Malta: the EU’s secret tax sieve

This guest blog was written by Nicolás Brennan Hernández, an economist specialising in international trade and political economy. The views expressed are those of the author.

Malta is one of a number of European Union member states that actively undermine their neighbours through the provision of financial secrecy and opportunities for corporate tax abuse. As our Corporate Tax Haven Index shows, Malta has ensured that its headline corporate tax rate of 35% translates for multinationals into an effective tax rate of just 5%. We are pleased to share the following analysis of Malta’s corrupting approach and the challenges it now faces. 

This archipelago of 500,000 people, scattered across 316 square kilometres of Mediterranean limestone, hosts €479.7 billion in foreign investment, equivalent to more than 20 times its yearly GDP. Perched in the centre of the Mediterranean, Malta has served as a waystation since Phoenician merchants first recognised its strategic value. It continues this role, only now serving as a convenient stopover for corporate profits fleeing European tax collectors and illicit capital evading oversight.  

In a world where the European Union is searching in every nook and cranny for the funds to pay for rearmament, an ageing population, the energy transition, and to compensate those affected by American tariffs and Chinese exports, the matter of taxation and where funds go to avoid it is as important as ever. Jurisdictions that allow corporations to evade taxes are generally frowned upon, but some attract more criticism than others.  

As an Irishman abroad in the EU with a passion for policy debates, I have grown accustomed to apologizing for Ireland’s liberal approach to corporate taxation. It is an approach designed to attract hundreds of billions of capital flows, but that isn’t always reflected in average wages. Its Gross National Income (GNI), which looks solely at the income generated on the island, is almost half of its nominal GDP.  Yet Ireland attracts disproportionate criticism. Walk down Grand Canal Dock and you’ll find genuine European headquarters. Luxembourg and the Netherlands have proven equally adept at carving profitable niches in the race toward rock-bottom rates. There is, however, a jurisdiction that makes all three look restrained: the Republic of Malta.  The country makes Ireland’s GDP iffy statistics look like shoplifting compared to the Louvre robbery. 

The scale of the model

The numbers are an affront to credulity. Though Malta accounts for 0.1% of EU-27 GDP and population, and is the smallest member state on both counts, its inward FDI stock reached €479.7 billion in December 2024. For context, Spain, with 100 times Malta’s population and nearly 70 times its GDP, hosts €917 billion, less than double Malta’s haul. Against a GDP of roughly €20 billion, that €479.7 billion yields a ratio exceeding 2,300%, compared to the EU average of 48.5%.  

Walk through Valletta’s ancient streets, and you won’t find the gleaming towers or bustling headquarters this half-trillion might suggest. This is because the companies exist solely on paper, channeling revenues and assets from other jurisdictions through Special Purpose Entities (SPEs). 98.2% of Malta’s inward FDI and 99.4% of outward flows derive from financial and insurance activities. Even the European Central Bank itself states bluntly that special purpose entities, the companies established on paper in Maltese soil, “dominate external accounts” with “very limited impact on real economic activity.” 

How did Malta pull it off? 

At first glance, Malta’s tax regime appears, if anything, burdensome. The nominal corporate tax rate sits at 35%, exceeding Spain (25%), Italy (24%), and dwarfing Ireland’s 12.5%. Yet this façade conceals the mechanism that matters: Malta’s tax refund system for non-residents. While Maltese-owned companies face the 35% rate, those with non-domiciled shareholders pay just 5%, the EU’s lowest effective rate, and less than half of Ireland’s demonised 12.5% rate.  

The policy is simple. Companies remit 35% to Maltese authorities, and shareholders then receive tax credits equal to the corporate tax paid. For non-residents, Malta permits refunds of 86% of corporate tax remitted. What began as 35% drops to 5%, and occasionally to zero, for royalties and capital gains. Easy money. Aside from hotels, pharmaceutical companies, and gaming offices, however, the multinational headquarters taking advantage of the regime are nowhere to be seen. Why? 

Well, Maltese law doesn’t require physical presence. Under 2019 regulations, companies need only maintain a registered office, hold one annual board meeting on Maltese soil, and retain local records. Directors need not be residents. Staff need not be nationals. Office space can be shared among dozens of entities. The bar for “adequate” presence is nearly subterranean.  

Surely someone must supervise the €30 billion that enters and leaves annually? Yes: the firms’ own representatives, of course. In practice, this means the same individual servicing a dozen letterbox companies from a shared Valletta office bears personal responsibility for detecting suspicious patterns in billion-euro flows passing through structures that exist primarily to obscure ownership. The Financial Intelligence Analysis Unit (FIAU) supervises from a distance; day-to-day monitoring rests with professionals whose business model depends on not asking inconvenient questions. For those who missed the 2008 financial crisis or found its lessons on self-regulation insufficiently clear, Malta offers a refresher course. The lack of oversight, alongside a significant online gambling sector, has led the island to develop a reputation for money laundering and “tax optimisation.” 

When scrutiny arrived

These schemes did not pass unnoticed, however. The consequences arrived in June 2021, when the Financial Action Task Force (FATF) greylisted Malta for strategic deficiencies in combating money laundering and terrorist financing. FATF’s 2019 evaluation found chronic enforcement failures, including that money laundering investigations weren’t priorities, teams lacked resources, and authorities couldn’t investigate financial crimes involving corruption.  

The permissiveness surrounding money laundering and corruption would reach a boiling point in 2017. Investigative journalist Daphne Caruana Galizia, whose Panama Papers reporting exposed the “intimacy between big business and politics,” was assassinated by car bomb in October of that year. An official government inquiry concluded the state bore responsibility for creating an “atmosphere of impunity.” The greylisting was a belated acknowledgement that Malta had become a jurisdiction where financial crime flourished under official protection.  

The delisting twelve months later proved nearly as controversial. In 2022, FATF declared that Malta had “strengthened its [Anti-Money Laundering] regime,” but some civil society groups were convinced that the progress was meant to assuage FATF’s concerns rather than solve internal deficiencies. Money laundering charges plummeted from 57 in 2021 to 16 in 2023, a decline critics viewed as evidence that reforms “targeted smaller players” while structural issues persisted. More troubling, Maltese courts began overturning FIAU penalties as “unconstitutional,” invalidating hundreds of thousands of euros in fines that had helped convince FATF to delist Malta. 

Malta’s National Risk Assessment, published in December 2023 by the very body tasked with improving the country’s reputation, painted a damning picture: only 5% of lawyers and 1% of tax advisors submitted suspicious transaction reports. Advisors handling cross-border planning operated without licensing or fitness checks, and their effectiveness was rated “LOW.” Clearly, while legislation was put in place to improve Malta’s reputation and return capital flows, enforcement remains weak. In spite of it, or perhaps because of it, Malta’s FDI was reaching new heights by 2024. 

Malta’s less than thorough approach to financial monitoring was highlighted in its response to EU sanctions following Russia’s invasion of Ukraine. Across Europe, enforcement produced substantial results: Italy seized €143 million, France impounded vessels worth hundreds of millions, and Spain froze assets exceeding €10 billion. In contrast, Malta only identified €150,000 in sanctioned assets, less than the price of a studio apartment. This comes from a jurisdiction that cultivated Russian elites as clients, selling, as recently as 2024, passports to Russian oligarchs with direct involvement in the war in Ukraine, until the EU struck down the law. When a country hosts €479.7 billion in FDI stock, the claim it harbours virtually no sanctioned Russian wealth is highly suspicious. Either Malta’s enforcement proved especially incompetent, or it declined to look where uncomfortable discoveries might lurk. 

Defenders might argue Russian capital simply wasn’t a significant share. I would love to verify the claim, but Malta, conveniently perhaps, stands alone among EU-27 members in refusing to report the geographic origin and destination of FDI flows and stocks to Eurostat. While every other jurisdiction publishes detailed breakdowns, Malta’s submissions contain only aggregate totals. This opacity is not oversight but deliberate policy. The ECB notes diplomatically that Malta’s special purpose entities “dominate external accounts,” yet ultimate beneficial owners remain shrouded. Jurisdictions declining to disclose capital sources typically have compelling reasons for doing so.  

It is easy to understand Malta’s economic calculus. As intangible as the capital held on the island might be, law offices and financial services firms are thriving, generating high revenues and wages for thousands of workers. The 5% corporate tax rate, while incredibly low by EU standards, helps fund an important share of Malta’s public services, accounting for 21% of government revenue, compared to an EU average of around 10%. Without these arrangements, an island of 500,000 people, devoid of natural resources and with little arable land, would face grim prospects. 

Yet economic pragmatism cannot excuse complicity in financial crime. The car bomb that killed Daphne Caruana Galizia in October 2017 illuminated the toxic endpoint of a state captured by interests it’s meant to regulate. Her murder revealed the logic underpinning Malta’s business model: when prosperity depends upon not asking difficult questions about capital flows, those who insist on asking become existential threats.  

A model under pressure

Moreover, not only is this arrangement morally questionable, but it is far from sustainable. The OECD’s Pillar Two framework, which establishes a global 15% floor, fundamentally alters the calculus that sustains Malta’s model. Countries will be able to tax profits generated within their borders but booked in jurisdictions with a corporate tax rate below 15%. Ireland will weather this transition with its scale, infrastructure, educated workforce and genuine multinational operations. Malta offers none of these. When refund mechanisms reducing effective rates to 5% stop working, capital will evaporate as swiftly as it arrived; capital has no loyalty other than to itself. 

Malta will then face a reckoning: what remains when the €479.7 billion in FDI stock leaves as easily as it entered, when nameplate companies vanish, and Valletta office buildings stand vacant? The Mediterranean sun will continue shining on ancient stone, and the Maltese people will remain. But the pass-through economy, that extraordinary construction of legal architecture and regulatory gymnastics, cannot survive contact with a world that no longer has a need for it.  

Illicit cash flows might continue being laundered on the island, but after the greylisting, the country is unlikely to loosen enforcement much further. If it continues in its current trajectory, it will isolate itself further from an EU that already has little need for an island encouraging Russian oligarchs to purchase Maltese citizenship and firms to avoid paying taxes in other EU states. In the name of European solidarity, ethical financing and economic sustainability, it will need to pivot before it is left to dry out in the Mediterranean sun.