Why a resident outside of Malta would conduct business through a Malta company

Maltese companies are frequently used by individuals who reside outside their country of nationality (e.g., digital nomads) who need a base for their business activities and management of wealth. Malta is a well-regulated EU Member state with English as an official language. The economy is business friendly and well organised with a number of incentives available for start-ups, trading and service activities and can be tax efficient for international activities. How would someone take advantage of the efficient Maltese tax system? Here are some examples.

A company is considered resident in Malta for income tax purposes if it is incorporated or registered in Malta, or in the case of a non-Malta incorporated company, if its control and management is exercised in Malta.

The Maltese company tax rate is 35% and is charged on profits realised from income less deductible business expenses. However, through a combination of Malta’s full imputation system and a system of refunds payable to shareholders upon distributions of dividend, the effective rate of tax suffered on business conducted by Malta companies can be significantly reduced.
Malta companies must submit audited accounts with its tax returns.

Example 1 – Single Malta Trading Company

A company, Malta Co. 1, is 100% owned by an individual who is a resident in Norway and earns income from selling goods online. The taxable profits of the company is 100. Malta Co. 1 must pay 35 in income tax on its profits and is left with net profits of 65 which can be distributed as a dividend to its shareholder.

Upon such distribution, the shareholder may be entitled to claim back 6/7 of the tax paid by the company from the Malta tax authorities, resulting in a net total received income from the company (i.e., 65) and refund from the Malta tax authorities (i.e., 30) of 95 (out of the 100 profits made by the company). Malta does not charge any withholding tax on dividends distributed to a non-resident shareholder, and the tax refund payment does not suffer any income tax in Malta.

Example 2 – Double Malta Structure

Malta Co. 1 is 100% owned by an individual who is a resident in Sweden. Malta Co. 1 owns 100% of the shares in Malta Co. 2. Malta Co. 2 earns income from royalties from intellectual property. The taxable profit of Malta Co. 2 is 100. Malta Co. 2 must pay 35 in income tax on its profits and is left with net 65 profits which can be distributed as a dividend to its shareholder (i.e., Malta Co. 1).

Upon distribution, the Malta Co. 1 may be entitled to claim back 6/7 of the tax paid by Malta Co. 2 from the Malta tax authorities, resulting in a net total received income from Malta Co. 2 (i.e., 65) and refund from the Malta tax authorities (i.e., 30) of 95 (out of the 100 profits made by Malta Co. 2). Malta Co. 1 can retain the dividend and refund received (e.g., to use for further investments), or it can distribute its profits to its shareholder. If profits are distributed, it will be in the form of a dividend.

A further option to the above is available if the double company structure elects to be registered as a fiscally consolidated unit, whereby Malta Co. 1 is elected as the main taxpayer. This would mean that instead of Malta Co. 2 paying 35 in tax and then Malta Co. 1 claiming 30 back as a refund, the tax would be consolidated at Malta Co. 1 level and a net payment of 5 would be made by Malta Co. 1 instead.

Example 3 – Malta Holding Company

Malta Co. 1 is 100% owned by an individual who is a resident in Finland and earns income from dividends received from subsidiaries where Malta Co. 1 owns more than 5% of the equity shares (i.e., a participating holding). There are more instances where a holding can qualify as a participating holding even though the 5% threshold is not met. Malta Co. 1 can opt for claiming a participation exemption on such dividends, resulting on no tax in Malta being payable on such dividends received by Malta Co. 1. Malta does not charge any withholding tax on dividends distributed by Malta Co. 1 to a non-resident shareholder.

These are just a few examples of how the jurisdictions of Malta and the Nordics can work together. This is a simple illustration of how the system can work and is not advice, as there are conditions applicable to make this work. All proposed set-ups should be analysed before set up, including how receipts of dividends and tax refunds may be taxed in the country of residence of the non-Malta shareholder.

Contact us to learn if a company in Malta would be right for you. More information about establishment in the Nordics can be found from our trusted partner, The Nordic GEM.