The Economic Substance Regulations (ESRs) in Malta were introduced to align with international standards set by the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD). These regulations require certain companies to demonstrate that they have substantial economic activity in Malta. Here’s an overview of the key aspects of Malta’s Economic Substance Regulations:

1. Applicability

The ESRs apply to companies engaged in relevant activities, including:

• Banking.
• Insurance.
• Fund management.
• Finance and leasing.
• Shipping.
• Holding companies.
• Headquarters.
• Distribution and service centers.
• Intellectual property (IP).

2. Core Income-Generating Activities (CIGA)

Companies must carry out core income-generating activities in Malta, which vary depending on the business activity:

• Banking: Raising funds, managing risk, taking hedging positions, etc.
• Insurance: Predicting and calculating risk, insuring or re-insuring against risk, etc.
• Fund Management: Taking decisions on the holding and selling of investments, calculating risks and reserves, etc.
• Finance and Leasing: Managing risks related to loans or leases, arranging or providing credit, etc.
• Shipping: Managing crew, ensuring ship safety, overseeing and tracking deliveries, etc.
• Holding Companies: Managing equity participations, collecting dividends and interest.
• Headquarters: Providing senior management, making strategic decisions, incurring expenditures, etc.
• Distribution and Service Centers: Transporting and storing goods, managing stocks, providing consulting or other administrative services.
• Intellectual Property: Research and development, branding, and exploitation of intellectual property assets.

3. Economic Substance Requirements

To satisfy the ESRs, companies must:

• Be Directed and Managed in Malta:
  • The company’s board meetings must be held in Malta with a quorum of directors physically present.
  • Minutes of meetings should be kept in Malta.
  • The directors should have the necessary knowledge and expertise to discharge their duties.
• Have Adequate Personnel: The company must employ an adequate number of qualified employees physically present in Malta.
• Have Adequate Premises: Maintain adequate physical offices or premises in Malta.
• Incur Adequate Expenditure: The company should incur adequate expenditures in Malta proportionate to its activities.

4. Reporting Obligations

Companies subject to ESRs must:

• File Annual Returns: Submit annual economic substance reports to the Malta Business Registry (MBR) within nine months from the end of the financial year.
• Provide Information: Disclose information on the company's activities, the type and level of income, the location of activities, and compliance with the substance requirements.

5. Compliance Monitoring and Penalties

• Review by Authorities: The MBR reviews the submitted economic substance reports to ensure compliance.
• Penalties: Non-compliance with ESRs can result in significant penalties. Initial penalties can range from €10,000 to €50,000, and further non-compliance may lead to additional fines or other measures, including the possibility of striking the company off the register.

6. Economic Substance Test

Companies need to pass an economic substance test demonstrating they have substantial activities in Malta. This involves proving that:

• The core income-generating activities are conducted in Malta.
• There is a proportional level of expenditure, employees, and physical presence in Malta.
• The company is managed and controlled from Malta.

7. Outsourcing

Outsourcing of certain activities is allowed, provided that the outsourced activities are conducted in Malta, and the company retains the ability to supervise and control the activities.

8. Exemptions

Certain entities may be exempt from ESRs, such as companies that are tax resident in another jurisdiction.

Implementation and Assistance

Given the complexity of the regulations and the potential penalties for non-compliance, companies operating in Malta often seek the assistance of legal and financial advisors to ensure they meet all requirements.

It is advisable to consult with local professionals who are well-versed in Malta's tax and compliance landscape to navigate the specifics of the Economic Substance Regulations effectively.

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