Malta has implemented the island’s first comprehensive transfer pricing rules that will take effect as from the 1st January 2024.
The Malta Transfer Pricing (TP) Rules will apply to (i) new cross-border arrangements that commence on or after this date, and (ii) pre-existing arrangements that are significantly altered on or after 1 January 2024. This article provides a non-exhaustive overview of the scope and principal provisions of the new legislation.
Malta Transfer Pricing Rules: Scope
The Malta TP Rules define “the arrangement” as follows:
- any transaction, agreement or dealing of any kind, or series thereof, where, at the relevant time, the parties to such an arrangement are associated enterprises, or
- any notional dealing between a body of persons and its permanent establishment (“PE”).
The Malta Transfer Pricing Rules are called into play for arrangements between associated enterprises, that is where one entity holds (directly or indirectly) in the other no less than 75% of the voting rights or ordinary capital. Two or more enterprises that are all controlled by another enterprise will also be deemed as associated enterprises and subject to the same 75% threshold of direct or indirect participation rights. Multinational groups that are required to file Country-by-Country reports (for example, through having consolidated group revenue of EUR 750 million or more), the participation rights threshold reduces to 50%. Smaller scaled businesses are exempt from the provisions of the TP Rules, including micro, small or medium-sized enterprises.
It is worth noting that the Malta TP Rules will also apply to arrangements between non-Malta resident enterprises and their Malta PEs, that will be treated as a completely separate and independent enterprise.
Arrangements that are cross-border in nature and involve at least one corporate taxpayer will fall within the scope of the Malta Transfer Pricing Rules, being arrangements that are:
- made between a Malta resident and a non-resident company, or
- effectively connected to a PE outside of Malta and one of the parties thereto is a Malta resident company, or
- made between a non-resident company and the PE of another non-resident company in Malta to which the transaction is effectively connected.
Malta Transfer Pricing De-Minimis Exemption
The Malta Transfer Pricing Rules will apply to any cross-border arrangement whose aggregate arm’s length value exceeds EUR 6 million in revenue, or EUR 20 million in terms of capital. Any arrangements of a lesser value will therefore fall outside the scope of the TP rules.
Malta Transfer Pricing Rules: The Main Provisions
Arm’s length principle
The TP Rules introduce into the Maltese legislative framework, specific provisions to apply the arm’s length principle to transactions between associated enterprises. The notion of arm’s length is a key feature of transfer pricing with this principle found in article 9 of the OECD Model Tax Convention. Arm’s length requires that any transactions taking place between related companies must be carried out at the same prices and conditions that would otherwise apply to non-related enterprises.
The Malta TP Rules specify that for corporate income computed under the Income Tax Act, any amount relating to a cross-border arrangement will be deemed to be incurred or due to the amount calculated in line with the arm’s length principle. Every company with transactions or arrangements that fall under the scope of the Transfer Pricing Rules will need to rigorously maintain transfer pricing documentation as verification that all its cross-border arrangements are carried out correctly vis-à-vis the arm’s length principle.
The Transfer Pricing Rules allow that the precise calculation of arm’s length values are to be determined as per methods that will be specified by the Commissioner in Guidelines that are yet to be published.
Transfer Pricing Rulings
The Malta Transfer Pricing Rules allow for the Commissioner for Revenue (CfR) to make unilateral and advance transfer pricing rulings.
Taxpayers may apply to the CfR to issue a unilateral ruling with the objective of providing certainty to the application of the TP Rules to a specific cross-border arrangement. Such requests are to be made in writing and will attract a fee of EUR 3,000. As may be expected, the applicant will need to provide all necessary information, being the identification of the members to the arrangement and their ultimate beneficial owners, and any other information requested by the CfR. Once issued, a unilateral transfer pricing ruling shall remain binding on the Commissioner for five years, following which the taxpayer may apply for it to be renewed against a fee of EUR 1,000.
Moreover, the Malta TP Rules permit the Commissioner to commit to binding advance transfer pricing agreements between Malta and foreign tax authorities relative to the application of transfer pricing rules.
How can we help?
The introduction of transfer pricing rules to the Maltese legal order imposes new and significant obligations on Malta resident companies and Malta PEs of non-resident companies. Taxpayers falling within the scope of the TP Rules will need to review their transfer policies to assess whether they conform with the arm’s length principle and prepare the supporting documentation.
Our team of experienced advisors can help to identify, assess and mitigate potential transfer pricing risks in your business and to develop a sustainable, tax efficient transfer pricing policy for the future. As a collaborating firm of Andersen, leading global Tax & Legal advisors, we offer the comfort of years of experience in this highly sophisticated area of tax practice.
Get in touch to learn more on the implementation of the Malta Transfer Pricing Rules