Click here to view the April newsletter
Malta has long been regarded as one of Europe’s premier business hubs, offering a solid legal framework, attractive tax rates, and a strategic location within the European Union. Beyond traditional trading companies, numerous international businesses – particularly holding companies, financial service providers, and tech startups – have chosen Malta to take advantage of these benefits. However, with evolving global regulatory standards, particularly the growing emphasis on anti-tax avoidance measures, the concept of “substance” has become increasingly important.
Substance refers to the genuine economic activity that a company conducts in a jurisdiction, ensuring that it is not merely a shell company used for tax avoidance purposes. In this article, we’ll discuss the importance of maintaining good substance for Malta-registered companies, the requirements for demonstrating substance, and how it can benefit businesses.
What is Substance and Why Does It Matter?
Substance is essentially the real business activity and operational presence that a company demonstrates in the jurisdiction where it is incorporated. The concept has become especially significant in light of the OECD’s Base Erosion and Profit Shifting (BEPS) initiatives and the EU’s Anti-Tax Avoidance Directive (ATAD). These global initiatives aim to combat tax avoidance practices such as “letterbox companies” that have no real activity in the country of registration.
For Malta-registered companies, good substance means that the company must have physical operations, employees, and decision-making processes in Malta. If a company does not meet these substance requirements, it risks facing increased scrutiny from tax authorities, both in Malta and internationally, which could lead to challenges in claiming tax advantages or even penalties.
Key Elements of Good Substance in Malta
To ensure that a Malta-registered company demonstrates good substance, it needs to fulfill several key criteria, including:
Registered Address in Malta (Mandatory)
Every company registered in Malta must have a registered address within the jurisdiction. This is a mandatory requirement and serves as the official location for all legal and administrative communications. While having a registered address is a basic requirement, it is essential for ensuring that the company complies with Maltese corporate governance standards and legal obligations.
The registered address must be a physical address, not just a mailbox or virtual address. This establishes that the company is genuinely operating from Malta, even if it does not have a physical office.
Real Decision-Making in Malta
A company must show that its management and control are exercised in Malta. This means that key decisions should be made by directors who are resident in Malta, and board meetings should be held in the country. Having decision-makers who are physically present in Malta and actively involved in the day-to-day operations of the company helps establish that the company is genuinely operating from Malta.
Local Director and Secretary (Highly Recommended)
While it is not mandatory for a Malta-registered company to have a local director and company secretary, it is highly recommended as part of demonstrating good substance.
Local Director: Having a local director who is a resident of Malta is highly recommended for demonstrating that the company’s decision-making and management take place in Malta. A local director plays an important role in ensuring that the company’s operations and governance are genuinely based in Malta.
Company Secretary: Similarly, appointing a company secretary who is either a resident of Malta or a corporate service provider is highly advisable. The company secretary helps ensure compliance with legal and regulatory obligations and contributes to the company’s operational presence in the jurisdiction.
Physical Office in Malta (Not Mandatory, but Enhances Substance)
While a physical office is not strictly required under Malta’s substance rules, it is highly recommended in cases where strong substance is necessary. A physical office used for business operations, staffed with employees, helps solidify the company’s presence and demonstrates genuine economic activity, which is important for local banks in Malta, for instance (see below).
Staff and Resources in Malta
If your company requires qualified employees in Malta to handle its day-to-day operations, we are here to assist. We offer a full range of payroll services to support your staffing needs. This service ensures that your employees are fully compliant with Maltese labor laws, tax regulations, and social security contributions. We handle the payroll processing, including payslips, tax filings, and other administrative tasks, so that you can focus on growing your business while ensuring your team is taken care of in full compliance with local regulations.
Strong Local Substance for Bank Account Opening
A key requirement for opening a business account with traditional banks in Malta is the demonstration of strong local substance. Malta’s banks have stringent due diligence and anti-money laundering (AML) procedures in place, and they require companies to demonstrate a real presence in the country to ensure compliance with international regulations.
For companies looking to open a corporate account in Malta, the banks will typically require evidence of a physical office, local employees, and directors who are actively involved in the management of the business. Without strong substance, companies may face difficulties in opening or maintaining a business account in Malta, as banks may view them as lacking legitimacy or risk in terms of compliance.
The Role of Substance in Malta’s Tax System
Malta offers an attractive tax regime for companies, including a low effective corporate tax rate of 5% on income generated abroad through active business and 0% tax rate on dividends and capital gains if participation exemption applies. However, to benefit from Malta’s tax incentives, companies should have genuine substance in the country. This is particularly the case for companies engaged in active trading.
The Malta Tax Authorities require companies to prove that they are conducting substantial business activities in Malta to benefit from these tax advantages. This includes demonstrating that the company is not simply incorporated in Malta to take advantage of its tax benefits without contributing to the local economy.
Corporate Tax Rate and Participation Exemption
For holding companies in Malta, the participation exemption regime provides significant tax advantages, allowing the company to benefit from full exemption on corporate income tax from foreign subsidiaries, including dividends, and capital gains.
However, to qualify for the participation exemption, the company must demonstrate substantial activity in Malta, such as having qualified directors, responsible for managing the company’s affairs.
Malta’s International Reputation and Anti-Tax Avoidance
To align with international standards and avoid being labeled as a tax haven, Malta is committed to ensuring that companies established in the country fulfill the substance requirements. The Maltese government has implemented strict anti-avoidance measures and has signed various agreements for the automatic exchange of information under the Common Reporting Standard (CRS).
As such, maintaining good substance is vital for a Malta-registered company’s reputation and long-term success.
Good substance is no longer just a matter of compliance for Malta-registered companies; it is an essential aspect of doing business in a globalized economy. By ensuring that your company demonstrates real economic activity, physical presence, and proper governance in Malta, you can enjoy the full benefits of the country’s tax advantages and thrive in both the EU and the global marketplace.
Engage with local legal and financial experts who can help ensure your company meets all substance requirements and remains compliant with Maltese and international regulations. We’re just a message away!
Click here to view the April newsletter
