Tax Authorities from the Country of Origin and Malta: How International Authorities Assess Malta Companies – Tax Authority Perspectives

Malta and Your Home Tax Authority: Why the Relationship Is Complicated

I’ll say it upfront: If you form a Malta company, or are considering it, your home tax authority will find out sooner or later. Not because Malta is still a “tax haven”—that’s history—but because international transparency is now standard everywhere.

The days when Malta was a mysterious offshore destination are over since 2018. That’s down to the Common Reporting Standard (CRS)—an automatic information exchange between 100+ countries. Malta automatically reports your company data to your home country, and vice versa.

Why Tax Authorities Review Malta Companies Critically

From your home authority’s perspective, Malta is still “the country with low taxes.” The effective 5% corporate tax for certain income triggers automatic audit interest. Many officials overlook the fact that Malta is now entirely EU-compliant and meets all OECD requirements.

The most common reservations of international authorities:

• Suspected Tax Optimization: Any Malta structure is primarily seen as potential tax avoidance
• Substance Deficiency: Fear of “shell companies” with no genuine business activity
• Automatic Audits: Malta companies land on internal “watch lists” for in-depth reviews
• Complexity Aversion: Caseworkers often don’t fully understand the Malta tax system

The Shift in Authority Perceptions

Still, a slow shift is happening. Since Malta tightened its substance requirements in 2019 and implemented new EU state aid law in 2021, informed tax authorities take Malta more seriously. No longer as a “tax haven,” but as a legitimate EU business location with strict compliance requirements.

Tip: Never assume your Malta company is “off the radar.” Plan transparently and with real substance from day one—it will save you a lot of trouble later.

CRS and Automatic Information Exchange: What Your Tax Authority Knows About Malta

Since 2018, Malta is a full-fledged CRS participant. This means: Every bank, trustee, and management company in Malta automatically reports all relevant financial data of EU citizens and residents from other CRS countries.

These Data Are Automatically Sent to Your Home Authority

The data exchange is broader than most realize. Malta sends the following information annually by September 30:

The FATCA Component: USA-Specific Reports

Parallel to CRS is the American Foreign Account Tax Compliance Act (FATCA). If you are a US person or your Malta company has US ties, additional data goes to the IRS:

• Detailed transaction statements
• Quarterly balance reports
• Contractual partners and business relationships
• All real estate transactions regardless of amount

Timing and Data Availability

This is where it matters practically: Your home authority doesn’t get Malta data instantly, but fairly promptly. The typical process:

1. Jan–Mar: Maltese banks gather previous year’s data
2. Apr–Jun: Submission to Malta Financial Intelligence Analysis Unit (FIAU)
3. Jul–Sep: FIAU consolidates and shares with partner countries
4. Oct–Dec: Data becomes available to your home authority

This means: If you set up a Malta company in 2024, your tax authority will know by the end of 2025 at the latest.

How Authorities Use CRS Data

Most tax authorities now use automatic screening systems. These scan for typical patterns:

• Disproportionate Dividends: Large payouts without matching business activity
• Round-Trip Payments: Money moves abroad and quickly returns
• Tax Arbitrage: Timing mismatches between Malta and home country taxation
• Substance Red Flags: High profits with minimal local costs

Reality Check: I know cases where German tax auditors arrived at the first meeting with printed CRS data. Transparency isn’t optional—it’s reality.

Substance Checks for Malta Companies: What International Authorities Focus On

“Substance” is a term you’ll hear in any discussion about Malta companies. But what does it really mean? International tax authorities review whether your Malta company engages in genuine business activity or is merely a tax-driven setup.

The OECD Substance Criteria in Detail

Since the OECD BEPS (Base Erosion and Profit Shifting) Measures, there are clear substance standards. These apply across the board—whether a German, Austrian, or French inspector is reviewing:

Malta-Specific Substance Tightening

Malta imposed its own substance regulations in 2019, going beyond EU minimum standards. This cuts both ways: On the one hand, compliance is more complex; on the other, international authorities take Malta companies more seriously.

Economic Substance Test (EST) in Malta:

• Minimum Staff: Depending on activity, 1–3 qualified full-time employees
• CIGA Activities: “Core Income Generating Activities” must be demonstrably carried out in Malta
• Expenditure Ratio: Local expenses must be at least 10% of relevant income
• Board Meetings: At least 50% of board meetings held physically in Malta

Practical Substance Evaluation by Authorities

If a German tax auditor examines your Malta structure, they will proceed systematically. I’ve accompanied such audits and know the standard process:

1. Document Analysis (Phase 1):
   • Articles of association and amendments
   • Company register extracts for past 3 years
   • Audit reports and management letters
   • Lease agreements and insurance policies
2. Personnel Review (Phase 2):
   • Employment contracts and payslips
   • CVs and qualifications of managers
   • Organization charts and decision-making authorities
   • Attendance records and travel reimbursement
3. Business Activity Analysis (Phase 3):
   • Client and supplier contracts
   • Email correspondence on key decisions
   • Invoices and payment processing
   • Marketing activities and market presence

Red Flags Auditors Spot Immediately

Certain setups instantly trigger alarm bells with experienced tax auditors. Avoid these at all costs:

• Nominee Director: Local director without genuine authority
• Copy-Paste Contracts: Identical contract templates across different Malta companies
• Excess Margins: 90%+ profit margins with no visible value added
• Circular Transactions: Business mainly within the same corporate group
• Timing Optimization: Transactions timed exclusively for tax benefit

Positive Substance Indicators

Conversely, these factors impress auditors and boost your credibility:

• Local Client Relationships: Genuine Maltese or Mediterranean business partners
• Several Years Continuity: Stable team and business model
• Proportional Infrastructure: Office and staff fit the business size
• Independent Validation: External verification of business activity
• Regulatory Compliance: Full adherence to Maltese sector regulation

My Experience: Substance isn’t a binary—it has shades. A moderate degree of substance with a clear business rationale convinces auditors far more than a hyper-engineered structure that smells of optimization.

Germany and Malta Companies: BZSt Perspective and Practice

The Bundeszentralamt für Steuern (BZSt) has massively expanded its Malta expertise in recent years. As the coordinating authority for international tax matters, BZSt sees Malta structures daily and has developed clear evaluation criteria.

BZSt Audit Routine for Malta Companies

If your Malta company first appears on German authorities’ radar, a standardized process starts. The BZSt uses a risk assessment system that categorizes Malta companies based on various factors:

The German AO and Malta Companies

German auditors mainly rely on the Tax Code (AO), particularly paragraphs 42 and 43. These anti-abuse rules are strict, but not automatically Malta-specific:

§ 42 AO (Abuse of Arrangements): Applies only if the Malta structure is predominantly tax-motivated and the arrangement is inappropriate.

§ 43 AO (Hidden Profit Distribution): Relevant for intra-group services between a German parent and Malta subsidiary.

Typical German Audit Focus Points

Based on my consulting experience, these are the default questions of German auditors:

1. Management and Control:
   • “Where are key business decisions made?”
   • “Who has actual authority over Malta management?”
   • “Are there regular reporting structures back to Germany?”
2. Transfer Pricing:
   • “Are transfer prices at arm’s length?”
   • “Is there local TP documentation in Malta?”
   • “Are comparable market prices achieved with third parties?”
3. Functional and Risk Analysis:
   • “Which functions are actually exercised in Malta?”
   • “Who bears key business risks?”
   • “Are there documented risk management processes?”

Germany-Malta DTA: Opportunities and Pitfalls

The Double Taxation Agreement (DTA) between Germany and Malta from 2001 generally protects against double taxation but also includes strict anti-abuse clauses:

• Principal Purpose Test (PPT): DTA benefits are denied if the main purpose was tax benefit
• Beneficial Owner Rule: Dividend, interest, and royalty relief only with genuine economic ownership
• Subject-to-Tax Clause: Certain benefits only if Malta actually taxed the income

BZSt Cooperation Procedures with Malta

The BZSt works closely with the Maltese Inland Revenue Department. This cooperation is smooth now—sometimes too smooth in the taxpayer’s view:

• Mutual Agreement Procedures (MAP): Joint clarification within 6–12 months
• Spontaneous Information Exchange: Unusual transactions are exchanged without prior arrangement
• Joint Audits: German and Maltese auditors work on site together
• Advanced Pricing Agreements (APA): Advance arrangements on transfer pricing

Successful Reasoning Approaches in German Audits

If you face a German audit involving Malta, you’ll be well served with these arguments:

• EU Freedom of Establishment: Cite Art. 49 TFEU—Malta is a legitimate EU base
• Business Rationale: Show non-tax reasons for choosing Malta (market access, regulation, etc.)
• Principle of Proportionality: Argue that alternative setups would be disproportionately complex
• OECD Compliance: Demonstrate adherence to all BEPS standards

Practical Tip: German auditors value preparation and willingness to cooperate. Transparency and readiness with documents from the outset often prevents further investigation.

Austria, Switzerland, and Other EU Countries: Country-Specific Differences

Every country views “Malta” through its own lens. What counts as substantial in Germany may be suspect in Austria. And Switzerland does things its own way. Here’s what you need to know.

Austria: Strictest EU Review of Malta Companies

The Austrian Ministry of Finance (BMF) is traditionally skeptical of Malta setups. That’s due to negative experiences with early “EU passport” constructs in the 2000s.

Austrian Particularities:

Austrian auditors systematically ask:

• “Essential Test”: Does the Malta company match its legal appearance?
• “Arm’s Length Test”: Would an independent third party make the same choices?
• “Abuse Indicators”: Are there signs of tax abuse?

Switzerland: Pragmatic Assessment With Clear Boundaries

The Federal Tax Administration (ESTV) takes a more pragmatic approach. As long as you’re transparent and comply with Swiss tax law, Malta is accepted as a legitimate EU base.

Swiss Focus Topics:

• Withholding Tax Relief: Malta companies must show genuine business for DTA benefits
• Reporting Obligation: Swiss individuals must declare Malta holdings from 10%
• CRS Implementation: Full automatic information exchange since 2018
• Anti-Treaty-Shopping: Relief subject to strict screening of conduit structures

France: Bureaucracy Meets Malta Skepticism

The French Direction Générale des Finances Publiques (DGFiP) combines bureaucratic thoroughness with a basic distrust of “optimization structures.”

French Specialties:

• Documentation Requirements: Extensive pre-documentation for all Malta setups
• Exit Tax: Strict rules on shifting French activity to Malta
• CFC Taxation: Aggressive taxation of controlled Malta subsidiaries
• Treaty Override: National anti-avoidance rules override DTA provisions

Netherlands: Business-Oriented Assessment

The Dutch Belastingdienst is the most pragmatic. As a traditional international “gateway” country, Dutch auditors understand complex setup logic.

Dutch Criteria:

1. Business Substance Test: Focus on real business, not just formal rules
2. Economic Nexus: Clear link between profits and real activity
3. Anti-Hybrid Rules: Very strict checks of double-tax mismatches
4. Ruling Practice: Advance binding assurances possible for Malta structures

Italy: Formal Focus With Substance Realism

The Agenzia delle Entrate requires thorough documentation, but is cooperative if there is genuine substance.

• Controlled Foreign Company (CFC) Rules: Detailed substance test for Malta subsidiaries
• Transfer Pricing: Extensive TP documentation even for small transactions
• EU Directive Implementation: Strict adherence to all EU anti-avoidance rules

Country Comparison: Success Strategies

From my experience with various tax systems, here are the likeliest strategies for each country:

Golden Rule: Know the mentality of your home tax authority. The same Malta structure might pass in Germany but fail in Austria—not because of the facts, but because of the interpretation.

Anti-Avoidance Rules: How Authorities Assess Malta Structures

International anti-avoidance rules are the sharpest instrument tax authorities use against unwanted Malta structures. These aren’t Malta-specific but often impact Malta companies particularly hard.

ATAD I and II: EU-Wide Anti-Avoidance Standards

The EU Anti-Tax Avoidance Directive (ATAD) has reshaped the game since 2019. All EU member states must implement minimum standards against tax avoidance.

ATAD Core Rules and Malta Impact:

How GAAR is Practically Used Against Malta Companies

The General Anti-Avoidance Rule is the go-to tool. It applies whenever:

1. Artificial Arrangement: Structure is mainly tax-motivated
2. Tax Benefit: Significant saving over direct structure
3. Purpose Breach: Arrangement undermines intended tax rules

Typical GAAR Malta Company Cases:

• Back-to-back licensing: IP transferred to Malta and licensed to group companies
• Dividend stripping: Short-term Malta setup to exploit dividend relief
• Profit shifting: Artificial profit moves without real function move
• Treaty shopping: Malta entity set up only to use DTA benefits

CFC Rules: Passive Malta Subsidiaries Taxed at Home

The Controlled Foreign Company (CFC) Rules mean passive Malta company income is taxed at home as if you earned it directly.

CFC Triggers for Malta Companies:

• Control threshold: You directly/indirectly own >50% of the Malta company
• Tax rate test: Malta tax rate is <50% of home rate
• Passive income: >30% of income is passive (interest, dividends, royalties)

CFC Escape Routes:

Principal Purpose Test (PPT): The Treaty Killer

The Principal Purpose Test from the OECD MLI is the new treaty shopping defense system, asking: Was tax benefit the main purpose of your Malta structure?

PPT Red Flags for Malta Structures:

• Timing: Malta company established right before profit realization
• Conduit Character: Shell/holding without own value creation
• Tax Engineering: Complex structure only for tax optimization
• Short-Term: Structure wound up after saving realized

BEPS Action 5: Harmful Tax Practices

Malta is under constant OECD review for its IP-Box and refund systems. The assessment can change, and that’s important for your planning.

BEPS Action 5 Monitoring:

• Nexus approach: IP benefits only if substantial R&D in Malta
• Transparency: All IP-Box users are automatically reported
• Ring-fencing ban: Tax relief not just for foreigners
• Grandfathering: Old setups must be adapted by 2025

Practical Anti-Avoidance Defense

If you’re building or managing a Malta structure, proactively minimize anti-avoidance risk:

1. Substance First: Build real business before using tax benefits
2. Documentation: Record all non-tax reasons for Malta choice
3. Timing: Avoid suspicious timing with tax moves
4. Proportionality: Make sure Malta costs fit the savings
5. Expert Advice: Regularly review your setup for anti-avoidance risk

Reality Check: Anti-avoidance rules are tough, but not arbitrary. If you have real business reasons for Malta and proportional substance, you’re generally safe. The trouble starts with purely tax-driven setups.

Practical Tips: Preparing for Authority Communication

Sooner or later, you’ll discuss your Malta structure with your home tax authority. Whether on a tax return, during a routine audit, or after an information request—preparation will shape the outcome.

The Perfect Documentation Strategy

Successful Malta setups have one thing in common: complete, clear documentation from day one. Here’s my proven checklist:

Formation Documentation (Year 1):

• Business Case: Written reasons for Malta, with non-tax factors
• Market Analysis: Why Malta makes economic sense for your business
• Substance Planning: How staff, office, and activity will be built up
• Financial Planning: Realistic budgets for local spend and profit
• Compliance Concept: How all tax and regulatory duties will be met

Ongoing Documentation (Annually):

Communication Tactics With Auditors

The way you talk to tax auditors strongly influences how they judge your Malta setup. Here are the most effective approaches:

Dos:

• Proactive Transparency: Offer relevant info before they ask
• Structured Presentation: Explain your Malta setup logically and chronologically
• Business Focus: Always lead with business reasons for Malta
• Willingness to Cooperate: Show a fair, open attitude
• Show Competence: Prove you know and follow all rules

Donts:

• Defensive Attitude: Don’t instantly go into justification mode
• Tax-Based Arguments: Never say “It’s legal” or “Everyone does it”
• Hiding Complexity: Never try to conceal complicated structures
• Creating Time Pressure: Auditors need time—don’t rush them
• Patronizing: Never tell the auditor what he can or cannot do

Preparing for Typical Auditor Questions

Based on hundreds of Malta audits, I know the standard questions. Prepare for these:

1. “Why Malta?”
   • Good answer: EU membership, English-speaking, regulatory fit for our sector, access to Mediterranean markets
   • Poor answer: Low taxes, consultant’s recommendation, “it’s cheaper”
2. “Who makes business decisions?”
   • Good answer: Malta management with documented powers; board minutes prove local decisions
   • Poor answer: “All handled from Germany; Malta director does what we say”
3. “Isn’t this just a tax move?”
   • Good answer: Taxes were ONE factor among many, main reason was [business]
   • Poor answer: “Sure, that’s the point—tax saving is legal”

The Ideal Audit Process

A well-prepared audit meeting follows standard phases. Knowing this lets you use it to your advantage:

Phase 1: Understanding the Structure (30 Minutes)

• Present a clear organization chart
• Explain business model and value chain
• Show a timeline of the structure’s development
• Name all advisors and service providers involved

Phase 2: Substance Review (45 Minutes)

• Virtual office tour (photos/videos)
• Present Malta staff with CVs and roles
• Show local clients and contracts
• Explain decision processes with specific examples

Phase 3: Transfer Pricing (60 Minutes)

• Present TP documentation, benchmarking
• Explain function and risk allocation
• Show third-party comparable transactions
• Discuss alternative pricing methods

Phase 4: Compliance & Outlook (15 Minutes)

• Confirm full tax compliance in both countries
• Show proactive adaptation to new regulations
• Offer further info or follow-up
• Set schedule for open points

Emergency Strategies for Critical Situations

Sometimes, things go wrong despite good prep. For these cases, have quick reactions ready:

Golden Rule: Never go into a Malta-related tax audit unprepared. The first 30 minutes often set the course for the entire procedure. Competence and transparency open doors—secrecy closes them.

Common Myths and Realities: What Malta Companies Really Mean

After years advising on Malta, I know the most persistent myths about Malta companies and tax authority views. It’s time to clear these up and lay out the facts.

Myth 1: “Malta is a Tax Haven—Authorities Are Always Suspicious”

Reality: Malta has been an EU member since 2004 and meets all OECD standards. The “myth” lingers from the 1990s and is long outdated.

What Authorities Actually Think:

• Informed auditors: Recognize Malta as a regulated EU business location
• Uninformed auditors: Still have the old “offshore” image in mind
• Experienced auditors: Realize Malta firms often have tougher compliance than local ones

Myth 2: “5% Tax in Malta Is Automatically Suspicious”

Reality: 5% applies only to certain income streams and after passing strict substance rules. Most Malta companies pay much more.

Actual Malta Tax Rates in Practice:

Myth 3: “CRS Makes Malta Companies Transparent—So There’s No Point”

Reality: Transparency isn’t a disadvantage. Many Malta setups are both tax-efficient and commercially sound with full transparency.

Advantages Despite CRS Transparency:

• EU Directives Access: Parent-subsidiary, mergers, and interests & royalties directives
• Regulatory Gateway: EU passport for financial services
• DTA Network: Over 70 double tax treaties
• Business Environment: English-speaking, common law, stable legislation
• Geographic Positioning: Bridge between Europe, Africa, Middle East

Myth 4: “German/Austrian Auditors Always Reject Malta Structures”

Reality: Modern authorities judge Malta firms by the same substance and business criteria as any international arrangement.

Myth 5: “Malta Companies Are Only for Large Corporations”

Reality: Malta setups work from annual revenue of around €500,000—if the business model fits.

Successful Malta Structures by Company Size:

Myth 6: “Anti-Avoidance Rules Make Malta Setups Impossible”

Reality: They only hit artificial, substance-less arrangements. Genuine activity with adequate substance is still fully legal and recognized.

ATAD-Compliant Malta Structures:

• EU trading companies with local staff and warehousing
• Software development hubs with R&D teams in Malta
• Financial service providers with a MiFID license and local infrastructure
• IP holding companies with Nexus-compliant R&D activity

Myth 7: “Malta Substance Is Expensive and Complicated”

Reality: Modern Malta substance is predictable, scalable, and often cheaper than comparable structures in Germany or Austria.

Typical Malta Substance Costs (Annual):

• Basic substance: €45,000–65,000 (1 manager, office, compliance)
• Enhanced substance: €85,000–120,000 (2–3 staff, bigger infrastructure)
• High substance: €180,000–250,000 (full onsite team)

The New Reality: Malta as a Normal EU Business Base

The key realization: Malta in 2025 is a regular EU business location with unique strengths—no more, no less. International tax authorities now assess Malta setups by the same criteria as Dutch holdings or Irish IP firms.

Success Factors for Modern Malta Structures:

1. Business-first: Real commercial reasons for choosing Malta
2. Proper Substance: Staff and infrastructure that fit the business
3. Proactive Compliance: Adhere to local and international rules from the start
4. Transparent Communication: Open dialogue with all relevant tax authorities
5. Constant Adjustment: Regularly adapt to new regulations

Bottom Line: Most “Malta problems” stem from outdated mindsets—of both advisors and clients. Those who treat Malta as a “tax haven” in 2025 will fail. Used as a specialized EU business hub, it offers significant advantages.

Frequently Asked Questions