The Importance of Substance


With all the changes being carried out at OECD level, the requirement for an operation to have substance in the country where such operations are carried out has become of utmost importance and should be planned seriously. Substance was always a very important matter, however, this has significantly increased once the OECD presented its action plan on Base Erosion Profit Shifting (BEPS).

Substance has become a key term when setting up a new corporate structure, in international tax planning and in restructuring of existing corporate structures.

Companies or shareholders operating companies overseas and benefitting from lower taxes in those countries will need to ensure that their corporate structure is still valid in today’s day and age.

The ultimate goal of BEPS is to counter tax fraud and prevent the granting of tax treaty benefits to international corporate structures set up to make use of the beneficial double tax treaties. In broad terms, this means companies must show that the management, control and day-to-day decisions concerning business activity are taken in the country where the company is based.

What sort of substance should one look at as a minimum?

In the absence of a formal definition of the management and control requirement, the following parameters are normally accounted for when setting up a Malta Company:

  • Composition of the Board of Directors with at least 50% or more being a Maltese national or having permanent place of residence in Malta;
  • The decisions of the board are taken in Malta and the minutes recorded locally through regular board meetings;
  • Economic substance is present within Malta such as an office and employees.

The “substance over form” doctrine is now being considered throughout the EU and this is also the case in Malta; overlooked from an Inland Revenue, Banking and Administrative perspective.

Corporate structures cannot be generalised though they must be tailor made according to the operations of the company and must be looked at on a case by case basis.

Points to consider when setting up a new structure;

  • Obtain a tax opinion prior to setting up or entering into a transaction. Obtaining a tax opinion in advance will provide assurance that every transaction is well looked into from an international stand point and in line with the economic substance requirements.
  • If there is any doubt, obtain a tax ruling.
  • Appoint qualified individual directors who are able to understand the business activity.
  • Set up an office in the country you carry out your operations with the necessary number of individuals to provide the economic substance.
  • Carry out regular board meetings (such as 1 per quarter as a minimum) and have these recorded and safeguarded.

The substance requirements do increase the costs for a company that lacks substance, however, the risk of being challenged by the tax authorities in the future for the lack of substance on certain transactions will surely be more costly and troublesome for an entity.

About the Author

Malcolm Ferrante forms part of our International Tax Advisory department at CSB Group. His role involves assisting a portfolio of clients with tax advice while also assisting with the preparation and submission of Company Tax Returns and Tax refund forms.

For further information and on advice and assistance as to how CSB Group may be of help in setting up your structures in Malta in the most tax efficient way or reviewing an already existing structure in line with the current international tax rules, please contact Malcolm Ferrante on [email protected].