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If you’re thinking of using Malta as part of your international business strategy, you’ve probably come across its attractive tax benefits. One of the key questions you’ll face is:
Should you:
- Form a separate subsidiary in Malta, or
- Set up a Fiscal Unit (with your foreign company as the parent and a Maltese company as the local subsidiary)?
What’s better for your tax planning?
Let’s break it down in super simple terms so you can make the best decision!
Option 1: Form a Subsidiary in Malta
This option involves setting up a brand-new company in Malta, which will be a standalone legal entity. Think of it as a “little sibling” to your main company. Here’s how it works:
- The Maltese company operates independently and pays taxes in Malta.
- Malta has a corporate tax rate of 35%, but here’s the catch: with its refund system, shareholders can often reduce this rate significantly (sometimes as low as 5%).
- You’ll still need to manage two separate entities: your main foreign company and the Maltese subsidiary.
Why might this be a good idea?
- Simple structure: If you’re just looking to expand operations or tap into Malta’s tax perks, a subsidiary keeps things straightforward.
- Tax refunds: Malta’s tax refund system could work in your favor, if you have non-resident shareholders and offer your services/products outside of Malta.
- Flexibility: You can design the subsidiary’s operations as you see fit.
Challenges to consider:
- Separate administration: You’ll have to maintain compliance and reporting for two separate entities, which can increase costs.
- Limited integration: The Maltese company’s profits and losses aren’t automatically connected to your main foreign company.
- Tax Refunds take time. Are you ready to wait?
Option 2: Create a Fiscal Unit
What is a Fiscal Unit?
A Fiscal Unit lets your foreign company act as the “parent” of a Maltese subsidiary, effectively merging them for tax purposes in Malta. Instead of treating the two companies as separate entities, they’re considered a single group for tax reporting.
Why is this important? Because it gives you serious tax efficiency and control, something you don’t get with a standalone subsidiary.
Why a Fiscal Unit Wins for Tax Planning
Consolidated Tax Reporting
One of the biggest benefits of a Fiscal Unit is that you only need to file one tax return for the entire group in Malta. This can save you time and reduce administrative headaches compared to managing two separate entities.
- The profits and losses of the Maltese subsidiary are automatically “merged” with the parent company.
- This means you can offset profits with losses across the group, potentially reducing your overall tax liability.
5% Corporate Tax paid on the whole group, instead of Tax Refunds
Your foreign parent company receives the same tax benefits as it would if the Maltese subsidiary were standalone. But now, you can apply these benefits across the group, creating a more streamlined process.
Cash Flow Advantages
When the parent and subsidiary are treated as one, there’s no need for inter-company payments (like dividends or loans) to move money around. This makes managing cash flow between your foreign company and the Maltese entity much easier.
Maximized Tax Efficiency
With a Fiscal Unit, your group’s financials are viewed as one big picture. Here’s what that means for you:
- If your foreign company has losses, they can help offset the profits of the Maltese subsidiary.
- Likewise, if the Maltese company experiences losses, those can reduce the overall tax burden of the parent company.
In short, it’s a more flexible and optimized system for managing taxes across borders.
Stronger Group Integration
A Fiscal Unit simplifies the connection between your foreign company and the Maltese subsidiary. Instead of running two separate legal and operational systems, the Fiscal Unit allows for more streamlined management and alignment of business goals.
Appealing for Larger Operations
If you’re a growing business or part of a larger corporate structure, the Fiscal Unit model becomes even more attractive. It’s designed to handle complex, multi-jurisdictional setups efficiently, which might save you headaches in the long run.
Comparing Fiscal Units to Subsidiaries
| Feature | Fiscal Unit | Standalone Subsidiary |
|---|---|---|
| Tax Filing | Single consolidated return | Separate tax return for each company |
| Profit/Loss Offsetting | Group profits and losses can offset each other | No automatic offset; handled as separate entities |
| Cash Flow | Simplified within the group | Requires inter-company transactions |
| Tax Refunds | No need, 5% tax straight away for a group | Applies to the subsidiary only |
| Complexity | Upfront setup but streamlined long-term | Simpler setup but more ongoing admin for two entities |
What to Watch Out For with a Fiscal Unit
While a Fiscal Unit is incredibly beneficial, it’s not for everyone. Here are a few things to consider:
Eligibility Requirements
Malta has specific rules about who can form a Fiscal Unit. For example:
- The parent company must own at least 95% of the Maltese subsidiary.
- The parent company can be either Foreign or Local, while the trading subsidiary must be registered in Malta.
Make sure your business structure meets these conditions!
Legal and Tax Advice is Essential
Setting up a Fiscal Unit involves more planning upfront. You’ll need professional advice to ensure compliance with both Maltese law and international tax rules. Contact us now!
When a Fiscal Unit is the Right Choice
A Fiscal Unit shines when:
- You’re operating across multiple countries and need a global tax strategy.
- You value time & can’t afford to wait for a tax refund.
- Your parent company or Maltese subsidiary is likely to have fluctuating profits or losses.
- You want to simplify cash flow and administration between entities.
- You’re planning for long-term growth and want a scalable, efficient setup.
For companies running operations outside of Malta, the Fiscal Unit model offers unmatched tax efficiency, integration, and simplicity. While it requires a bit more effort to set up, the long-term benefits—like consolidated reporting, loss offsetting, and cash flow optimization—make it a winning choice for many businesses.
Before making your decision, consult a tax expert to ensure a Fiscal Unit aligns with your company’s goals and meets all eligibility requirements. With the right guidance, Malta’s Fiscal Unit system could be the secret to supercharging your international tax strategy!
Here’s to smarter tax planning and business success in Malta! Contact us now!
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