic ties, transfer pricing, CFC rules (Controlled Foreign Company) Coordination: Both authorities can exchange information and act jointly What does this mean for you? You must meet both Maltese and your home country’s requirements. A Maltese tax advisor alone won’t cut it—you need cross-border expertise. When is your Malta company audited? The most common triggers Automatic system triggers Certain situations almost automatically trigger an audit: Trigger Likelihood Typical Timing Revenue 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 audits more often than you might think: Business partner audits: If your German client is audited and auditors find payments to your Malta company, you’ll automatically end up on the list. Whistleblowers: Ex-employees, dissatisfied business partners, or even competitors may provide leads. Random findings: During bank data matching or other investigations, authorities may stumble upon Malta connections. The “substance trap” Malta companies without recognizable substance are particularly in focus. If your company: – Has no employees in Malta – Does not use any office space – Functions only as a mailbox company – Carries out its main business abroad …then an audit is virtually unavoidable. The European Commission has adopted stricter anti-abuse directives, particularly targeting “shell companies.” Understanding timing International audits follow a typical pattern: – Year 1–2: Start-up phase, usually quiet – Year 3–4: First critical phase, automatic data matching begins – Year 5–7: Main risk period, established structures are scrutinized – From year 8: Risk decreases, unless there are conspicuous changes What does this mean for you? Plan from the very beginning as if you’ll be audited from year three. That way, you’ll be on the safe side. International tax audit Malta: The typical process Phase 1: Notification (4–8 weeks lead time) The audit usually starts with an innocuous letter. Maltas IRD writes to you in English; your home tax office writes in German. Both say they want to “check some documents”—a euphemism for: “We’re going to take your business model apart.” Recognize typical wordings: – Routine compliance check = standard audit – Transfer pricing review = focus on transfer pricing – Substance requirements verification = substance audit – CFC regulations assessment = review of CFC rules Phase 2: Document request (2–4 weeks) Now it gets serious. Both authorities simultaneously request documents: Malta side: Local bookkeeping, VAT returns, employment contracts, lease agreements Home country: Proof of management, email correspondence, travel receipts, decision documentation Overlaps: Contracts, invoices, bank statements—things get tricky here Pro tip from my own experience: Prepare two separate sets of documents. Malta wants to see you’re active locally. Your home country wants to see if real management is in Malta. Phase 3: On-site audit (1–3 days Malta, 2–5 days home country) This is where the wheat is separated from the chaff. Maltese auditors look at your office, speak with employees, and check local substance. At the same time or shortly after, home country auditors visit your German/Austrian/Swiss locations. Key questions in Malta: – Where do you make business decisions? – Who has access to the bank account? – How often are you physically in Malta? – Who creates your offers and invoices? Key questions in the home country: – Where do you really run the company from? – Where are important business documents stored? – Where do client meetings take place? – Who makes strategic decisions? Phase 4: Evaluation and follow-up questions (4–12 weeks) Both authorities evaluate in parallel and exchange findings. You’ll receive follow-up questions about inconsistencies or unclear points. This phase determines the success or failure of the audit. Phase 5: Audit report and decision (8–16 weeks) In the end, there are two reports—one from Malta, one from your home country. In the best case, both confirm your structure. In the worst case, both require you to pay additional tax on the same income (double taxation), which you then have to settle through a mutual agreement procedure. Preparing for a tax audit in Malta: Your checklist for the worst-case scenario Documenting Malta substance Without real substance in Malta, any audit is doomed to fail. Prepare this evidence: Substance proof Minimum standard Better Optimal Office space Rented office Own equipment Multi-year lease + photos Staff 1 part-time employee 2+ qualified employees Local management team Business activity Bookkeeping on site Operational activities Full value creation Decisions Board meetings in Malta Documented resolutions Minutes + attendance lists Applying the 90-day rule correctly Many Malta entrepreneurs believe 90 days of presence per year is enough. That’s a dangerous misconception. The 90-day rule only applies to Maltese tax residency, not 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 from Malta Documenting transfer pricing If your Malta company works with related entities, transfer pricing (intra-group pricing) is under special scrutiny. Prepare: Comparative analyses: Prices for similar services on the open market Functional analysis: What function does each company serve? Risk allocation: Who bears what commercial risks? Documentation: Written agreements on transfer pricing Email management for audits Emails are the most common stumbling block in international audits. Auditors analyze exactly where strategic decisions are made. Do’s: – Make and document major business decisions in Malta – Use Malta email addresses for official correspondence – Keep written records of decision-making processes – Regularly document coordination between Malta and home country Donts: – Make strategic decisions via email from Germany/Austria/Switzerland – Treat your Malta company like a mailbox company – Negotiate important contracts only from your home location – Use bank authorizations exclusively in your home country Preparing legal protection Timely secure qualified legal advice: Malta lawyer: Specialist in Maltese tax and company law Home country tax advisor: Expert in international tax structures Coordination: Both should know and coordinate with each other Contingency plan: Clearly defined contacts for audits A Malta tax advisor will cost you about €150–300 per hour, an international specialist €250–500. That may sound like a lot, but a poorly prepared audit can cost you five- or six-figure sums in back taxes. The critical audit fields: Where auditors take a closer look Management and control The most important audit field: Where is your company actually managed? Auditors look at: Decision-making: – Who makes strategic decisions? – Where are board meetings held? – Who has signing authority? – Where are contracts negotiated? Operational management: – Where does management work on a daily basis? – Who oversees business operations? – Where is staff managed from? – Where are important business documents stored? An experienced auditor recognizes fake structures quickly. If your “Maltese CEO” never sets foot in Malta and all important decisions are made via WhatsApp from Munich, your audit is lost. Substance audit in detail Maltese auditors are becoming increasingly critical about substance: Audit aspect Weak substance Strong substance Office space Shared office, sporadic use Own office, daily presence Staff Externally contracted services Own qualified employees Bank accounts Only one business account Several local bank accounts Business activity Pure holding function Active operational activities Local clients No Malta clients Also local business relationships CFC rules and controlled foreign company taxation CFC rules (Controlled Foreign Company Rules) are the nightmare of 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 earns mainly passive income Taxation in Malta is much lower than at home The Malta company is not substantially active Typical CFC traps: – Pure license management without genuine development work – Holding structures with no operational activity – Interest income from group loans – Passive investment income Transfer pricing under the microscope With related companies, authorities closely scrutinize whether transfer prices are at arms length: Common problem areas: – Management fees between Germany and Malta – License payments for intellectual property – Interest rates on loans between group companies – Profit margins on goods/service sales Arm’s length principle: All prices must be as if unrelated parties were negotiating. Prices too low towards Malta or too high will get noticed. VAT and sales tax issues VAT becomes particularly complex. Malta companies often have to consider both Maltese VAT and German/Austrian/Swiss sales tax: Place of supply: Where is the service provided for tax purposes? B2B vs. B2C: Different rules depending on client status OSS procedure: One-Stop-Shop for EU-wide B2C sales Reverse charge: The recipient is liable for the tax A Maltese VAT expert can be worth their weight in gold here. Sales tax back-payments are often higher than income tax claims. Common mistakes in Malta tax audits – and how to avoid them Mistake #1: Underestimating substance requirements Typical mistake: “A virtual office and external accountant should be enough.” Reality: Substance requirements have increased. The EU Anti-Tax Avoidance Directive (ATAD) requires “sufficient economic substance” for tax recognition. How to avoid the mistake: Invest in real office space—not just a mailbox Hire qualified staff in Malta Shift real business activities to Malta Document all measures that create substance Mistake #2: Poor email hygiene Typical mistake: Making strategic decisions by email from Germany but claiming that management is in Malta. Why this fails: Auditors systematically analyze email records. If all important decisions come from German IP addresses, your Malta structure isn’t credible. Correct email strategy: Make major business decisions only from Malta Use Malta email addresses for official correspondence Plan regular “Malta weeks” for strategic planning Document and justify decision-making processes Mistake #3: Transfer pricing chaos Typical mistake: Setting transfer prices on gut feeling, without market comparison or documentation. The problem: Inappropriate transfer pricing leads to profit adjustments and back taxes in both countries. Professional transfer pricing documentation: Service type Market usual range Documentation required Management fees 3–8% of revenue Functional analysis + benchmarking License fees 5–15% depending on sector IP valuation + comparative studies Loan interest 1–6% above base rate Rating + interest rate comparison Cost-plus surcharge 5–20% on costs Function and risk analysis Mistake #4: Uncoordinated advice Typical mistake: Maltese tax advisor and German tax advisor don’t know each other and give contradictory statements during the audit. Why this is fatal: Contradictory statements from your advisors look like an admission of guilt to auditors. Coordinated advice strategy: Bring both advisors together before the audit Develop a joint strategy Prepare harmonized arguments Regular updates during the audit Mistake #5: Poor documentation of Malta presence Typical mistake: Im regularly in Malta, but cant prove it. The problem: Without evidence, no auditor will believe your Malta activities. Complete presence documentation: Collect all flight tickets and boarding passes Keep hotel invoices or rental receipts Document business meetings in Malta Take photos of Malta meetings Collect restaurant receipts from Malta Keep mobile phone location data Mistake #6: Seeking legal advice too late Typical mistake: Only looking for a lawyer when notified of an audit. Why this is too late: During the audit, you can only react—not proactively structure. Proactive legal advice: – Annual structure reviews with tax advisors – Regular updates on law changes – Preventive optimization before issues arise – Emergency plans for different audit scenarios What does this mean for you? Plan your Malta structure from the outset as if you’ll be audited next year. Then you’ll sleep more soundly and be well prepared. After the audit: How to handle the result Using positive audit results correctly If both authorities recognize your structure—congratulations! But don’t rest on your laurels: Documenting success: Safely file audit reports Use successful arguments for future audits Maintain or improve structure standards Regularly update your documentation A positive audit report is like a seal of quality—it protects you significantly in future audits. Dealing with additional tax claims If you’re required to pay additional taxes, remain calm and handle things systematically: Immediate steps for extra demands Analyze the audit report: Which points are criticized? Review possible appeals: Are the accusations justified? Intensify tax advice: Now you need professionals Secure liquidity: Additional payments can be substantial Avoiding double taxation Worst-case scenario: Both countries demand tax on the same income. Here, Double Tax Treaty procedures (DTT) apply: Procedure Duration Chance of success Cost Mutual agreement 12–36 months High if the law is clear €10,000–50,000 Arbitration 6–18 months Very high €25,000–100,000 Appeal/litigation domestically 6–24 months Medium €5,000–25,000 Optimizing your structure after an audit Use audit results for the future: If the audit is successful: – Replicate the success model – Set documentation as the standard – Further build up substance – Refine compliance processes If the audit is partially successful: – Improve criticized points – Adjust structure in problem areas – Intensify advice where needed – Take preventive action for the future If the audit fails: – Rethink structure fundamentally – Consider alternative models – Develop exit strategies – Limit damage Using legal remedies strategically Not every appeal makes sense. Check carefully: An appeal is worthwhile if: – There are legal errors in the audit report – New evidence strengthens your case – There have been procedural errors – The additional payment is disproportionately high An appeal is risky if: – The law is clear against you – Further audit areas could be uncovered – Costs exceed the benefit – Delays cause more harm than good An experienced tax attorney can be indispensable here. Long-term compliance strategy After every audit, you should rethink your compliance strategy: Tighten monitoring: Regular internal “mini-audits” Intensify advice: Quarterly updates with tax advisors Professionalize documentation: Systematic recording of all relevant data Train your team: Raise staff awareness of compliance What does this mean for you? An audit isnt the end of the world, but a chance for improvement. With the right strategy, youll emerge from the audit even stronger. Frequently asked questions about international tax audits in Malta How long does an international tax audit take for Malta companies? An international tax audit typically lasts 6–12 months from the first notification letter to the final notice. Complex cases or appeals can drag on for 18–24 months. The Maltese side is usually faster (3–6 months), while German or Austrian audits take longer. Can I still make structural changes during an ongoing audit? Basically yes, but be careful: structural changes during ongoing audits often look like an admission of guilt and can lead to further audit areas. Smaller optimizations (better documentation, stronger Malta presence) are usually unproblematic; you should always coordinate major changes with your tax advisor. What does professional support during an international tax audit cost? Expect to pay €15,000–50,000 for complete audit support. Malta tax advisors charge €150–300/hour, international specialists €250–500/hour. The investment is almost always worth it—unaudited audits frequently result in five- or six-figure back taxes. Do I have to be personally present in Malta as managing director during the audit? Personal presence is not mandatory but is highly recommended. Auditors judge your willingness to cooperate and your commitment to the Malta structure. Absence without good reason can be interpreted negatively. If you cannot attend, ensure you have competent representation on site. Which documents are most commonly requested in Malta audits? Standard requests are: complete bookkeeping for the last 3–5 years, all shareholder resolutions and board meeting minutes, employment contracts for Malta employees, office lease/purchase agreements, bank authorizations and signing authorities, email correspondence for key business decisions, travel receipts and attendance records, contracts with related parties, and transfer pricing documentation. Can German and Maltese auditors audit together on site? Yes, joint audits are increasingly common. The audit teams from both countries communicate and may audit simultaneously or one after the other. These “joint audits” are especially thorough but also have the advantage that contradictions between the authorities can be resolved more quickly. What happens if I didnt comply with the 90-day rule? The 90-day rule only affects your personal Maltese tax residence, not management of your company. However, regular Malta presence is important for the credibility of your structure. Less than 30 days a year in Malta will be critically questioned. More important than total presence is when you are in Malta—strategic decisions should be made there. Can I challenge negative audit results? Yes, you have various legal remedies: appeal against the tax assessment (usually a four-week deadline), action before the tax court (after unsuccessful appeal), mutual agreement procedure for double taxation (no deadline), EU arbitration for cross-border disputes. Chances of success depend heavily on the individual case—qualified legal advice is essential. Should I proactively request a tax audit? It’s possible, but generally not advisable. Voluntary audits (“Voluntary Disclosure”) can make sense if youve discovered errors yourself and want to correct them. Otherwise: dont wake sleeping dogs. Its better to have your tax advisor regularly conduct internal compliance checks. How do I recognize reputable advice for Malta structures? You can recognize reputable advisors by: many years experience with Malta structures (at least 5 years), cooperation between Malta and home country advisors, realistic assessments instead of miracle promises, transparent fee structures, references from successfully handled audits. Beware of advisors who promise “100% safe” structures or downplay substance requirements.
