Mr. F, an independent contractor, is working in Luxembourg and is paying Luxembourg taxes (with rates up to 38%). He is going to start a new service contract to work in Italy for a US company (US Co), which has a European office in the UK. US Co is using his services by sub-contracting him out to one of its Italian clients. Mr. F wants to know whether he can reduce his exposure to Italian income tax, which has rates up to 45%, by using an offshore tax efficient structure.
Mr. F could establish a new company in Malta, where it has a good tax treaty with Italy. The Malta company (Malta Co) would employ him and sub-contract him to US Co. This would ensure that any fees paid for his work in Italy would be taxed in Malta, where there is no withholding tax on dividends. Although the Italian-source fees received by Malta Co are subject to 35% tax, two-thirds of this tax will be refunded upon the distribution of the dividends to Malta Co. As a result, this structure successfully reduces the tax burden in Malta to just 11.67%, and Malta does not levy a withholding tax on dividends.