Guide to a Foreign Company for Businesses and Entrepreneurs to Reduce Tax, Ensure Compliance, and avoid the abusive use of a sham foreign company
How to set up a foreign company (in Malta or elsewhere): Pay less tax and mitigate the risks of the abusive use of a sham foreign company for an Effective and Compliant International Tax Planning Strategy
TABLE OF CONTENTS
WHAT IS A SHAM FOREIGN COMPANY (FICTITIOUS FOREIGN COMPANY)
HOW TO SET UP A COMPANY ABROAD
WHEN A COMPANY IS TAX RESIDENT IN ITALY OR IN THE COUNTRY OF ORIGIN OF THE UBO
SETTING UP A FOREIGN COMPANY IN MALTA
TAX ADVANTAGES OF A COMPANY IN MALTA
HOW TO AVOID THE ABUSE OF A SHAM FOREIGN COMPANY OR A FICTITIOUS COMPANY
Many advertisements promise to set up a company in Malta, Switzerland, Cyprus, Dubai, Singapore, the USA—or in other jurisdictions—for a few thousand euros, in a few days, without being physically present, and immediately enjoying tax advantages, for example, paying only 5% in taxes in Malta.
Is this all true?
There is no single answer: it depends on factors such as international compliance and its real operational capacity.
It depends on your business project, your objectives, how the company is structured, and how the project is actually implemented. The residence of shareholders (natural person or corporate entity) and directors, how dividends will be received, and many other specific circumstances also matter.
You can establish a fully regular structure that conforms to local and international regulations and obtain legitimate tax benefits.
Similarly, you could set up a company that provides no real benefits and instead exposes you to costs and risks—for example, penalties for abusive use of a sham foreign company or regulatory non-compliance.
WHAT IS A SHAM FOREIGN COMPANY (FICTITIOUS FOREIGN COMPANY)
In simple terms, under Italian regulations (and similarly in all OECD countries), a sham foreign company is one that is formally headquartered abroad but is, in reality, fictitiously foreign because it is managed and controlled from Italy. This occurs if its effective place of management is in Italian territory and if it lacks a real premises, autonomous management, resident directors or staff, and substantive economic activity in the foreign country.
This means that Italy, through investigations also via the international exchange of information, can tax all of the company’s income as if it were an Italian company, with heavy penalties and interest for omitted or late tax returns and, in the most serious cases, even criminal charges for tax evasion.
HOW TO SET UP A COMPANY ABROAD
The first step is to consult a professional experienced in international advisory, with cross-border expertise in the regulations of the involved countries and their interpretation of international conventions (DTTs).
This professional must understand your needs and advise you on the most efficient corporate structure, assess the tax residence of shareholders and directors and the related implications, decide whether establishing a holding company is appropriate, and verify how dividends will be distributed and their tax treatment.
An independent consultant, free of conflicts of interest on where the company has to be domiciled, after a thorough due diligence, might even advise against setting up a foreign company: it is often preferable to avoid unnecessary costs and structures that could lead to double taxation or heavy penalties.
Relying on the experience of a friend who set up a company in Malta, Delaware, or Dubai is not enough: business projects are rarely identical, and it is possible that the friend’s company is neither compliant with regulations nor tax-efficient.
Similarly, consulting an AI website is insufficient: answers found online are often generic or contradictory and cannot replace a complex, personalized analysis that verifies the specificities of your project.
It is also risky to use one of the many online sites that promise to set up a foreign company with a few clicks without understanding the regulations and implications of this choice. Once you have opened your “box,” you must then fill it with substance and make it function in compliance with the rules.
Every project has its own specificities and requires a detailed, preliminary cross-border analysis (e.g., the nature of the business, the clients, the chosen jurisdiction for the company, the identity of shareholders (individuals or legal entities) and directors, their country of residence, how and where you intend to receive dividends, etc.) to be able to suggest the most advantageous and compliant tax solution under the laws of the involved countries.
To set up a foreign company without the risk of Italy (or any other jurisdiction involved) considering it fictitiously established abroad, one must start from an analysis of Italian regulations on the tax residence of companies.
WHEN A COMPANY IS TAX RESIDENT IN ITALY OR IN THE COUNTRY OF ORIGIN OF THE UBO
The concept of tax residence for individuals, companies, and entities is evolving under OECD regulation and local laws, and has profoundly changed as of January 1, 2024, following the amendments introduced in Italy by Legislative Decree No. 209 of December 27, 2023.
As extensively explained in the article “ON THE TAX RESIDENCE OF COMPANIES and ENTITIES,” with clarifications from the Revenue Agency’s circular, companies and entities are now considered resident if, for the majority of the tax period, they have in the territory of the Italian State:
- The legal domiciliation address, or
- The place of effective management, understood as the continuous and coordinated assumption of strategic decisions concerning the company or entity as a whole; or
- The primary ordinary management, understood as the continuous and coordinated execution of acts of current management concerning the company or entity as a whole.
The rule of the alternativity of the three criteria remains, as the occurrence of just one of them is sufficient to establish residence in Italy, provided it persists for the majority of the tax period.
The criteria for determining a company’s tax residence must also consider the regulations established by the OECD Double Taxation Conventions, signed by Italy with various countries worldwide.
SETTING UP A FOREIGN COMPANY IN MALTA
The most common company type in Malta is the Limited Liability Company or Ltd, a private company limited by shares with a minimum share capital of EUR 1,164.69.
To proceed with the registration of a company in Malta at the Business Registry, a company name is required, along with a Memorandum and Articles of Association specifying the company’s Maltese registered office, its corporate purpose, its main intended business activity, the share capital (minimum of Euro 1,165.00, of which at least 20% must be paid up upon incorporation), the details of the shareholders (individuals or legal entities, from 1 to a maximum of 50), the director, and the company secretary, who must be resident or have a professional domicile in Malta, and the corporate structure.
Some activities (e.g., financial services, cryptocurrencies, online gaming, investments) require specific licenses or authorizations from supervisory authorities like the MFSA (Malta Financial Services Authority).
TAX ADVANTAGES OF A COMPANY IN MALTA
The standard corporate tax rate is 35%. However, Malta has a special refund system, whereby tax refunds of up to 6/7ths of the tax paid are granted upon the distribution of dividends, effectively reducing the tax burden to 5%.
Malta has a unique tax system, called the “full imputation system.” This means that when a Maltese company pays tax on its profits (e.g., 35%), that tax is “imputed” to the shareholders when they receive dividends.
In practice, the same tax is not paid twice—once at the corporate level and again at the shareholder level, as happens in many other countries. Therefore, when the company distributes dividends, the shareholder is entitled to a refund of the tax already paid by the company.
malta corporate tax maltaway
Another tax advantage in Malta is the tax exemption on Royalties derived from patent rights.
In Malta, as the only white-listed country with a permanent NON-DOM territorial taxation system, there is also an articulated low-tax system for individuals, with ordinary and special regimes, for which our professionals are authorized intermediaries.
HOW TO AVOID THE ABUSE OF A SHAM FOREIGN COMPANY OR A FICTITIOUS COMPANY
Let’s consider the case of Luigi, an Italian entrepreneur who lives and works in an Italian city. After reading online that companies in Malta pay only 5% tax, he decides to set up a company there for his business.
In a short time, without leaving Italy, he contacts a local operator and opens his Maltese company.
In reality, Luigi continues to make operational decisions and manage his company from Italy and acts as its director. Or, even if he appointed a Maltese director, this person has no substantive role in decision-making.
The Italian Revenue Agency could conduct audits and challenge Luigi, claiming the company is A FICTITIOUS COMPANY because the effective place of management of the business is in Italy, and demand payment of taxes in Italy with the application of heavy penalties.
The Italian tax administration can, in fact, consider a company, even with a foreign legal seat, as resident in Italy by applying a series of substantive and formal criteria.
To avoid incurring double taxation—being taxed both in Italy and abroad—it is essential to pay the utmost attention to the formal and substantive aspects of incorporating a company.
These include the location of the registered office, the drafting of the Articles of Association and corporate regulations, any connections or control relationships with Italy, the organizational choices related to the new Company, the director or the composition of the board of directors, the location of meetings, and the place where decisions and directives for managing the corporate activity are made and issued.
It is important to make an informed choice, supported by an in-depth analysis of the project and the corporate structure, to protect oneself proactively and ensure correct tax and legal planning.
A serious professional, when evaluating the setup of a company abroad, should conduct a detailed analysis and present the client with a clear choice:
Build a structure with real economic substance, effective presence, and operational management abroad; or
Acknowledge, realistically, that the goal of obtaining 5% taxation in Malta, for example, for their specific type of activity and project is not sustainable.
This approach avoids creating a sham company, i.e., one fictitiously established abroad, with all the resulting fiscal and legal implications.
CONTACTS: How to set up a foreign company (in Malta or elsewhere): Pay less tax and mitigate the risks of abusive use of a sham foreign company, for an Effective and Compliant International Tax Planning Strategy
We are an International Legal and Tax Advisory Firm, staffed exclusively by professionals with 40 years of experience across over 30 jurisdictions. We assist you in transferring or incorporating a company abroad for advantageous taxation.
For a preliminary detailed analysis and specific consultancy to define a personalized strategy for setting up a foreign company in Malta or other jurisdictions, contact us for a confidential consultation.
CONTACTS MALTAWAY
You must be logged in to post a comment.