Over the years I have witnessed what has today become a typical story: lured to Malta by a variety of reasons, be it to take advantage of a beneficial residency programme or simply to retire under the sun, an expat takes the plunge and moves to our islands. Not long after settling in, the expat finds out that Malta has more to offer than initially thought and starts considering moving his or her business too.
One of the first questions asked would unexpectedly be: how can one establish a business presence here in Malta? This is asked because there are a number of different ways to establish a business, such as a Maltese limited liability company, a branch of a foreign company or a partnership (general or limited). Expats may be unsure what best type of setup would suit their particular circumstances. The choice, however, is generally narrowed to two – i.e. a branch or a company. The pros and cons of both options are briefly discussed below.
A limited liability company is the most popular, accepted and recognised form of business entity, and for this reason many choose this option. It is relatively fast and easy to set up a company in Malta – the main document required is a memorandum and articles of association signed by all the shareholders. No notarial deed or Apostille documents are necessary.
Following incorporation, the company must abide by a number of compliance requirements on a yearly basis: e.g. the preparation and filing of audited financial statements, the annual return, the income tax return and VAT returns (if applicable).
There is no exception from the preparation of audited financial statements, even in the case where the company has not carried on any trading activities and is dormant.
Maltese branch of a foreign company
Entrepreneurs who migrate to Malta would typically already own a foreign company in their prior country of residence.
Although it may initially appear to be a simpler option to just register their foreign company as an 'overseas company' with the Registry of Companies, the compliance requirements of a Maltese branch do not differ much from those of a Maltese limited liability company. Audited financial statements, income tax returns and VAT returns (as applicable) would still need to be prepared and filed with the Maltese authorities. From an administrative perspective, the costs of running a company are similar to those of a branch.
From an income tax perspective, while both companies and branches are subject to income tax at the rate of 35 per cent, branches are generally only taxed on income and certain capital gains arising in Malta. On the other hand, companies are subject to income tax and certain capital gains on a worldwide basis.
Even though companies have a much wider tax net, with proper planning, the effective tax rate of 35 per cent may be reduced significantly through a refund system. Also, people making payments to the branch are in certain cases required to withhold Maltese income tax, an administrative burden which does not exist in the case of a company.
Overall, if the expat plans to stay in Malta for some temporary purpose only, a branch may be more suitable compared to a Maltese company since it is easier to close a branch down – all that is required is a notification to the Registry of Companies and other Maltese authorities as applicable. On the other hand, in order to close a Maltese company, the full liquidation procedure must be followed.
If the intention of the expat is to create a stronger and more permanent business connection to Malta, the setting up of a Maltese company presents the better option. Local banks may feel more comfortable providing finance to Maltese companies rather than to local branches of foreign companies.
It must be kept in mind that from a legal perspective a branch is not a legal person separate from its head office. A branch can be said to be a limb of the foreign company such that any legal contracts entered into by the branch are automatically binding the foreign company.
In contrast, a Maltese company is a separate legal person in itself such that any legal contracts it enters into do not bind any other related company that the expat may own.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.