Malta 5% structure – reduce fixed cost and unshell (ATAD3) proof it

[TarderJoe]

Hi everyone,

The topic has been partly covered here and there already and I am trying to gather the bits and pieces. I am opening the thread because others are facing the same challenge and it will be good to have the situation in Malta and possible solutions up to date.

I have a 3-tier structure of Trading LTD (MT), Holding LTD (MT) and Scottish LP (UK).
The LP is necessary because I am residing full time in Malta, managing the LTDs.

Currently, all three entities are managed by a company service provider.
The situation with the CSPs in Malta becomes increasingly dissatisfying.
They charge a high “maintenance fee” for providing registered address, company secretary and filing of annual return. And they treat you as if they own you, because they know that it is super difficult to change the structure.

So far have figured out the following solutions:

1. Reduction of the fixed cost.
If residing in Malta, you can be your own company secretary and you can make your flat or office registered address. To file the annual return is quite easy. By this, you can pull out Trading and Holding from your CSP and reduce the cost a lot (>50%).

2. Elimination of the Holding
To get the tax credit you don’t need the Holding, because the outside entity also can form a fiscal unit. Personally, I will keep it, because with a local bookkeeper, it won’t cost a lot and you never know if you might use it in the future.

3. Replacement of the foreign entity (here: Scottish LP)
This is the point I am struggling. The LPs unlimited Partner is the CSPs LTD. You can’t replace it with your own LTD, because the Scottish LP always needs to consists of two individuals, otherwise it will fall apart. I wonder if they set up this up purpose, in order to lock you in.
So, I am looking into alternative, how to completely 100% of the structure and break free from any CSP or third party.

The following suggestions came up on replacing the Scottish LP:
A) Cyprus LTD. It should work, but you need a local director so you are again dependent of an CSP. And it’s even more expensive than Scottish LO.
B) Delaware LLP. I won’t consider it, because the US involvement makes it more complicated.
c) UK LTD. which you can form without residing in UK and a company secretary is not necessary. Compared to the Scottish LP it more complicated and costly, because the LTD cannot be exempt from bookkeeping, filing annual statements etc. The UK LTD will receive dividends tax free form Malta because it is from a subsidiary. The dividends will then be distributed to UBO, currently there is no withholding tax.
D) Partnership in another EU jurisdiction e.g., Estonia
There is a good thread about this: https://www.offshorecorptalk.com/threads/eu-partnerships.42053
@Don has provided a lot detailed information about this.
To me this seem to the closest thing to the Scottish LP setup. Estonia LP is a legal entity on its own. Pass through dividends are not taxed.
However, it’s not clear to me if I can set up the Estonia LP without a local director. And if the unlimited partner can be a LTD owned by the limited partner, i.e. the UBO will totally control the set up. With Scottish LP that’s not possible.

Unshell (ATAD3) proofing:

It is questionable, that any of the above entities will pass the EU unshell test. As a result, the dividend payment to UBO residing in Malta could be regarded as Malta origin, and become taxable in Malta, so the overall 5% tax set up is lost. They could also become taxable in the outside holding because an unshelled company would lose its DTA and parent-subsiary benefits.

So, what I am looking for is a long term solution for the non-Maltese holding:
-That would not be subjected or preferably not affect by unshelling.
-Ideally it should be completely controlled by the UBO. To not be dependent on third parties.

Does anybody have experience with replacing a Scottish LP ? Please share.
Any other suggestions are also very welcome!

Joe

 

[Don]

Can you further elaborate why you need a Scottish LP?

It seems overcomplicated structure.

I believe you should be able to create another LP with yourself and the Scottish LP and then set the same LP as a GP for the other LP, replacing the 3rd party.
LP-s are great structures for personal use and it often doesn't cost much to create one extra that will be completely dormant. Ideally you would want to manage LP without being GP yourself to limit personal liability.

In Estonia local director is not a legal requirement. You need to appoint a professional service provider as a legal contact person to provide you with an address though, which should come bundled with mail-forwarding service.

 

[TarderJoe]

As I am residing in Malta, I can’t own my MT companies directly.

When the MT government designed the 5% scheme they needed a way to prevent all the existing businesses (owned by Maltese) to access it. Otherwise they would have eroded their tax base. So they made in a way that it works only for foreigners that fall under non dom taxation.

The outside holding does not necessarily have to be an LP. That’s just the solution my CSP is offering.
I have been thinking whether an UK treaty non resident LTD could also be used instead of LP.
The key point is that the outside holding must be able to pay dividends to the UBO residing in Malta and these dividends must be considered to by paid from an outside entity in the MT tax offices view.
Therefore my worry about the unshell directive.

Your suggestion to replace the LPs current GP with another LP formed by myself is interesting and creative. But I have been told, that for an LP you always need to have 2 different natural persons behind it in the end. I was told that you can’t form a partnership with yourself, which would be the case with your idea.
Otherwise I would just have formed a UK LTD and make it the GP.

 

[uncreative]

Hi, I have the same maltese structure with the scottish LP and the end.
I can understand what you write. I see it similarly, you have the feeling of being trapped in the quite complex construct.

It works and if you have a good service provider that you trust and who handles the paperwork on time, it can also have advantages.

Nevertheless, there are additinal fixcosts in my case of 15-20k per year just for the administration of the company.

I also find it too complex and what bothers me most is the idea that the general partner finally has the main power in the Scottish LP. One reason why I don't use the maltese holding for investing.

But if I were you, I would just wait and see for at least 1 year. A new tax structure is on the way at the latest 25.
It will probably become easier and you may only need one company.

Everyone has to decide for themselves whether Malta will still be so lucrative as a business location after the tax change.
I think the CIT will be increased to 10-15% under pressure from the EU, but maybe you can user after it a simple setup.

I would therefore wait and see for now, in the end you will invest time, money and effort in changing the setup and Malta will no longer be lucrative enough for you due to the change in the tax regime.

Another important point in this context:
How does the Maltese exit tax actually work in this setup? Maybe it also has advantages that the Scottish LP is the head of the setup... Because if you move away, the exit tax shouldn't actually apply, it would have to be due in Scotland?

So far, no one has been able to tell me how exactly the exit tax is calculated and whether you have to pay it if you simply leave Malta and look after your customers with another company in a new country, for example.

 

[TarderJoe]

Ok got your point of waiting out for one year. I hope they will not increase the tax to much or at least only for the large corporations.

I am also not doing investments with the Maltese company but for another reason: if you do everything outside Malta, dividend, interests and capital gains are tax free with non Dom taxation.

The exit tax is also totally unclear for me, but I know that they still promote Malta to startups, because of low tax when exiting the investment.

 

[Cavaliere]

The exit tax is indeed very confusing, there is also a very large disconnect between what is put into writing and what is enforced in Malta.

Most companies in Malta do not turn a profit on paper, most do not even pay VAT. There is some enforcement on VAT now at say the village grocer if you've read The Times.

I do wonder, how do you structure your ininvestments? Do you use a non-Malta entity for that?

 

[TarderJoe]

I am holding the securities with an online broker.

 

[Don]

The outside holding does not necessarily have to be an LP. That’s just the solution my CSP is offering.
I have been thinking whether an UK treaty non resident LTD could also be used instead of LP.

I don't see why a treaty non-resident UK LTD would not work.
What jurisdictions do you have in mind for treaty residency?

If you are restructuring, maybe you want to include a foundation or trust instead for asset protection.
You could probably replace the GP with some foundation or non-profit.

Estonia could be a decent option if you want to save money.

 

[TarderJoe]

Re treaty non-resident UK LTD : I would make the LTD resident in Malta, thus it can form a fiscal union with the Maltese trading LTD and eliminate the need for the maltese holding. In Maltese taxation view the pass through dividends should be viewed to have arisen from UK, because they look where the paying entity is incorporated and that is still the UK. Hence not taxable for non Dom individuals.

@Don as you have already pointed out the advantages of Estonian LP as simple solution instead of Scottish LP, could you please comment of the following

For Estonian LP:
-you don't need local director and secretary (you said this already above)
-you need a second (local) natural person to from a partnership ? This would be provided by local CSP ? Or is there a way to form a LP completely by oneself ?
-the distributed pass through dividends would be not taxable in Estonia ?
-LP is an legal entity of its own right, even though it may be fiscally transparent, it is incorporated in Estonia , so the pass through dividers payment are considered to arise from Estonia

 

[Don]

For Estonian LP:
-you don't need local director and secretary (you said this already above)

Yes! From legal perspective you only need CSP for legal address/mail handling.

-you need a second (local) natural person to from a partnership ? This would be provided by local CSP ? Or is there a way to form a LP completely by oneself ?

You can do yourself. If you want you can have a ready made second LP be a GP of the LP and at the same time the same LP can be a partner of the other LP. Its possible to achieve no financial statements reporting and no personal liability.

-the distributed pass through dividends would be not taxable in Estonia ?

Participation exemption applies, so no.

-LP is an legal entity of its own right, even though it may be fiscally transparent, it is incorporated in Estonia , so the pass through dividers payment are considered to arise from Estonia

Yes LP is a company tax resident in Estonia.
As an additional benefit you can leverage the profits not taxed until distribution regime and no WHT on interest paid by non-residents, so its a great addition to the structure for treasury purposes.

 

[TarderJoe]

As an additional benefit you can leverage the profits not taxed until distribution regime and no WHT on interest paid by non-residents, so its a great addition to the structure for treasury purposes.
@Don with this you mean that Estonian LP will be used to accumulate the profits and re-invest instead of dividend payout ? LP would need to have bank and borkarage account, I am not sure how easy it is to open account e.g. with Interactive broker for such a vehicle.

Ay per your second part: No WHT on interest paid by non-resident
How would one pratically use it ? would it possible to give a shareholder loan UBO to LP, LP would give intercompany loan to Malta LTD. Interest Malta to LP will reduce MTCo profits, LP will pay interest to UBO without any tax ?

It sounds almost to good to be true.
Will it survive unshell ATAD3 ? Probaly difficult to tell now.

 

[Don]

As an additional benefit you can leverage the profits not taxed until distribution regime and no WHT on interest paid by non-residents, so its a great addition to the structure for treasury purposes.
@Don with this you mean that Estonian LP will be used to accumulate the profits and re-invest instead of dividend payout ? LP would need to have bank and borkarage account, I am not sure how easy it is to open account e.g. with Interactive broker for such a vehicle.

Yes, it can be reinvested without tax.
Interactive brokers is very common.
There are also some local alternatives like Lightyear, which is not super awesome but very easy to open an account compared to IBKR.

Ay per your second part: No WHT on interest paid by non-resident
How would one pratically use it ? would it possible to give a shareholder loan UBO to LP, LP would give intercompany loan to Malta LTD. Interest Malta to LP will reduce MTCo profits, LP will pay interest to UBO without any tax ?

It's possible in theory.

It sounds almost to good to be true.
Will it survive unshell ATAD3 ? Probaly difficult to tell now.

Depends on the context.

 

[A1988]

Sorry if I am missing something, if you are a day trader, you can just trade under your personal name with an individual account with IBKR and bring all capital gains into Malta tax free as non dom? Why pay extra for companies? The law is pretty simple for non doms, all capital gains arising outside malta are not taxed in malta even If remitted to malta.

 

[MarkusCostigan]

Sorry if I am missing something, if you are a day trader, you can just trade under your personal name with an individual account with IBKR and bring all capital gains into Malta tax free as non dom? Why pay extra for companies? The law is pretty simple for non doms, all capital gains arising outside malta are not taxed in malta even If remitted to malta.

Yes, but active trading cannot be considered as capital gain... but as income ( brackets 0/35%).

 

[A1988]

Yes, but active trading cannot be considered as capital gain... but as income ( brackets 0/35%).

Yes but the idea of non dom is just the opposite right? Say one resides in malta and trades futures and options on a daily basis in the US with his own capital and brings that capital gains inside malta or leaves it outside, how will it be taxed under income? It's the person's capital that he is risking ? The law for non dom in malta states any capital gain arising outside malta is not taxed and even if brought into Malta is exempt from any tax.

 

[PhantomOf ThePits]

Yes but the idea of non dom is just the opposite right? Say one resides in malta and trades futures and options on a daily basis in the US with his own capital and brings that capital gains inside malta or leaves it outside, how will it be taxed under income? It's the person's capital that he is risking ? The law for non dom in malta states any capital gain arising outside malta is not taxed and even if brought into Malta is exempt from any tax.

Its like MarkusCostigan said.

I lived on Malta few years ago but left again
I do active futures/stocks/crypto trading.

As an individual, you'll run into big tax issues if you do that when you are physically on Malta (and even if you're not physically there).

Spoke before moving there to different lawfirms and asked them like 'ok, if i buy on Malta, take a ferry to Sicily and sell there' is that an issue?
All said no.
But the thing is active trading is a niche and many tax advisors have no idea about it.

I wanted to get a tax ruling but they denied it as they said it's Malta generated income even if I'm not physically there as they consider it my main residence.

So, if you want to be on the safe side, dont trade actively from Malta and dont trust most advisors.

Maybe the tax office wont find out, but if they catch you, might run into big tax issues.



Only way potentially around it is trading with a company structure but there you're running into different other issues while being Maltese NonDom

TLDR:
Dont move to Malta as an active trader who generates big enough profits from the activity.

 

[burden]

Maybe the tax office wont find out, but if they catch you, might run into big tax issues.

How big are your tax problems after all?

Dont move to Malta as an active trader who generates big enough profits from the activity.

Good advise, always heard the opposite. Malta has been good for exact that activity also as private investor in stocks & crypto.

 

[PhantomOf ThePits]

How big are your tax problems after all?

Good advise, always heard the opposite. Malta has been good for exact that activity also as private investor in stocks & crypto.

Yeah I also heard that advise before, even from professional tax advisors.

However, if you dig deeper, you have big risks there as an ACTIVE trader which is then not considered cap gains, but income.
Maltese income tax is not cheap.

Better dont move to Malta to actively trade from there -- i spent lots of time and money to investigate it and came to the conclusion its better to move

 

[A1988]

Yeah I also heard that advise before, even from professional tax advisors.

However, if you dig deeper, you have big risks there as an ACTIVE trader which is then not considered cap gains, but income.
Maltese income tax is not cheap.

Better dont move to Malta to actively trade from there -- i spent lots of time and money to investigate it and came to the conclusion its better to move

What are the alternate options aside from Malta? In europe, Asia, Latin America and central America in your opinion? The advisor I spoke to said if its your capital, it's under private investment management, you are managing your own capital and generating income from it, the maltese law does not specify it clearly but capital gains generated outside malta for non dom is not taxed even if you bring it to your maltese bank account or definitely not taxed if kept outside malta in my opinion.

 

[aniglo22]

What are the alternate options aside from Malta? In europe, Asia, Latin America and central America in your opinion? The advisor I spoke to said if its your capital, it's under private investment management, you are managing your own capital and generating income from it, the maltese law does not specify it clearly but capital gains generated outside malta for non dom is not taxed even if you bring it to your maltese bank account or definitely not taxed if kept outside malta in my opinion.

Did you try Cyprus ? Monaco would be also an option if you are wealthy.