Malta Private Companies

Although a civil law jurisdiction Malta’s company law is very closely based on UK legislation. Company and contract law in Malta is broadly very similar to the UK and the various common-law jurisdictions. For a general discussion on the benefit of private companies including the protection of limited liability please see our main article on private companies in the product section of the website.

Per maggiori approfondimenti sul diritto societario maltese in italiano clicca qui. 
Per informazioni non esitate a contattarci all’indirizzo email it@demontfordbell.com

Summary
Malta operates a fairly esoteric taxation system whereby all Maltese companies pay 35% tax but 6/7ths in the case of active income and 5/7ths in the case of passive income are refunded to foreign shareholders (or non-Maltese nationals resident in Malta who are holding via a foreign holding company) making the effective rate of tax 5% and 10% respectively. Malta also exempts from tax capital gains and dividend income from subsidiaries where the Maltese company holds at least 10% of equity. It is important to note that tax residency in Malta does not prevent a company also becoming tax resident elsewhere based on its operation if for example its directors are based in another country it is likely to be taxable there also (for this reason many providers offer local directors to operate the company from within Malta). More sophisticated anti-avoidance systems may seek to attack the use of foreign companies by their nationals to avoid taxation based on either their ownership or by claiming the foreign company lacks substance (this body of anti-avoidance rules is called Controlled Foreign Corporation (CFC) rules). For a discussion of what measures can be taken to add substance to Maltese companies please see our article on business incubation. For alternatives designed to avoid CFC rules based on ownership please see our article on Foundation in Malta and Hybrid Companies and Trusts in general. Please see below for details on the appointment of local directors.

Active Income
Trading income in Malta is taxed at 35%. This tax must be paid and a receipt is provided. Following payment of tax the shareholder can apply for a refund of 6/7 meaning that, taking the company and its foreign shareholders as a whole, the effective rate of tax is 5%.

Passive Income
Malta operates a participation exemption which exempts from tax dividends and capital gains derived from participating holdings (holdings of 10% and more). In most cases dividends distributed from other EU and non EU subsidiaries and received in Malta will be exempt from tax under either the Parent-Subsidiary Directive or the Participation Exemption.  Dividends from holdings of less than 10% are subject to tax at an effective rate of 10%. This tax rate is arrived at via the 5/7ths shareholder refund.

Treatment of Tax Refund
The payment of the tax refund (explained above) to the shareholder can attract attention or even adverse tax treatment in the hands of the shareholder. In addition the refund is only applicable over distributed profits and this distribution may be a taxable event for the shareholder. It is for these reasons that many clients prefer to form a two-tier structure rather than a single company, please see below for more information. In the case of a Malta holding and trading company the trading company pays 35% tax and then 6/7ths or 5/7ths

Value Added Tax (VAT)
Malta is part of the EU VAT system and the local rate is 18%. VAT is subject to the same rules (such as reverse charging) as elsewhere in Europe. Only locally arising VAT must be paid (and then recovered) which means that in most cases VAT is not a cost. For more information on VAT and VAT services please see our main article on Accountancy Services in Malta.

Capital Gains
Excepting gains related to Maltese real estate there is no capital gains tax in Malta for companies with foreign shareholders.

Dual Taxation Treaties
Malta has an extensive network of dual taxation treaties which may be relevant to dividend routing. A situation where this may be relevant is where a gain arises in a company registered in country A but repatriation to country B could have adverse tax consequences. In this situation interposing a Maltese company may allow the funds to move without adverse tax consequences. In such cases it is generally important that the company has some substance in Malta.  For a discussion of the ways to add substance in Malta please see our main article on business incubation in Malta.

Duty on Documents
Companies having foreign shareholders claim exemption from duty on documents as a matter of course (indeed such exemptions are usually handled by the agent as part of the process of formation). This exemption can be achieved either by virtue of foreign ownership (in most cases) or limiting operation to outside of Malta (relevant where a local holding company is used).

Formation and Administration

Types of Private Companies in Malta
There are two main types of private companies in Malta: the private limited company and the private exempt private limited company. The two types of companies are for most intents and purposes the same and the decision of which one is appropriate is normally handled by the service provider. Throughout this article we will group the two types of companies together but please note the following table which lists all important differences between the two types of companies.

Merchant Shipping Act Companies
There is also a third type of private company which can be registered in Malta under the Merchant Shipping Act. These companies may be exempt from tax and their operation is limited to the maritime sector and are not discussed here. For more details please see our main article on the maritime sector in Malta.

Name Reservation
The first stage to forming a company is name reservation. Names are reserved for three months upon approval, must end in the word ‘limited’ or ‘ltd’ and cannot have the same or a similar name to an existing company and may not contain offensive words or words which imply it will be regulated (assuming it is not regulated, for a discussion of regulated entities please see our regulation section on the products page). Words which might imply regulation include: ‘bank’, ‘investments’, ‘forex’ etc. The process of name reservation takes less than one working day. Where clients do not wish to choose the name service providers can choose a name for them. In situations where some trading history is required (or in cases of extreme urgency where a client may need a company and cannot wait for formation) a shelf company may be available. For more information on shelf companies please see below.

Holding/Trading
In Malta there is no difference between holding and trading companies and the words “holding” and “trading” can be used in any case regardless of the activity of the company. The activity of the company is set out in its objects (explained below).

Objects
Maltese companies must specify their objects (the purpose for which they are established) and these cannot be unlimited. It will therefore be necessary to address this at formation. Objects can be drafted in a very open manner and it is rare for a Maltese company to be rejected based on its objects unless they imply that the company will be undertaking a licensed activity (assuming that the company does not hold a licence, for a discussion on licensed companies please see our main article in the products section). If the company intends to undertake trade it will need to register for Value Added Tax (see below) and the area of trading activity must be specified in its objects. Objects can be changed later by resolution of the shareholders (who may be either directly holding their shares of holding via nominees).

Directors and Secretary
Directors are responsible for the day to day running of the company and may be removed and changed by the shareholders. The company secretary is responsible for advising the directors on local corporate governance matters, liaising with the registrar of companies wherever necessary to file forms from time to time and generally dealing with the technical matters of the company’s commercial operation. In Malta the company secretary must be a natural person in all cases but the directors can be corporate entities. For the exact rules in this area please see the table above differentiating between the two types of companies in Malta.

Client Directors
Clients may wish to be director and/or secretaries of Maltese company themselves and there is no prohibition on this. For detailed information about minimum number of directors required etc please see our table above. A Maltese company is tax resident in Malta by way of its incorporation however this does not stop it from also becoming resident elsewhere by virtue of its management and control. Specifically many countries seek to tax foreign companies which are operated by directors in their country. For example a Maltese company with directors in the UK will be liable to pay both Maltese and UK corporate tax. This body of anti-avoidance rules is termed Controlled Foreign Corporation (CFC) rules and generally will defeat the purposes for which the company was established. One measure to tackle this is the appointment of local directors (see below). For a more detailed discussion on CFC rules and the importance of substance in Malta please see our main article on business incubation in Malta.

Local Directors
The appointment of local directors is a good first step in ensuring that the company is managed and controlled in Malta. It also adds a degree of privacy since the directors of a Maltese company are a matter of public record. Local directorship services are competitively priced but in most cases will make up the bulk of the service providers fees since this area presents the most risk for the service provider. The disadvantage of appointing local directors is that the client will either need to take less of an active role in the operation of the company (its daily management etc) or will need continue to do so in some way. Unless this continued involvement is within a clearly defined role it could open the Maltese company to an attack from tax authorities in more sophisticated countries under so-called ‘shadow directorship’ provisions which seek to establish that the client is the de facto director of the company.

Splitboard
Some clients may prefer to remain on the board of the company but appoint a greater number of foreign directors. The intention in this case is to legitimize some continued control of the company whilst seeking to keep the management and control in Malta and not where the client is resident.  Various approaches exist to achieve this such as the appointment of a majority of local directors or the limitation of the clients involvement to a non-executive role. In any case this service is offered by local providers subject to an Enhanced Due Diligence (EDD) requirement but it should be noted that it is considerably more expensive than where the service provider retains full control of the company.

Legal Representatives
Unusually Maltese law creates a distinction between the managers of a Maltese company and its “legal and judicial representatives”. It requires that details of both be included in the Memorandum of Association. The reasoning for this difference is unclear and in most cases the legal representatives clauses will simply state that the company’s legal representatives are its directors and may specify any formalities relating to the execution of documents (such as dual signatory arrangements for example). It is worth noting that this clause could however nominate persons individually by name (rather than vesting legal representation in the current directors whoever they may be) or could appoint legal representatives who are not directors. It is unclear in this case to what extent the directors would be responsible for the operation of a company which they do not have authority to represent. The jurisprudence argument for this provision is that it affords a greater flexibility to the representation of the company and can accordingly afford greater protection to its shareholders. Critics would counter that these measures can be better achieved in the articles of the company and if anything lead to entrenchment and poor drafting and may be contrary to other perhaps overriding legal considerations such as that in most countries (and especially in the EU) if a third-party engages in good faith with a company then their contract will be legally enforceable notwithstanding that the person representing the company lacked proper authority. In any case it is to be noted that the two concepts are separate in Maltese legal theory though in most cases will be the same.

Share Capital
The minimum share capital of Maltese companies is approximately 1,200 EUR (the exact amount is a conversion from 500 Maltese lira and is not a round figure). The share capital must be paid up at least 20% and unusually the registrar seeks documentary evidence that this has happened before it will register the company. The paying up of share capital can be done into a local bank (they have accounts for this purpose) or to a licensed service provider (provided the amount is less than 12,000 EUR). Some providers hold the funds and credit them to the company account when it is opened or return it to the directors whilst others hold it against fees due by the company in the future. Since Malta has no thin capitalisation rules there is usually no reason a larger share capital is desirable in the case of unregulated companies. There are also no restrictions on the use of capital (excepting certain licensed companies) which means that once formed the capital can be used to meet debts as they arise or lending to third parties etc.

Non-Cash Contributions
The share capital of a Maltese company can be subscribed with non-cash contributions. This means that an asset represents the value of the share capital. In this case the report of a local auditor will be required. It is to be noted that Malta does not have thin capitalisation rules so an alternative to non-cash contributions would be to transfer the asset later by way of a shareholders loan. The benefit of this method is the avoidance of the requirement for an auditor’s report as well as a reduction in formation and ongoing fees due to the company’s registry since these are based on the size of the capital.

Bearer Shares
Bearer shares are prohibited in Malta for Maltese companies and for the shareholders or beneficial owners of Maltese companies. This prohibition may be relevant when considering holding structures since if countries which still allow bearer shares are involved the articles of the foreign company must include a specific prohibition against their issue.

Company Seal
Maltese companies do not have company seals and instead execute documents in accordance with their judicial and legal representatives (please see above for more details).

Nominee Shareholders
Maltese nominees are licensed and have various advantages include speeding up formation times and ongoing administration as well as anonymity. For a discussion of their pros and cons please see our main article on Maltese nominees.

Shareholders Refund
Under the shareholder’s refund system (which achieves the 5% trading and 10% passive income rates explained above) a payment will be made from the Maltese tax authorities to the shareholder. This will happen not less than four and not more than eight weeks after an application has been made (assuming all paperwork is in order). It is important to note that the shareholders application for refund may be made only over distributed profits.

Maltese Two Tier Structure
A Maltese two-tier structure refers to a Maltese holding company with a holding company which may be Maltese or registered elsewhere.

Relevant to Shareholder’s Refund
For an explanation of the refund system please see above. This system has two disadvantages: firstly it requires a full distribution of profits by way of dividend which may not be desirable; and, secondly, if the shareholder is the client directly (or any person or company outside of Malta) the receipt of funds from Maltese tax authorities creates a connection at the very least and could even result in the application of further tax. Various solutions exist to this problem. The most basic way is to take receipt of the funds in a local bank account in the shareholder name (for details about local banking please see our main article on banking in Malta). This is unlikely to be effective and operates on non-disclosure which could amount to tax evasion. Another solution is the interposing of a zero tax company as shareholder to take receipt of the dividend. This is effective from a Maltese point of view but may defeat the benefit of using Malta over an offshore country. The most effective solution (though also more expensive than the others) is the forming of two Maltese companies; a trading and a holding. The trading pays 35% and then declares a dividend to the holding company (this dividend is exempt from tax under the participation exemption). The holding company then receives the tax refund which is also exempt from tax. It may then pass this back down to the trading company by way of shareholder’s loan.

Relevant to Maltese Residents
Another reason for a Maltese two tier is connected to Maltese residents or persons considering becoming Maltese resident. The refund system (explained above) is not applicable to local residents (whether they are Maltese nationals or not). There is a specific loophole to allow local residents (who are not Maltese nationals) to take advantage of this tax rate but they must do so via a foreign holding company.

Banking
Maltese companies may bank in Malta but there is no requirement for this, they may choose to bank elsewhere or they may not need an account. For a full discussion on the services available please see our main article on banking in Malta. Where the service provider appoints directors they will wish to retain control of the bank account. If they do not the service providers would incur all liability (both to the shareholders and more generally) without the ability to control the company. For clients wishing to retain some degree of control it may be possible to establish dual signing authority whereby neither party can transfer alone. Whilst this is often possible it may be undesirable from a management and control point of view as it points to a managerial role being carried out by the client which, if not legitimised in some way, could have adverse tax consequences under anti-avoidance rules.

Incubation Services
Many services exist in Malta to add substance to the local operation including office rental, local staffing, translation etc. Substance may be important to countering certain types of anti-avoidance rules. For a discussion on Controlled Foreign Corporation (CFC) rules and the importance of substance please see our main article on business incubation in Malta.

Value Added Tax (VAT) Registration and Administration
VAT is a European-wide sales tax. As an EU member Malta is part of the European Value Added Tax (VAT) system which makes possible the registration of both Maltese and foreign companies for Maltese VAT. Registration in Malta is simple (one of the fastest in the EU) and since registration can be done in any EU country many clients prefer to register in Malta. The advantages of registration in Malta include fast turnaround times (around one week) and the affordability of accounting resources to prepare and file returns. VAT registration in one EU country means (in most cases) that VAT will not be charged by or to other EU countries under the reverse charge mechanism this means that VAT will not be a cost. The VAT rate in Malta is 18%. In almost all cases a trading company in Malta will need to register for VAT. For more information please see our main page on accountancy services in Malta.

VAT Schemes
Malta operates VAT schemes for the reduction of VAT on the purchase of pleasure vessels or aircraft (to as low as 5.4%) for our main article on Malta VAT leasing please see the relevant section regarding either vessels or aircraft.

Accounts and Audit

Preparation of Accounts
The preparation of accounts can be done by any person but since all Maltese companies must prepare audited accounts and these accounts must be filed it is generally advisable to have an accountant provide this service. For simple companies with limited or no trading activity the accounting may be included with the audit fee and the client will not save money by preparing the accounts themselves since the accountants will need to review them in any case. The fees for accounting in Malta are very reasonable and amongst the lowest in the European Union.

Audit
All Maltese companies must prepare audited accounts but the cost is highly competitive, one of the lowest in the European Union. For simple companies with limited or no transactions the fees for accounts may be included with the audit. Many accountants also offer generous packages for accounting for multiple companies as may be necessary if a Maltese two tier structure is adopted.

Payroll
Maltese employees are liable to income tax only if they are resident in Malta and (excepting Maltese nationals) are taxed only on income arising in or remitted to Malta. Maltese income tax is charged on a tiered basis up to 35% but since little or no income may be chargeable the effective rate can be much lower or nil. Aside from income tax Malta has one of the lowest social security rates in Europe which is capped at around 3,500 EUR annually (total of employer and employee contributions). An EU citizen can pay their Social Security in any member state and many foreign nationals prefer to pay in Malta. Maltese residency is straightforward for European Union citizens who have a Treaty of Rome right to live and work in Malta without the the need for work permits or residency permits. Non-EU citizens can become resident on a number of grounds including following the grant of a work permit and such residency may grant some freedom of movement within the Schengen area. Malta imposes no restrictions on the movement in or out of capital and if part of the EU no restriction can be imposed by the outbound country either. Please see our main article on residency for more details.

Annual Reporting
Aside from accounts (explained above) Maltese companies must submit an annual return to the companies registry. This document together with the accounts makes up the public record of the company. Matters which are included therein are listed below.

Matters of Public Record
The following matters are public record in Malta:

Objects
The trading purpose of the company is public record.

Accounts
Audited accounts are public record.

Registers
Registers of the company such as mortgages, directors, secretaries, shareholders are all public record. For privacy local directors may be used as well as nominee shareholders (for a discussion on the pros and cons of using nominee shareholders please see our main article on Maltese nominees).

Shelf companies
Shelf companies are companies which have been formed for some time and can be bought by clients. The reasons for using a shelf company are usually either extreme urgency (a contract must be signed today and cannot wait for incorporation) or give the impression that the company has an established trading history. Shelf companies are not very popular in Malta since formation is so fast and straightforward but some service providers may have them available. The purchase of a shelf company attracts a premium over formation to offset the back filing which the service provider has attended to during the company’s life.

Local Phone Number/Domain Registration/Website
Registration of a local phone number, a com.mt domain (for emails and/or webhosting) are all discussed in the main section on business incubation in Malta.

Timescale
Normally it will take two working days to incorporate a Maltese Company after compliance procedures have been satisfied and the minimum capital requirements have been deposited in Malta.  Ready made companies are generally not required but can be provided upon request.

Transfer of Domicile
Maltese law allows for the inbound and outbound transfer of companies. This means that foreign companies (in countries which also allow for transfer of domicile) can relocate to become Maltese companies and vice versa. The moving of companies into Malta from offshore areas such as the British Virgin Islands and the Isle of Man to Malta is usually the result of a newly introduced hostile tax treatment of these areas. For example, Isle of Man companies holding Spanish property have come under attack from Spanish authorities. The transfer of the property from the Isle of Man company would attract unwelcome taxes such as capital gains or stamp duty so one solution is the transfer of the company to Malta which (being another EU member) cannot be similarly attacked. Another area where transfer of domicile may be relevant is in dividend routing. This is where a shareholder in country A owns a company in a low tax area. Country A imposes hostile tax treatment on the receipt of dividends from this low tax area. The company cannot transfer its assets out without incurring taxable gains and/or interfering with its trading activities and so it relocates to Malta from where the receipt of dividends may be more favourably treated.

Fees
The cost of forming Maltese companies is based on the share capital and since there are no thin capitalisation rules in Malta (as explained above) in almost all cases the cost will be 245 EUR for formation and EUR 100 for annual returns. Many firms collect the first year annual return on formation since liabilities of companies in Malta are, unusually, enforceable against the directors personally. The above figures refer only on fees due to the Maltese registrar and do include the fees of professional firms which may be engaged to provide, for example, formation or management services.

Penalties
Penalties against Maltese companies, for example for failing to file accounts or annual returns, are unusually enforceable against the directors personally. This has the result that many local providers are reluctant to appoint officers to companies without some form of security such as having one year’s fees in hand or control over fees in the company’s bank account.

Termination
Maltese companies, unlike companies in most other countries, are not generally struck off for failure to comply with filing requirements (such as annual return and audits) and debts continue to accrue indefinitely notwithstanding culls which occur only very rarely. This is a consideration when forming Maltese companies since it will be necessary to allow a cost for their liquidation, though the accounts fees are some of the lowest in Europe.

Maltese Alternatives