Tax audit in your home country: Your rights regarding Malta 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 regular German GmbH. This is because your home tax office must first check if and how it can even access your Maltese company.

The reason for the audit: Why you?

Often these are random or sector-specific audits. But with Malta companies, there are often specific triggers:

• Substance doubts: The tax office doubts your company is really active in Malta
• Change of managing director: You are suddenly registered as managing director
• Notable transactions: Large money flows between Germany and Malta
• Tips from third parties: Business partners or former employees get in touch
• 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 see in practice again and again:

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 usually contains:

1. The audit period (usually 3–5 years retroactively)
2. The types of taxes to be audited
3. The name of the auditor
4. The legal basis of the audit

For Malta companies, there is often an additional note about “audit of CFC taxation according to §§ 7–14 AStG (Foreign Tax Act).” This is the legal term for: “We check whether your Malta company is just a mailbox company.”

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

Many entrepreneurs think they are defenseless against the tax authorities. Not true. You have specific rights, which Id like to explain clearly.

Right to fair procedure: Your basic protection

The tax office must abide by strict procedural rules. For Malta companies, these rules are especially important as international cases are complex:

• Duty of clarification: The auditor must explain what is being audited and why
• Right to be heard: You may respond to all allegations
• Access to files: You can inspect all audit documents
• Right to consult: You may involve a tax advisor

Practical tip: Insist on written minutes of all meetings right from the start. With international matters, auditors easily forget what was said.

Right to adequate audit period

This is important: With Malta companies you often need more time, as documents must be requested from Malta. The tax office must grant you “adequate deadlines” (§ 200 AO).

In practice this means:

• At least 2 weeks for documents from Germany
• 4–6 weeks for documents from Malta
• Extension in case of need for translation
• Consideration of Maltese holidays and summer vacations

Your right to protection of legitimate expectation

This is a powerful tool many dont know about. If you have complied with the law and case law changes, you can rely on protection of legitimate expectation.

This is relevant for Malta companies, for example when:

• Substance requirements change
• New DTA (double taxation agreement) interpretations
• Stricter CFC taxation rules

Limits of audit rights: What the tax office cannot do

The German tax office also has limits, especially with Malta companies:

Audit defense strategies: How to prepare

The best defense is good preparation. In 15 years of practice, I have seen: Those who act systematically almost always come out ahead in the end.

The 48-hour rule: Immediate steps after audit order

When the audit order arrives, you usually have only a few days to take the first steps. Here is my immediate checklist:

1. Analyze audit order carefully: What exactly will be audited?
2. Contact tax advisor: Immediately, not “when there’s time”
3. Review documents: What is available, what is missing?
4. Inform Malta partners: Lawyer, tax advisor, secretary on site
5. Set communication strategy: Who speaks to the auditor?

Document strategy: What you must have ready

For Malta companies auditors always want to see these documents. Prepare them in advance:

• Corporate law documents: Incorporation certificate, shareholder agreements, minutes
• Substance proof: Lease agreements, employment contracts, director contracts
• Operational documents: Invoices, contracts, correspondence
• Financial documents: Annual financial statements, bank statements, tax returns
• Control documents: Board minutes, director resolutions, transfer pricing documentation

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

Substance defense: Your most important building block

The core of any Malta audit is the question of substance: Does your company really have economic substance in Malta? This is usually crucial.

The three pillars of substance defense:

Communication strategy: How to deal with the auditor

Dealing with the auditor often determines success or failure. Here are my experience-based rules:

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

Using Maltas double taxation agreement: Your shield

The double taxation agreement (DTA) between Germany and Malta is your strongest legal tool. Many entrepreneurs don’t know it well or use it incorrectly.

The most important DTA provisions for your defense

The Germany-Malta DTA from 2001 (last amended 2018) clearly regulates who may tax what. The most relevant articles for you:

• Article 4 (Residence): Where is your company resident for tax purposes?
• Article 7 (Business profits): Who may tax the profits?
• Article 26 (Information exchange): What information may Germany request?
• Article 27 (Assistance in tax collection): How far does cooperation go?

The tie-breaker test: When both countries claim rights

Sometimes both Germany and Malta claim taxation rights over your company. Then the famous tie-breaker test from Article 4 par. 3 DTA applies:

“A company is resident in the state where its place of effective management is situated.”

In practice this means: Where are key business decisions made? The tax office checks:

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

Understanding information exchange correctly

Many Malta entrepreneurs fear automatic exchange of information. The DTA regulates exactly what Germany may request and what not:

Mutual Agreement Procedure: In case of dispute

If Germany and Malta cannot agree, you can apply for a Mutual Agreement Procedure (MAP). This is an arbitration procedure between the two tax authorities.

MAP makes sense for:

• Double taxation despite DTA
• Disputes over residence
• Discussions about permanent establishment
• Transfer pricing disputes

The application must be submitted within three years from the first measure that leads to double taxation.

Common audit focus areas for Malta companies

From hundreds of audit procedures, I know the favorite targets of German tax offices. If you know these, you can prepare specifically.

Audit focus #1: False self-employment and permanent establishment

The classic: You work from Germany for your Malta company, and the tax office claims you are falsely self-employed or that 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 risk?
• Business assets: Who owns computers, office, etc.?

My experience: Work no more than 50% of the time in Germany and keep detailed records of all Malta stays. This avoids 80% of all permanent establishment issues.

Audit focus #2: Transfer pricing and arm’s length comparison

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

The most common points of dispute:

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

Audit focus #3: Substance and economic reality

This is the biggest challenge: Does your Malta company have substantial business activity or is it just a tax saving model?

The substance audit takes place on three levels:

Audit focus #4: CFC taxation (CFC Rules)

The German CFC rules (§§ 7–14 AStG) are the sharpest sword of the tax office against Malta companies. They apply if:

1. You own more than 50% of the Malta company AND
2. The Malta company generates “passive income” AND
3. Malta tax rate is below 25%

Examples of passive income:

• Interest and dividends
• Royalties without substantial development
• Rental income from real estate
• Capital gains

The three most common auditor errors with Malta companies

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

1. Maltese law is ignored: Auditors apply German law to Maltese cases
2. DTA provisions are overlooked: Auditors forget the agreement entitlement
3. Substance is checked only superficially: Auditors look only at Germany, not Malta

When things get serious: Organizing professional defense

Sometimes taking initiative is not enough. If the audit escalates or complex legal issues arise, you need professionals. Here I explain whom you need, and when.

The optimal advisory 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 in these situations, you should bring one on board immediately:

• Criminal proceedings imminent: On suspicion of tax evasion
• Large additional payments: Over €100,000 in dispute
• DTA disputes: Germany and Malta disagree
• Procedural errors: The tax office does not follow the rules
• EU law involved: Fundamental freedoms may be violated

Coordination between Germany and Malta

The hardest part of Malta audits is coordination between two countries. Here is my checklist for perfect alignment:

1. Develop a common strategy: German and Maltese advisors must say the same thing
2. Synchronize documents: All documents must be consistent
3. Control communication: One contact person per country
4. Align deadlines: Coordinate Maltese and German timeframes

Cost-benefit analysis: What is good defense worth?

A professional audit defense costs between €15,000 and €50,000, depending on complexity. Sounds like a lot, but the calculation usually works out:

Example from practice: A client was to pay €180,000 in back taxes. After 18 months of proceedings and €35,000 advisory fees, he ultimately paid €25,000. Saving: €155,000 minus €35,000 = €120,000 net.

The most common advisor mistakes in Malta audits

Unfortunately, not all advisors are equally good. Watch out for these warning signs:

• Only German point of view: Advisor ignores Maltese law
• No Malta experience: Advisor lacks Malta expertise
• Generalizations: “Malta companies are always problematic”
• No strategy: Advisor reacts only, no proactive planning
• Poor communication: You don’t understand what’s happening

After the audit: Dealing with additional taxes and appeals

The audit is over, and the audit report is in your hands. Now the second half of the game begins: How do you deal with the result?

Reading the audit report correctly

The audit report is often 50–100 pages long and full of legal jargon. Only a few points are really decisive:

• Additional taxes total: What needs to be paid?
• Legal reasoning: Why must it be paid?
• 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 respond. Make full use of this time – often, the tax office will still accept arguments.

My structure for a successful response:

1. Factual correction: What did the auditor misunderstand?
2. Legal objections: Which laws were misapplied?
3. New arguments: What has happened since the audit?
4. Compromise proposal: What could a solution look like?

Appealing strategically

If the tax office sticks to its view, youll receive the tax assessment. You have one month to appeal. With Malta companies, this is often worthwhile because:

• Caseworkers in the appeals department are often better trained
• There is more time for detailed legal argument
• New case law can be taken into account
• Out-of-court settlements are possible

Different appeal strategies

Depending on the situation, different appeal strategies make sense:

Tax court action: The last resort

If the appeal fails, you can go to the tax court. For Malta companies this can make sense because:

• Tax judges are often more internationally oriented
• DTA issues are dealt with more expertly
• EU law is better considered
• Precedents can be set

But be careful: Taking action in the tax court takes 2–4 years and costs €20,000–100,000. Its usually worthwhile only for contested amounts of over €250,000.

Suspension of enforcement: Buying time

Even if you appeal, you usually have to pay first – unless you successfully apply for suspension of enforcement. It will be granted if:

• There are serious doubts about the legality
• Immediate enforcement would cause undue hardship
• Security is provided (usually 110% of the additional amount)

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

Frequently asked questions

Can the German tax office even audit my Malta company?

Yes, the German tax office can audit your Malta company if a German tax event exists. This is for example the case if you, as a German citizen, are a director or if the company generates German income. The tax office uses the double taxation agreement for this and can request mutual assistance from Malta.

How long does a tax audit of Malta companies take?

A tax audit of Malta companies takes above-average time, as international matters are complex. Normal external audits last 6–12 months, with Malta companies often 12–24 months. If mutual assistance is requested, this can take up to 2–3 years.

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

The cost for a professional defense is between €15,000 and €50,000, depending on the complexity of the case. Sounds like a lot, but with typical dispute amounts of €100,000 to €500,000, good defense almost always pays off. Plan for at least 200 advisor hours.

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

You must provide all documents relevant for German taxation. These include articles of association, annual accounts, director contracts, lease agreements for Maltese offices, and proof of substance in Malta. You only need to provide internal Maltese records upon specific request.

Can I move the audit to Malta?

No, you cannot move the audit to Malta. Germany audits German tax matters, and the audit basically takes place in Germany. However, you can demand that Maltese documents are reasonably considered, and translations can be created 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 estimate your taxes – and these estimates usually go against you. For Malta companies, tax offices often estimate the entire profits as German income. Its better to be cooperative but insist on your rights.

When should I bring in a lawyer?

You should involve a lawyer if criminal proceedings are imminent, large additional payments over €100,000 are at stake, or complex DTA issues arise. A lawyer is also recommended in case of procedural errors by the tax office. A specialized lawyer costs €200–500 per hour but can prevent considerably higher additional payments.

How likely is a criminal case with Malta companies?

Criminal cases are less common with Malta companies than often feared. In some audits, proceedings are initiated, usually only in cases of blatant tax abuse or if documents are concealed. With proper documentation and transparent cooperation, the risk is low.

Can I still make corrections during the audit?

Yes, you can still make voluntary disclosures or corrections during the audit. This shows your willingness to cooperate and can mitigate penalties. For Malta companies, this often concerns subsequent improvements of substance or the correction of transfer pricing agreements.

How far back can the tax office audit?

In principle, the tax office can audit retroactively for four years (assessment period). In cases of gross negligence, the period is extended to five years, and in cases of intentional tax evasion, to ten years. With Malta companies, tax offices often use the maximum period because they suspect tax planning abuse.