STARTING A BUSINESS: MALTA VS. ESTONIA

Deciding upon a corporate structure and location is a key decision for every entrepreneur to make. Although there are quite a few high-quality options available, many people struggle to find the best corporate structure and suitable jurisdiction in which to set up a trading, holding or investment company.

One question we regularly receive is: “which is better: Estonia or Malta?” We hope that this article comparing the costs and benefits of running a business in Malta vs. Estonia will help you choose which is best for you.

Before we start, we remind you that you should ensure you always consult your tax lawyer before setting up a company abroad.

Estonia vs. Malta — which is best for business?

Malta — an international financial centre, well-positioned for business travellers, with a secure and friendly environment. It’s a trusted base for your business wealth with its attractive asset management and investment potency.

Estonia — on the other side of Europe, a Northern business hub, known as a digital state and a country of unicorns, Estonia is home to an impressive number of impactful and world-changing startups, with the safest digital commercial register in the world.

The financial aspect

Let’s assess the corporate tax, company registration and business environment in both Malta and Estonia.

• Both countries are members of the EU and Schengen area.
• English is the official language in Malta, while most Estonians speak English as well.
• Company formation in Estonia can be submitted entirely online by any e-resident. In Malta, it can be done fully online but only by licenced Corporate Service providers.
• Malta’s effective corporate tax rate is just 5%.
• Estonia has a standard tax rate of 20% on distributed profits.
• Estonia has a deferred corporate tax system, where tax is paid at profit distribution.
• Malta has a full imputation system; shareholders of Malta Co. are entitled to a tax refund.
• Both Estonia and Malta sport participation exemption on foreign qualified dividends.
• Capital gains are tax-exempt in Malta yet taxed in Estonia when distributed to shareholders.

Malta is not considered as a tax haven, it’s a well-regulated onshore jurisdiction. The corporate income tax rate in Malta is 35%, which is quite high. However, there is a law that provides that 6/7ths of the taxes paid will be refunded, which means that the effective corporate tax rate is just 5%.

From 2020, Maltese legislation allows for foreign legal entities to register a subsidiary in Malta and opt for fiscal unit group taxation and simply pay 5% corporate tax without a refund procedure. Simple, efficient, and with zero hassle, this sports a huge cash flow advantage. Taxes on dividends are charged at 0%. There’s no tax on capital gains.

Estonia charges 0% corporate tax if profits are not distributed, and 20% on distributed profits. However, this can be reduced to 14% if regular dividend distributions are made for three years or more.

There is no tax on outbound dividends and outbound interests and 0–10 % withholding tax on royalties.

While Estonia is also not a tax haven, its tax code has topped the Tax Competitiveness Index for several years.

Both countries have full access to tax treaties and EU directives.

Starting a company

How easy is it to actually start a company in the respective countries?

• Incorporating a limited company in Malta online takes up to 5 working days. Estonian e-residents can start a company in 2 hours.
• The minimum share capital for opening a company in Malta is EUR 1,200, of which at least 20% (EUR 240) is to be paid upfront. The minimum share capital in Estonia starts at EUR 0.01 per shareholder.
• The minimum number of shareholders is one: either for incorporation in Malta or Estonia. Corporate shareholders are permitted, and non-resident shareholders are permitted in both jurisdictions.
• There is no requirement to appoint a local resident director either in Estonia or in Malta. Corporate directors are permitted in Malta, not in Estonia. The minimum number of directors is one in both jurisdictions.
• Opening a business bank account in Malta can take up to 6 weeks with a local bank or 5 working days at E-Money Institution. The business banking options in Estonia are quite similar and the best option is to open a business account with a payment institution (Wise, Intergiro, OuiTrust, Payhawk). EMI provides more flexibility, with no need to physically visit their offices for identity verification, and requires less local substance for your business, than traditional banks do. For a local bank account, a strong local connection is needed.

In both countries, you can register your company online via local corporate service providers. The process of incorporation takes up to one week in Malta and a few hours in Estonia.

A local registered address is required for incorporation in Malta. A local director and a secretary, both are highly recommended to keep your daily business routine smooth and save costs. All these services can be provided by local licenced firms.

In Estonia, you will need a local contact person, who must be either a specially licenced firm or a professional practitioner (notary, lawyer, accountant, etc). These and other services are provided by InCorpora OU, an E-residency Marketplace Member.

For e-residents in Estonia, the initial due diligence is performed by the police i.e., the Government of Estonia.

In Malta, the Malta Business Register requires certain due diligence documents. However, as a foreigner, you will be using the services of a local service provider.

The due diligence requirements are similar in both jurisdictions. You will need to provide certified copies of a passport/ID card, proof of your residential address (usually a utility bill), if required, a professional reference letter for beneficial owners of the company, for shareholders and directors.

Running your company

Malta companies must submit an annual return to the Malta Business Registry, along with a declaration, which confirms that no changes of ownership took place during the past year. This is done on the anniversary of the company’s establishment.

Important: public access to beneficial owners’ information in Malta was declared invalid by the Court of Justice of the European Union on the 22^nd of November 2022. The access is limited to competent authorities and subject persons only.

VAT declarations for trading companies are usually submitted quarterly. Audited financial statements and tax returns are to be submitted every year within 9 months of the end of the financial year. An extension may be claimed if the company is registered after the 30^th of June.

Upon profit distribution, you pay 35% corporate tax — which can later be claimed back in part by shareholders, resulting in an incredibly low (5%) effective tax rate. Alternatively, you may form a fiscal unit in Malta, consisting of 2 companies (at least one of them should be Maltese) and pay 5% tax for a whole group, skipping the process of a tax refund.

The Malta Business Registry also provides software that allows submitting most documents online and executing the majority of business tasks remotely via an online system, secured by digital certificates. However, in some cases (share transfer, for example) hard copies of originally signed documents will be required.

In Estonia, company management must submit an Annual Report. Income, social tax, and VAT declarations are made on monthly basis.

Estonian e-residents have 24/7 remote access to manage their companies online from anywhere in the world. They can simply authenticate using their E-Residency digital IDs and log in to file company annual reports, declare VAT returns, digitally sign contracts, and encrypt and send documents.

An annual report must be submitted to the Estonian e-Business Register within 6 months of the end of the financial year. Income and social tax returns are to be submitted by the 10^th of every month in the Estonian Tax and Customs Board online environment (e-MTA), and VAT returns by the 20^th of each month.

Added bonuses

As a thriving business hub, Malta has many more corporate structures to offer, besides the incorporation of a limited company.

Estonia is one of the best jurisdictions for holding your investments. You can read a deep dive on this by reviewing our previous article: Why an Estonia Co. is the Best Vehicle to Hold Your Investments In.

An Estonia Co. is cheaper to run and administer than a Malta Co. Additionally, in Malta, an audit is required for all companies, no matter the size or volume of business.

Both jurisdictions are good for holding foreign subsidiaries as qualified foreign dividends are tax-exempt. However, capital gains are tax-exempt in Malta, yet trigger a corporate tax in Estonia if paid out to shareholders of the Estonia Co.

The best of both worlds

Some of our clients make the most of both jurisdictions, combining Estonia and Malta. This combination can be a highly efficient corporate structure utilising the best Europe has to offer. Again, proper tax advice is required before setting up any international corporate structure.

In this combination, Estonia provides a safe digital register, e-residency benefits, and full participation exemption on foreign dividend income. While Malta has the lowest corporate tax rate in Europe. Putting the two together produces fabulous results. This is the beauty of international tax planning.

If you’re interested in this model, please contact us to discuss it in more detail.

Malta and Estonia in numbers

* The Corporate Tax Rate in Malta is 35% until dividend distribution, however, there is a law that provides that 6/7ths of the taxes paid will be refunded, which means that the effective corporate tax rate is just 5%.

** The Corporate Tax Rate in Estonia is 0% until dividend distribution, and flat 20% on net profit distributions (calculated as 20/80). If a company pays out regular dividends for three years, Corporate Tax Rate lowers to 14% (calculated as 14/86). Estonia has a deferred corporate tax system.

Summary: Why Malta?

Located in the Mediterranean, midway between Europe and Africa, the beautiful island of Malta is an excellent option for international investors and entrepreneurs for business relocation.

With its solid financial climate, strong political support from the government, attractive corporate tax system and plenty of corporate structures to choose from, Malta is gaining a position of a top choice.

With its cutting-edge infrastructure, robust asset management and investment fund sectors, and solid private wealth structure, such as trusts and foundations, Malta will take your business, wealth, and security to a new level.

However, a Malta company is somewhat more costly and the procedure of incorporating such a company is more time-consuming than alternative company incorporation in Estonia.

Summary: Why Estonia?

Estonia offers a simple, online process for foreign entrepreneurs to register an EU business.

Estonia has built a trustworthy, secure, efficient, and entrepreneur-friendly business ecosystem with minimal red tape and innovative regulations. Its favourable business climate allows anyone, from micro-enterprises to large multinationals, to build sustainable and successful ventures.

Conclusion

Malta does not have the lowest incorporation costs or state-of-the-art E-residency, which allows business owners to perform any routine operation online and at lightning speed.

If simple, fast, and money-saving incorporation and company maintenance is your priority then Estonia will fit the bill.

However, if you are looking for more advanced and flexible corporate structuring, a low effective tax rate, and potency for investment and private wealth, then a Malta company could become an essential part of your prosperity strategy.

For more information please contact us and we would be happy to consult you.