Table of Contents What does substance actually mean? The three pillars of Malta substance Offices in Malta: More than just an address Building your team: From the first job ad to a full team Operational activities: What tax authorities really want to see Common pitfalls and how to avoid them Practical checklist for building substance Frequently asked questions Building substance in Malta – it might sound dry and all about tax law, but its your ticket to a world where tax authorities examine things closely. I still remember my very first consulting appointment here: The lawyer looked at me and said, A letterbox company isnt enough anymore. You need real substance. What does that mean? Offices, staff and operational activities that prove your company truly operates in Malta – and doesnt just exist on paper. After two years of Malta reality and countless conversations with tax advisors, MFSA representatives and entrepreneurs, I know: Substance isnt a nice-to-have, its a survival strategy. The days when a rented business address in Sliema was enough are gone. International tax authorities are stricter than ever – and Malta plays by their rules. What does substance actually mean? Substanz – or substance, as its called in the English professional jargon – is the proof that your company carries out genuine economic activity in Malta. Its not just an empty shell saving taxes. The Malta Financial Services Authority (MFSA) defines it like this: Genuine economic activity with adequate resources and infrastructure. The official MFSA definition According to the MFSA guidelines, substance includes four core elements: Physical presence: Office space suitable for the business purpose Qualified staff: Employees with the required skillset Operational decisions: Key business decisions are taken in Malta Appropriate expenses: Operating costs in line with the business activity Sounds dry? Yes, it is. But the basic logic is simple: If you use Malta as a tax haven, you have to create real economic value, too. Why substance matters more than ever The EU has tightened up its Anti-Tax Avoidance Directive (ATAD). Germany, Austria and other countries are taking a closer look. I know entrepreneurs who had to completely overhaul their Malta setup because their home tax authority suddenly demanded substance proof. The German tax office put our Malta company under the microscope for three months. In the end, only one thing mattered: Can we prove that real work is being done in Malta? – Dr. Michael K., consultancy What does that mean for you? Malta remains attractive, but only with clean substance. Half-hearted solutions get expensive. The three pillars of Malta substance Every conversation with Malta experts comes back to the same pattern: Successful substance rests on three pillars. If one is missing, the whole thing wobbles. Pillar 1: Physical presence Having an office in Malta is a must – but not every office will do. The MFSA distinguishes between serviced offices and dedicated premises. Serviced offices – meaning shared office spaces – are now accepted only in exceptional cases. The standard is having your own premises. Minimum requirements for physical presence: Your own premises (not just a desk) Business address suitable for the activity level Permanent availability (not just a few hours per week) Appropriate size for the number of staff Pillar 2: Qualified staff Staff is the crux. You dont need twenty people, but employees must fit the business activity. A fintech company with just a secretary? Not credible. A holding structure with a qualified compliance officer? That works. Pillar 3: Operational decisions in Malta This is the toughest pillar: Important business decisions must demonstrably be made in Malta. Board meetings, strategic planning, investment decisions – all must be documented and localised. What does it mean for you? You cant just use Malta as a tax address – you have to live it as a real business location. Offices in Malta: More than just an address The office search in Malta is an adventure in itself. Ive seen entrepreneurs spend three months walking through Valletta, Sliema, and St. Julians every day. The problem: What is advertised as a business centre often turns out to be an overpriced desk in an open-plan office. The best office locations for substance Location Rent (per m²/month) Advantages Disadvantages Valletta €25-35 Prestigious address, central Expensive, parking problems Sliema €20-30 Business district, good infrastructure Very touristy St. Julians €18-25 Gaming hub, young crowd Noisy, party atmosphere Ta Xbiex €15-22 Quiet, yacht marina Limited office choices Gzira €12-18 Affordable, authentic Less prestigious What the MFSA checks in offices The MFSA carries out unannounced office inspections. Yes, seriously. A lawyer friend told me about a case when MFSA inspectors turned up at 2:30 pm and found the office empty. Result: queries, explanations, stress. MFSA checklist for office inspections: Are staff present and recognisably working? Is the office equipment suitable for the business? Are business documents available on site? Does the office feel lived in or staged? Does the employee count match the records? Realistic office costs in Malta A 50 m² office in Sliema will cost you monthly approximately: Rent: €1,000-1,500 Utilities: €200-300 Internet/Phone: €80-120 Cleaning: €150-250 Furnishing (one-off): €3,000-8,000 That adds up to €1,430-2,170 a month – plus furnishing. Cheaper than Munich, more expensive than Thessaloniki. What does that mean for you? Plan for at least €20,000 annual budget for a credible office. Cheaper is possible, but then it gets difficult to gain substance acceptance. Building your team: From the first job ad to a full team Finding staff in Malta is like dating: The first profiles look promising, but you quickly discover if its a fit once you meet. After dozens of interviews in Malta cafés, I learned: The job market is small, but the quality is high. How much staff do you actually need? The MFSA doesnt set fixed staff numbers, but checks appropriateness. A holding company manages with 1-2 qualified staff. An investment fund needs at least 4-6 full-timers. A payment service provider? Count on 8-15 people. Typical staff setups by business type: Business model Minimum staff Typical roles Annual cost Holding company 1-2 people Compliance Officer, Administrator €60,000-120,000 Investment Fund 4-6 people Fund Manager, Risk Officer, Compliance, Administration €280,000-450,000 Gaming license 8-12 people CTO, Compliance, Customer Support, Marketing €400,000-650,000 Payment Services 8-15 people AML Officer, Risk Manager, Operations, IT Security €450,000-800,000 Recruiting in Malta: What works Malta has 515,000 inhabitants. The skilled job market is correspondingly small. Most good people know each other. Networking is everything. The best recruiting channels in Malta: JobsPlus.gov.mt: The official government job board. Free, but slow LinkedIn Malta: Surprisingly effective for specialists Keep Me Posted: Local job board with wide reach Networking events: Malta AI & Blockchain Summit, Malta Business Network University of Malta: For junior positions and interns Salary level in Malta: What you really have to pay Malta has become more expensive. The gaming sector and fintech startups have pushed up salaries. These days, a qualified compliance officer costs €45,000-65,000 gross. Five years ago, it was €35,000. Typical gross annual salaries (2024): Compliance Officer: €45,000-65,000 Fund Administrator: €35,000-50,000 Risk Manager: €55,000-75,000 Senior Developer: €40,000-60,000 Marketing Manager: €35,000-55,000 Customer Support: €22,000-32,000 Office Administrator: €20,000-28,000 Staff documentation for substance proof Tax authorities want to see evidence. Employment contracts, payslips, social security proof. I recommend a monthly substance documentation: Working time logs for all staff Task protocols (who does what?) Meeting minutes with Malta relevance Office attendance lists Business decisions with Malta date and location Sounds bureaucratic? It is. But in doubt, it can save your skin. What does that mean for you? Plan on at least €100,000 per year for a minimally functional team. Any less and its tough to build credible substance. Operational activities: What tax authorities really want to see Operational activities are the core of substance. Its not enough for staff to sit in Malta and answer emails. The business activity must create genuine economic value – and you have to be able to document it. What counts as operational activity? The MFSA and international tax authorities focus on core income generating activities (CIGA). These are the activities directly contributing to revenue. For an investment fund, thats portfolio management; for a gaming company, software development; for a holding, strategic management of the shareholdings. Examples of recognised operational activity: Business model Operational activities in Malta Documentation burden Investment Fund Portfolio analysis, investment decisions, risk management High Trading Company Market research, negotiations, contracting Medium IP Holdings License negotiations, IP development, rights management High Gaming license Software development, customer support, compliance Medium Consulting Advisory services, project management, research Low Documenting operational activities Heres the crux: What evidence do you need to prove operational activity? After two years in Malta and plenty of chats with tax advisers, I recommend this system: Monthly documentation: Activity reports: What did each employee do? Decision protocols: What business decisions were made? Meeting minutes: Board meetings, team meetings, strategy sessions Email correspondence: Evidence of Malta-based communication Contract negotiations: Deals conducted from Malta Annual documentation: Business plan updates: Strategy plans drafted in Malta Budget planning: Malta-based financial planning Risk assessments: On-site risk analyses Compliance reports: Malta-specific compliance activities The limits: What does NOT count as Malta substance Not everything your Malta company does counts as substance. Pure admin work is not enough. A secretary just forwarding invoices? No substance. An accountant just entering someone elses figures? Same. What does NOT count as operational substance: Pure admin work with no decision-making Forwarding documents and emails Bookkeeping without strategic input Only phone services or customer care Warehousing without value add Board meetings in Malta: The substance gold standard Board meetings in Malta are the easiest way to demonstrate operational substance. If important business decisions are documented as being made in Malta, all tax authorities are happy. My board meeting checklist for Malta: Location: Always at the Malta office Participants: At least one director based in Malta Minutes: Detailed with date, place, decisions Topics: Strategic business decisions, not just formalities Frequency: At least quarterly, monthly is better A friend of mine runs his fintech business like this: First Monday of every month, board meeting in Malta. Strategic decisions, new partnerships, budget changes – everything discussed and recorded there. Result: No problems with German or Austrian tax authorities. What does that mean for you? Set up your business so that at least 60% of important decisions are demonstrably made in Malta. Otherwise, acceptance of your substance gets tricky. Common pitfalls and how to avoid them After two years of Malta reality, Ive seen every substance mistake at least once. Most are avoidable but expensive if you trip up. Here are the classics: Pitfall 1: Fake it till you make it The most common mistake: Rent an office, hire no one, and hope thats enough. Doesnt work. The MFSA does inspections, tax offices make inquiries. An empty office with dusty desks is a red flag. Solution: Hire real staff from day one. Better a part-timer than no one at all. Pitfall 2: Outsource everything Compliance outsourcing? Fine. Bookkeeping? Okay too. But if you outsource all the core operations, you have no substance left. MFSA only accepts outsourcing for support functions. Solution: Ensure all core business activities are handled internally. Outsourcing only for administrative support. Pitfall 3: Remote control from Germany This is the deadliest pitfall: All key decisions are still made in Germany, Malta is just window dressing. German tax authorities spot that immediately and tax the Malta company as a German permanent establishment. Solution: Move real decision-making power to Malta. Malta directors must have genuine authority. Pitfall 4: Saving money in the wrong places I know entrepreneurs who spend €50,000 on lawyers but skimp on office or staff. Thats backwards. Substance costs money – but less than a tax clawback. Solution: Set realistic budgets for office, staff, and operational costs. At least €150,000-200,000 a year for credible substance. Pitfall 5: Getting sloppy with documentation Everyone documents everything rigorously for six months. Then you get relaxed. Huge risk: When tax authorities check three years later, youre missing records for the last 18 months. Solution: Set up documentation routines. Monthly substance reports, quarterly compliance checks. Reality check: What Malta substance really costs Lets be honest: Substance in Malta isnt cheap. Heres a realistic cost estimate for a minimal setup: Cost item Annual cost One-off cost Office rent (50m²) €18,000-25,000 €5,000-10,000 Staff (2 people) €80,000-120,000 €5,000-15,000 Compliance & legal €15,000-30,000 €10,000-25,000 Accounting €8,000-15,000 €2,000-5,000 IT & communications €3,000-6,000 €2,000-8,000 Travel costs (board meetings) €5,000-12,000 – Total €129,000-208,000 €24,000-63,000 Thats the minimum for credible substance. Sounds like a lot? It is. But if you save €500,000+ in taxes, the math still works out. What does that mean for you? Substance in Malta is an investment, not a bargain. Count on at least €150,000 a year for a serious setup. Practical checklist for building substance After hundreds of Malta consultations Ive distilled a checklist that works. Its the essence of both successful and failed substance projects. Phase 1: Planning and preparation (months 1-2) Define your business model: □ Which operational activities should take place in Malta? □ How many employees are needed? □ What qualifications should staff have? □ What decisions are made in Malta? □ What is the realistic annual budget? Legal structure: □ Set up or transfer a Malta company □ Appoint Malta-relevant directors □ Apply for necessary licenses (MFSA, gaming, etc.) □ Complete tax registrations Phase 2: Infrastructure setup (months 2-4) Set up the office: □ Found and rented suitable premises □ Office furnished and operational □ IT infrastructure installed (internet, phone, server) □ Business address registered with authorities □ Documentation systems established Recruit staff: □ Job ads published □ Interviews held □ Employment contracts signed □ Social insurance registered □ Onboarding and training carried out Phase 3: Start of operations (months 4-6) Start business activity: □ First board meeting held in Malta □ Operational activities commenced □ Business decisions made in Malta □ Documentation up and running □ External communication from Malta Ensure compliance: □ MFSA filings submitted on time □ All tax obligations fulfilled □ Substance documentation complete □ Internal compliance processes established Phase 4: Ongoing monitoring and optimisation Monthly tasks: □ Create activity reports □ Keep attendance logs □ Document business decisions □ Complete compliance checklists □ Monitor costs and budget Quarterly tasks: □ Hold board meetings in Malta □ Substance review with advisers □ Assess staff performance □ Check for legal updates □ Identify optimisation opportunities Annual tasks: □ Comprehensive substance documentation □ Prepare annual tax accounts □ MFSA annual reports □ Staff and cost planning for next year □ Compliance audit by external advisers Emergency plan: If your substance is challenged Sometimes, despite all precautions, things go wrong. German tax authorities make inquiries, the MFSA demands more evidence. Then its all about keeping your cool and responding systematically. Immediate action for substance inquiries: Contact lawyer: Dont reply yourself, get a professional involved Gather documentation: All substance evidence from the last three years Brief the team: Prepare staff for possible questions Step up activities: More board meetings, more documentation Prepare an exit plan: In case substance is not recognised What does that mean for you? Building substance is a marathon, not a sprint. Allow 6-12 months for the full setup and maintain the standards rigorously after that. Frequently asked questions How long does it take to build credible substance in Malta? Realistic timeline: 6-12 months for the full build. The first 3 months go into office and team, a further 3-6 months for establishing steady operations. International tax authorities usually want to see at least 12 months of proven activity. Can I build substance with remote staff? Partially yes, but risky. The MFSA accepts remote work for supporting functions, but the core business activities must physically take place in Malta. Board meetings, strategic decisions and the management team should be on-site. What happens if my substance is not recognised? Your Malta company becomes tax transparent. German tax authorities may treat it as a permanent establishment and tax all profit in Germany – retroactively for up to four years, with interest and possible penalties. Is a co-working space sufficient for Malta substance? No, co-working spaces are not accepted as adequate offices for licensed activities. The MFSA insists on your own dedicated premises. Serviced offices only in rare cases and with special permission. How much does minimal Malta substance really cost? Expect to spend €150,000-200,000 per year for a credible setup with your own office and 2-3 employees. On top, set-up costs of €30,000-50,000. Cheaper is possible, but then substance acceptance is at risk. Do I have to live in Malta personally to have substance? No, personal residence isnt required. But you should be there regularly for board meetings and strategic decisions. 6-8 Malta stays per year are recommended. Which sectors have the strictest substance requirements? Financial services (banking, investment funds) have the highest. Gaming and payment services are just behind. Trading companies and holdings face moderate requirements. Simple service companies have the lowest. Can I move my German structure to Malta? Yes, but carefully. Transferring business activities can have tax consequences (exit tax, transfer of function). Always get tax advice first. How often does the MFSA check substance? The MFSA carries out unscheduled audits, usually for licensed companies every 2-3 years. Additional audits in case of complaints or unusual reports. Inspections have become more intensive lately. What’s the most common substance mistake? Remote control from Germany. Many entrepreneurs build office and team in Malta, but still make all key decisions in Germany. Tax authorities see through it immediately.
