Malta’s finances too dependent on international low tax regime, says fiscal watchdog

Malta’s fiscal watchdog has issued a significant warning about the country’s growing dependence on revenues linked to its international tax model, raising concerns about the long-term sustainability of recent improvements in public finances.

In its assessment of the government’s Annual Progress Report for 2026, the Malta Fiscal Advisory Council (MFAC) endorsed the official fiscal forecasts but highlighted an increasingly important risk: the extent to which government revenues have become reliant on corporate tax receipts generated by internationally oriented companies.

The warning comes at a time when Malta’s fiscal performance appears exceptionally strong. The deficit fell to 2.2% of GDP in 2025, significantly below previous forecasts, and is projected to decline further to 1.6% in 2026.

Public debt remains below 50% of GDP, while Malta is expected to exit the European Union’s Excessive Deficit Procedure after bringing its deficit below the 3% threshold.

However, the MFAC’s report notes that the story behind this fiscal improvement deserves closer scrutiny.

According to the independent Council, a substantial part of the recent strengthening in government finances has been driven by exceptionally strong growth in current taxes on income and wealth, particularly corporate tax receipts.

The watchdog noted that the surge in direct tax revenues in recent years was largely driven by taxes paid by international companies and was difficult to explain solely through normal economic growth.

Malta’s fiscal structure has changed dramatically over the past two decades.

Current taxes on income and wealth now account for more than 43% of total government revenue, compared with roughly 25% in 2000. The country ranks among the most reliant in Europe on this very volatile source of taxation.

While the inflow of corporate tax revenues has helped reduce the deficit and strengthen public finances, the MFAC warned that such revenues are inherently more volatile than taxes generated by wages or domestic consumption. Corporate tax receipts are closely linked to profitability, international business decisions and global economic conditions.

The report also points to the increasing importance of internationally oriented companies in generating these revenues. This exposes Malta to factors largely beyond its control, including changes in global tax rules, shifts in multinational corporate structures, international competitiveness pressures and the possibility of businesses relocating activities elsewhere.

The warning is particularly notable given the ongoing implementation of the OECD’s global minimum tax framework, which aims to reduce the incentives for multinational companies to channel profits through low tax jurisdictions.

Although Malta has adapted its tax framework to the new international environment, the long-term implications remain uncertain.

Stopping short of suggesting that corporate tax revenues are about to decline, the MFAC’s report questions whether recent windfalls can be assumed to continue indefinitely.

The Council insisted that a significant share of Malta’s recent fiscal consolidation has been driven by buoyant revenues rather than expenditure restraint, making public finances increasingly dependent on a relatively narrow source of income.

This is the second warning by the MFAC in recent weeks.

Just a few weeks ago, the council clearly stated that Malta’s current economic growth based on the importation of cheap labour and government handouts is not sustainable.