Welcome to the world of Transfer Pricing

Malta's new Transfer Pricing regulations

Malta has recently introduced formal transfer pricing rules through Legal Notice 284 of 2022. These rules, are set to reshape the landscape of multinational transactions in Malta. The new rules apply to basis years commencing on or after 1 January 2024, affecting both new arrangements and those materially altered after this date.

What about pre-existing arrangements?

Here’s where Malta’s unique ‘grandfathering provision’ comes into play. This provision exempts arrangements entered before 2024 from these rules, provided they are not materially altered. However, this provision is limited to three years, meaning that all arrangements will fall under the scope of the Maltese Transfer Pricing Rules from basis years commencing on or after 1st January 2027.

Who is subject to transfer pricing rules?

Transfer pricing will apply to cross-border arrangements between Associated Enterprises, defined as enterprises where one holds at least 75% of the voting rights or ordinary capital in the other body of persons or by virtue of any powers conferred by the articles of association or other document regulating the other body of persons, directly or indirectly, or if they are commonly controlled by another enterprise.

This threshold is reduced to 50% for multinational groups required to file Country-by-Country reports, such as those with total consolidated group revenue of at least EUR 750 million.

However, micro, small, or medium-sized enterprises are exempt from these rules.

The rules cover “cross-border arrangements” referred to as transactions between associated enterprises that meet one of the following conditions:

1. One party to the arrangement is not resident in Malta but is involved with a Maltese resident company, and the arrangement affects the company’s total income; or
2. One party maintains a permanent establishment outside Malta that is effectively connected to the arrangement and involves a Maltese resident company, impacting the company’s total income; or
3. One party is not resident in Malta but is involved with a company that maintains a permanent establishment in Malta or derives income or gains in Malta, and the arrangement influences the company’s total income.

These “permanent establishments” will be treated as separate and independent enterprises.

The importance of the Arm’s length principle

The arm’s length principle is central to these rules. Cross-border arrangements will be assessed to determine whether they meet this principle. If not, the total income will be computed under a deeming provision, and the arm’s length amount will be considered when determining a company’s chargeable income. The “arm’s length amount” is the amount independent parties would have agreed to under comparable circumstances.

Exceptions

These rules shall not apply to:

1. securitisation transactions under the Securitisation Transactions (Deductions) Rules; or
2. when both the below situations apply:

• the aggregate arm’s length value of all items of income and expenditure of a revenue nature forming part of cross-border arrangements in the relevant financial year does not exceed €6,000,000; and
• the aggregate arm’s length value of all items of income and expenditure of a capital nature forming part of cross-border arrangements in the relevant financial year, does not exceed €20,000,000:

However, if the parties involved in the aforementioned cross-border arrangements submit a request in writing to the Commissioner for the issuance of a determination stipulating that the provisions of these rules shall apply and the Commissioner issues such a determination, then the provisions of these rules shall apply as may be determined.

Transfer Pricing Records

Companies within the scope of the rules must maintain transfer pricing documentation to demonstrate compliance with the arm’s length principle. While not necessarily filed with the Tax Department, these documents must be readily available upon request.

Unilateral transfer pricing rulings and Advance pricing agreements

The rules provide a framework for unilateral transfer pricing rulings and advance pricing agreements.

• Unilateral Transfer Pricing rulings:

Taxpayers may request the Commissioner for Revenue to issue a unilateral ruling for a fee of €3,000 providing certainty in relation to the application of the rules to a particular cross-border arrangement. This ruling is valid for five years. If there hasn’t been any material change to the cross-border arrangement since the date of its issue, the interested party can request a renewal of the ruling. This request must be made in writing during the six-month preceding the expiry of the original ruling period, subject to a non-refundable fee of €1,000.

• Advance Pricing Agreements:

In addition, an advance pricing agreement may also be requested for a fee of €5,000, and subject to a validity period of up to five years. The competent authority has the ability to establish an advance pricing agreement with the relevant foreign competent authority, which can be either bilateral or multilateral.

The request for an advance pricing agreement can be made in relation to the tax treatment of a cross-border arrangement starting on or after the date the agreement takes effect. If the arrangement has already started on the date of the request, the request can extend to transactions that occurred during the previous three basis years.

It is the responsibility of the directly interested party to notify the competent authority of any relevant material change within 30 days from the date of its occurrence or the date from when such party becomes aware of it. If such notification is not made or is based on false information, the advance pricing agreement would become invalid.

A directly interested party can request a renewal of an advance pricing agreement under the same conditions as prescribed in this rule if there has not been a relevant material change since the date of its issue. A non-refundable fee of €2,000 is required when making a request for a renewal of an advance pricing agreement.

Ensuring compliance with Malta’s Transfer Pricing Rules

Understanding Malta’s transfer pricing rules and their implications is crucial. Use the upcoming months as an opportunity to identify any intra-group transactions which may fall within the scope of the transfer pricing rules.

• Gather and Improve Documentation: Assess whether appropriate transfer pricing documentation supporting the arrangement is in place. Take steps to document or improve documentation of the arrangements and the rationale behind such pricing.
• Consider Business Operation Changes: Consider any restructuring/changes to the business operation that may trigger transfer pricing implications.
• Adhere to the Arm’s Length Principle: Entities having transactions falling within the scope will have to substantiate adherence of their related party transactions to the arm’s length principle by demonstrating that such transactions yield a return that unrelated parties would derive in comparable circumstances.
• Monitor Changes and Updates: Keep an eye for any updates to the Rules, on the preferred transfer pricing methodologies, as well as on the relevant documentation obligations.
• Seek Professional Advice: Given the complexity of transfer pricing rules and the potential penalties for non-compliance, it may be beneficial to seek advice from professionals specializing in this area.

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