Malta is one of the countries that comes up most often in conversations about saving on taxes. This shouldn’t seem strange, as it’s an attractive country with a high quality of life that offers certain advantages to business-owners.
On the one hand, it’s in the EU, so it has many advantages that come with this, including if you want to offer your products or services within the common market. On the other hand, its non-dom system offers foreigners better conditions than other countries.
Today, I’m going to spell out all the options that Malta has for you, whether you want to take up residence or just establish your business there. In either case, the island offers many interesting ways to optimize your taxes.
Unfortunately, there are many myths surrounding Malta.
Many agencies and law firms on the island try to attract foreign companies to move their businesses there with the promise of saving on taxes. The solutions they propose may work for a time, but they’re not always safe from a legal point of view.
Other times, the problem is a question of cost: the financial structures that they propose are unnecessary and their high maintenance fees may make the company’s profits and sustainability take a hit.
Malta’s tax system has various peculiarities that usually create confusion. In fact, it’s the country that has both the highest and lowest level of corporate taxes in the world. I’ll explain how it all works.
Starting up a company in Malta
Malta is one of the few States in the world with an imputation system for corporate taxes. This means that Malta levies a relatively high corporate tax on companies but most of it ends up being reimbursed later. Malta’s corporate tax rate is 35%.
However, given that 85% of this 35% tax rate is reimbursed by the Maltese tax authority within two weeks, the effective tax rate actually lies at 5%, which is among the lowest in the whole EU (with the exception of free trade zones and exemptions for small-business owners).
This sounds great in theory, but in practice it doesn’t always go so smoothly.
Recently, there have been cases where the reimbursements never came or were very delayed. This tax reimbursement system hasn’t developed without difficulties, however smoothly it tries to portray itself as (the Maltese corporate tax system is very confusing and stipulates there are many exceptions to reimbursement).
With this system, you also can’t avoid CFC rules.
Finally, the biggest obstacle to reimbursement is the fact that the money isn’t transferred back to the company, but rather that 30% is put into another account that you choose. It’s not hard to imagine the problems that this can bring.
So, reimbursement isn’t received in the form of dividends, but rather as income.
If you’re subject to high taxes, your reimbursement will be assessed (when the money is transferred to a private account) for a progressive income tax, often exceeding the 26.8% withholding tax.
If, on the other hand, you live in Malta and operate your business as a non-dom, the tax reimbursement is considered national income and is taxed entirely according to a progressive system.
In both cases, you can avoid this by creating a holding structure that channels the reimbursement into earnings. This way, you can receive earnings with considerably lower corporate tax or, depending on the holding company, completely tax-free.
Whatever the case may be, it’s important to pay attention to the credibility of the holding company, at least while you are registered in a country with CFC rules. And if your company is from the EU and has real assets, this could be up twice more expensive.
Thus, the double structure in Malta for business-owners domiciled in countries with CFC rules is only worth it starting at very high income levels (anything over €300,000).
If, however, you live in Malta as a non-dom, as a foreign company you don’t need to pay attention to the credibility of this company. It would be better to ask yourself if you really need this type of double structure.
Starting a business in Malta as a non-dom
Many law firms try to sell the double structure between the company in Malta and the foreign company to obtain non-dom status for anyone who emigrates to Malta.
However, only a few future non-doms are aware that to get tax reimbursement, neither a Maltese company nor an additional foreign company is required.
The lawyers know this, but they don’t make much money from helping business-owners get non-dom status (because this only involves one payment). So instead of leaving it there, they sell these very expensive Maltese companies in global packages, with things like accounting included, which brings in an annual income that is consistently in the thousands of euros.
It’s true that a non-dom will find this solution works quite well in Malta, but paying for this can be clumsy and time-consuming. Instead, you can simply complete the registration process yourself and establish a foreign company in any part of the world (or use one you already have). With this foreign company, you can work in Malta without complications as a non-dom, and because there are no strict CFC rules (there are very lax laws for purely passive income), you can operate in an offshore country completely tax-free.
In contrast to the system in Cyprus, emigrating to Malta doesn’t require you to establish a company there.
How to get tax residence in Malta for EU citizens
To get non-dom status in Cyprus, you have to open a company there. In Malta though, any foreigner can become a non-dom without even having to apply for it.
Thanks to the freedom of establishment within the EU, there are the following minimum requirements:
- You have spend at least six months of the year in Malta
- You have to pay rent all year or own a house (its price doesn’t matter)
- You have to have valid health insurance
- You need to be economically independent (this means making €14,000 a year or €84.95 a week, which is also valid with a job contract)
The only condition that could be a problem for someone who wants to start a business or move their tax residence to Malta is staying the minimum six months on the island. The small size of the beautiful island means that 6 months in Malta may feel like much longer than that.
Many people wonder how the authorities can ensure that people stay there for at least 6 months. Given that Malta offers a special program for people who don’t want to stay on the island for the minimum requirement, it’s assumed that they want to monitor the situation as best they can.
Because Malta is an island, it’s easy to control who comes and goes. If a person wants to trick the authorities, the ferry to Sicily is a potential option. And although it’s not recommended that EU citizens break these rules, the worst that could happen is that you lose your residence permit.
If you don’t want to spend much time in Malta but want to benefit from its tax advantages, there’s another way, but you’ll need to bring enough money with you.
The Maltese HNWI program as an alternative for the wealthy
Malta offers a large number of programs for immigrants, which we aren’t going to pay attention to here, because I don’t think you’re interested in obtaining Maltese citizenship by paying one million euros.
What you may want to keep in mind, however, is the HNWI program. This lets non-doms live in Malta without a minimum stay in the country. HNWI comes from “High Net Worth Individual” and, as you can probably guess, it is aimed at people with a lot of money.
Besides not having to spend 6 months in the country, it also offers the benefit of a fixed tax rate of 15% on all income within the country. In the next section, I’ll explain why you may be interested in this fixed rate for a certain level of income.
To be able to take advantage of this 15% fee program, you will have to have a certain amount of capital that you bring with you to the island. The requirements for the HNWI non-dom program are:
- Buying a residence for at least €400,000 or paying a minimum rent of €20,000 a year
- There is no minimum stay in Malta, but you can’t spend more than 183 days in another country
- You have to pay a fixed fee of €25,000, plus €5,000 for each member of your family
- You will have to pass an eligibility test
- You need to have valid health insurance
As you can see, the freedom of movement offered by the HNWI program doesn’t come cheap. Above all, you have to keep the €25,000 fixed tax in mind.
The truth is that living as a non-dom without paying taxes is a myth that many people still believe. In fact, you can’t say that taxes in non-dom countries are even low.
What many people don’t understand about the non-dom system
Basically, non-dom status implies that foreign income is exempt from taxes as long as it doesn’t enter the country. Foreign income that stays in a foreign account will be truly tax-free.
When it comes to repatriating foreign income, many non-doms don’t know the meaning of the word.
Introducing money into the country doesn’t just imply making a transfer to a bank account there, but also withdrawing money from ATMs within the country, making payments there with a credit card, introducing cash from other countries (although this is hard to detect), etc.
In the end, all the money you use in Malta is really “repatriated” money, as it has been introduced into the country. All the costs that arise in situ in Malta therefore have to be taxed completely.
In practice, many non-doms hide certain expenses they have in Malta. The introduction of large quantities of cash from neighboring countries is a common resort, because it’s hard to discover. In theory, though, it means you’re committing tax fraud in Malta.
While in other countries you have to outline everything you’ve earned from non-dom taxes on your tax return, Maltese non-doms can tacitly use the transfer clause. And, while in many other countries you have to register all your international income (although only repatriated foreign income is taxed), in Malta you can legally hide all your foreign income, because only repatriated income needs to be declared.
Of course, I would recommend caution. No non-dom will be able to convince the officials in Malta that they spent 6 months there without generating any expenses within the country. This is to say, that if you don’t want any trouble, you should pay at least a minimum of taxes (and social security).
If you live anonymously and without (visible) luxuries, you won’t have any problem keeping your tax burden minimal. In contrast, if you are well known or live opulently, you will have to prepare for lots of questions.
The tax burden in Malta isn’t as high as many other European countries, but it’s something you have to bear in mind. More specifically, there is a progressive tax system with tax-exemption up to €8,500 and three tax brackets of 15%, 25% and 35%.
Unmarried people pay 15% up to €14,500, then 25% up to €60,000, and after that pay 35% (married people or people with children have more generous brackets).
Anyone who thinks that tax exemption can help them is mistaken. This exemption doesn’t apply to non-doms. This means that every penny of any money spent in Malta will be progressively taxed. Because of this, non-doms should envisage a 15% tax rate on income up to €14,500 a year.
This tax would total €180 out of a monthly income of €1,200. You can live perfectly fine on Malta with your net monthly income of €1,020. In this case, you absolutely won’t raise any alarms at the Maltese tax office, as long as you live a simple, quiet lifestyle (bear in mind that Malta is a small country where everyone knows each other).
You should therefore expect an annual tax burden of €2,000. This is what you will have to pay to maintain your non-dom status in Malta without raising the authorities’ suspicions.
You then need to add the necessary social security contributions, which are calculated taking into account many factors, but for freelancers and business owners come to a maximum of €53.08 per week, starting at an annual income of €18,500. This means an additional tax burden of €2,700 a year. For income less than €18,400, there is a 15% tax on net income, or 0.15×€1,020 = €153 of additional monthly costs, which comes out at almost €1,850 a year.
The legally safe non-dom structure assumes that you will contribute to the tax system and social security in Malta.
You should plan for an annual tax burden of at least €4,000 in Malta, based on a yearly average.
In contrast, if you have fulfilled the minimum residence of six months and then leave for the other six months of the year, this is completely tax-free. Income withdrawn and used abroad isn’t considered repatriated and is completely tax-free. Of course, the money you spend on rent in Malta will continue to be taxed.
Non-dom exceptions in Malta
To finish, we can specify two positive exceptions.
Firstly, you can transfer all your existing assets to Malta tax-free if you can demonstrate that these assets already existed before you registered in Malta.
In this way, you can move your assets to a Maltese private account and live off the transferred money perfectly legally.
Secondly, your capital yields are tax-exempt in Malta, even if they are used within the country.
However, don’t celebrate just yet. Some countries, like Germany and Switzerland, have stipulated double taxation agreements for their own benefit. Given that Malta operates tax exemption, there is a tax at source on capital yields on the total sum in these respective countries.
Furthermore, professional traders should have their eye on Cyprus (a country we will talk about soon) and not Malta. Maltese tax authorities classify businesses that trade shares as domestic income, as long as it is done in Malta on a largely professional basis.
Capital yields are only tax-exempt in Malta for private investors.
In any case, you have to pay attention to the definition of domestic and foreign income. In general, any payment from a Maltese company is considered domestic income, even if it ends up abroad.
If non-doms do business with Maltese companies, the profits from this are taxed within the country, even if these are transferred to a business account in the US, for example.
Nevertheless, the only exception—and with this we will close the loop on the original topic—are Maltese companies themselves.
A non-dom can have a Maltese company and order that the reimbursement of its taxes be paid to a foreign holding company, without this being considered as taxable domestic income. The logic behind this is that Maltese authorities also benefit from non-doms using business structures in the place they are established.
As I mentioned at the beginning, for non-dom residents it’s not necessary to have already established a Maltese company.
If a non-dom has a company in Dubai, for example, he can run it from Malta without any problems. He can liquidate his accounts with his customers in the United Kingdom, Ireland, Canada or Australia and cash them in Singapore. Every month, he can transfer €1,500 to his account in Malta to comply with his social security charges. Once he leaves Malta, he can spend all his money completely tax-free.
Let’s assume now that the business-owner doesn’t want to live a modest life in Malta. If this is the case, the HNWI program is worthwhile. If he allocates himself €5,000 a month, for example, he will pay €2,000 of that in taxes and contributions to social security, which isn’t far off the €25,000 lump-sum tax.
Given that part of the money will be spent on a luxury home, he will also be complying with the €20,000 annual rent minimum.
In the end, the business-owner is bored of the small island and decides to only stay there for two months in the spring, while dedicating the rest of the year to travelling the world.
Even though the annual cost is €45,000, he will have a legal residence in the EU and won’t pay taxes outside of Malta. The fiscal protection that this affords from the attempts of other EU countries to collect taxes makes Malta a worthy alternative to keep in mind if you are a wealthy partner of several corporations.
After 6 years of residence in Malta, you can choose to be nationalized. Of course, you should keep in mind that once you’re a citizen, you won’t have access to non-dom advantages.
For retirees and pensioners, there is an HNWI program with lower requirements (€275,000 for a house or €9,600 a year for rent) and a lump-sum tax of only €7,500. This can be very attractive for retirees and pensioners with large income from pensions and capital.
As you can see, Malta has much to offer, even beyond the economic factors. English is the official language, there is lots of history and culture, a high quality of life, a good climate, acceptable prices, along with security and accessibility. All of this makes Malta a great destination, as long as you do your research.
If you already have an idea about how you want to start your business in Malta and you want to check to make sure it’s a good choice, of if you aren’t sure and you want a consultation to decide between Malta and other options, we’re right here.