Cheapest jurisdiction for a partially dormant company?

[blubb]

Hi,

I'm a non-domiciled resident of Malta and looking to incorporate an IT services company that will be dormant from time to time, quite possibly several years in a row.

Wondering which structure you would advise for this purpose?

Malta Ltd companies have rather high fixed cost due to auditing requirements, which I'd like to avoid for the dormant years. Seeing incorporation is so easy in the UK I've been thinking about incorporating a private Ltd there. I'd then register a branch in Malta whenever the company is active and close it down again during dormancy.

This should in theory make all income taxable in Malta as the business will be conducted from Malta (i.e. work physically performed in Malta). The customers will most probably be EU companies, but there might be UK customers as well.

What are your thoughts on this? Or what would you suggest instead?

Looking forward to your insights

 

[CyprusLawyer101]

Work as a freelancer through a tradename

 

[blubb]

Not the most tax efficient solution

 

[CyprusLawyer101]

Simplest, cheapest and easily meets your basic requirement for half dormancy though

 

[Sols]

When you factor in the costs of registering and deregistering a branch of a foreign company, the potential complications of having to sort our your tax burden under a relevant tax treaty, VAT registration, et cetera, and considering the cost of your own time, are you sure it's not cheaper to just set up a Maltese company?

 

[Marzio]

Looking forward to your insights

Malta's resident non domiciled company is what you are looking for.

 

[Don]

Malta's resident non domiciled company is what you are looking for.

What's the minimum budget for this one? assuming you would set up some substance as well?

 

[Marzio]

What's the minimum budget for this one? assuming you would set up some substance as well?

Since he is already a Malta non dom he could easily be the director of the resident non domiciled company so the budget is the cost of the offshore company formation.

 

[Don]

Since he is already a Malta non dom he could easily be the director of the resident non domiciled company so the budget is the cost of the offshore company formation.

I believe this is best suited if the company would receive income from outside Malta (e.g., royalties, investments), but if source of income is Malta then it will be taxed in Malta.
In terms of Maltese domestic tax law, a non-resident is, in principle, subject to Maltese tax on income arising in Malta, irrespective of the existence or otherwise of a PE in Malta (subject to any double tax treaty provisions that would apply if in conflict with Maltese tax law).

 

[blubb]

Thanks @Marzio and @Don –
as the company will be receiving active income, this will in any case be taxable in Malta (arising in Malta as the work will be physically performed in Malta).

A resident, non-domiciled company would be required to comply with any rules in exactly the same way as a Maltese company would – i.e. including mandatory audits, correct?
That's why I don't see the benefit compared to a Maltese company in this case.

 

[Marzio]

if source of income is Malta then it will be taxed in Malta.

Malta doesn't have a territorial taxation country like HK so when they say "Companies which are resident but not domiciled in Malta are subject to tax in Malta on all income and chargeable gains arising in Malta" they refer to income arising from doing business with a Maltese company / individual.

 

[blubb]

Not exactly – actually, income is "arising in Malta" if the actual work is performed in Malta, no matter whether the client is Maltese or not. On the other hand, if the work is not performed in Malta it will not be taxable in case of a non-resident company even if the results are then sold to a Maltese client.

Ref.: https://cfr.gov.mt/en/inlandrevenue... for Individuals under the Income Tax Act.pdf
Especially paragraphs 1.5, 4.1 and 4.3

 

[Marzio]

Especially paragraphs 1.5, 4.1 and 4.3

Looks like 4.1 contradicts what i've been told or there's a way around it because i know people that are using this structure.

True, they don't have any employee in Malta so maybe they can go away with it by managing the offshore company and paying contractors outside Malta so that they aren't seen as performing activities in Malta.

It's probably a good idea to contact a professional lawyer but BE AWARE that with the resident not domiciled structure the professional will earn infinitely less than offering a Maltese trading + Maltese Holding structure or even a holding somewhere else so it's in his interest to tell you that it won't work.

 

[CyprusLawyer101]

Just to add my 2 cents , this is a guide on remittance basis for individuals and should not necessarily be construed to apply for companies. I haven't read the whole thing other than the paras you have mentioned and I wouldnt be fast to draw final conclusions based on the premise upon ehich the guidance ia being issued.

It would still be interesting to know if what Marzio is mentioning has a good standing.

 

[uplana]

Malta doesn't have a territorial taxation country like HK so when they say "Companies which are resident but not domiciled in Malta are subject to tax in Malta on all income and chargeable gains arising in Malta" they refer to income arising from doing business with a Maltese company / individual.

very important to notice. I thought it was different and got confused when I saw this the first time.

 

[FantomOffshore]

Not exactly – actually, income is "arising in Malta" if the actual work is performed in Malta, no matter whether the client is Maltese or not. On the other hand, if the work is not performed in Malta it will not be taxable in case of a non-resident company even if the results are then sold to a Maltese client.

Ref.: https://cfr.gov.mt/en/inlandrevenue/legal-technical/Documents/Guidelines on The Remittance Basis of Taxation for Individuals under the Income Tax Act.pdf
Especially paragraphs 1.5, 4.1 and 4.3

This is pretty hazy for me and up for interpretation. What if I have a SaaS and I build the entire product in Germany. I then sell it online, funds are flowing in, and I outsource the customer service, or it is run by bots. I move to Malta and manage the company, where would the actual work be performed?

I have yet to find the section of the ITA where they have defined what work, income and activities mean.

Like @CyprusLawyer101 stated:

This is a guide on remittance basis for individuals and should not necessarily be construed to apply for companies.

I agree, because work you perform for your own company or a company is not per definition (immediately) considered income.

The crux might be 4.1 vs 4.4. Because 4.4 explicitly states that: “Dividends are normally treated as arising in the country where the paying company is incorporated”. I think this could technically mean that working for your own offshore company does not equate to deriving income from it if you don't pay yourself a salary. Dividend income is definitely not “Income derived from employment or from a profession, business or other self-employment”.

The way the structure is compliant is as follows, per my logic:

1. Dividend is paid out by the company
2. Dividend is treated like arising in the country where the paying company is incorporated.
3. If paid into account abroad, is not considered received in Malta
4. Once transferred from the account abroad into Malta, it is considered received in Malta and thus a remittance.

The distinction here is between income and dividend. 4.1 seems to cover income from a company which is not a dividend, while 4.4 covers dividend income.

What are your thoughts @Marzio

If there is a public site with Maltese jurisprudence on this matter would be glad if someone could point me to it.

 

[blubb]

This is pretty hazy for me and up for interpretation. What if I have a SaaS and I build the entire product in Germany. I then sell it online, funds are flowing in, and I outsource the customer service, or it is run by bots. I move to Malta and manage the company, where would the actual work be performed?

While you can certainly very quickly get to a point where it isn't clear where the actual work is performed or what the actual work even is – it won't be in my case. My company will be selling services and I'll be performing them from Malta

1. Dividend is paid out by the company
2. Dividend is treated like arising in the country where the paying company is incorporated.
3. If paid into account abroad, is not considered received in Malta
4. Once transferred from the account abroad into Malta, it is considered received in Malta and thus a remittance.

All correct, but dividends are about the shareholder level while the whole "arising in Malta" discussion above concerns the company level.

 

[Marzio]

What are your thoughts @Marzio

Look if even your friend that works for the big four said that if structured correctly it could work who am i to disagree with him?

I think the best thing for both would be to get a professional advice from somebody on the ground in Malta because, especially with tax laws, the devil is in the details.

 

[FantomOffshore]

Look if even your friend that works for the big four said that if structured correctly it could work who am i to disagree with him?

He is not a Maltese lawyer, though. I just wonder how the people actively using this structure are doing it. I've contacted a few firms now.

I think the best thing for both would be to get a professional advice from somebody on the ground in Malta because, especially with tax laws, the devil is in the details.

Absolutely, I just always prefer to figure things out myself as well, since in this case the incentive for the tax lawyer, is as you stated, to say this structure won't work. There are almost no gains for him / her if somebody incorporates in the UK or somewhere else apart from the consulting fee.

All correct, but dividends are about the shareholder level while the whole "arising in Malta" discussion above concerns the company level.

True. On the other hand, dividend can also be considered income.

My company will be selling services and I'll be performing them from Malta

So what's your plan now, then?

 

[Marzio]

I just wonder how the people actively using this structure are doing it

I'm not 100% sure but i guess they are managing the company from Malta without having any Maltese employee. I don't see how Maltese tax administration could verify if the director is actively working for the company. They could guess "well you don't have any employee, you are managing the company from Malta so surely you are doing all the work" but they need to prove it, do they have the manpower to go after you? They are getting 5K tax without doing anything.

Also, all businesses need a help from somebody, you can't do it all alone so you could pay a freelancer to help you out and show invoices to anybody that question the fact that you are actively working from Malta.

Absolutely, I just always prefer to figure things out myself as well, since in this case the incentive for the tax lawyer, is as you stated, to say this structure won't work. There are almost no gains for him / her if somebody incorporates in the UK or somewhere else apart from the consulting fee.

That's 100% true.