Transfer pricing (TP) is a pivotal consideration for multinational enterprises (MNEs) operating in Malta, influencing how profits are segregated across different jurisdictions. Domestic transactions between Maltese entities are exempt from the scope of these rules. Additionally, small and medium-sized enterprises (SMEs), are equally exempt from these requirements, ensuring that compliance obligations are proportionate and targeted at larger multinational operations. With Malta’s commitment to international tax standards, legislative developments have introduced formal TP rules that businesses must understand to ensure compliance and optimise tax efficiency. Malta has formalised its TP framework through the introduction of the Transfer Pricing Rules (S.L. 123.207) via Legal Notice 284 of 2022, published on 18 November 2022. These rules have been further refined by Legal Notice 9 of 2024, issued on 19 January 2024.
For basis years commencing on or after 1 January 2024, the rules apply to any arrangement entered into on or after this date, as well as to pre-existing arrangements that are materially altered on or after this date. From January 2027, the rules will extend to all arrangements, regardless of the date on entry, effectively limiting the grandfathering provision to three years. The prescribed methodology is based on the internationally-recognised arm’s length principle which essentially seeks to establish what the price would have been, had the transactions been carried out under comparable conditions by independent parties. What constitutes an arm’s length principle can be defined as the amount determined on the basis of such methodologies, as shall be designated by the Commissioner in guidelines to be issued in terms of article 96(2) of the act.
It is interesting to note that taxpayers can now apply for a unilateral transfer pricing ruling. This means a ruling issued by the Commissioner that determines, in advance of an arrangement, an appropriate set of criteria for the determination of the transfer pricing for that arrangement. The said criteria include the method used to arrive at the transfer pricing, and appropriate adjustments thereto, and critical assumptions as to future events. One may ask what are the transactions taxed under the proposed rules? The answer is any cross-border arrangement which means an arrangement between associated enterprises, where any one of the following conditions is satisfied: (i) at least one party to the arrangement is not resident in Malta and at least one party to the arrangement is a company resident in Malta, and the arrangement is relevant in ascertaining the total income of that company; (ii) at least one party to the arrangement maintains a permanent establishment situated outside Malta to which the arrangement is effectively connected, and at least one party to the arrangement is a company resident in Malta and the arrangement is relevant in ascertaining the total income of that company; (iii) at least one party to the arrangement is not resident in Malta and at least one other party, not being resident in Malta, is a company which maintains a permanent establishment situated in Malta to which the arrangement is effectively connected, or otherwise derives income or gains arising in Malta, and the arrangement is relevant in ascertaining the total income of that company.
A request for a unilateral transfer pricing ruling shall be made by a party to the transaction. The scope for a unilateral transfer pricing ruling is to provide certainty in relation to the application of these rules to a transaction. Such a ruling shall remain binding on the Commissioner for a period of five years from the date the tax ruling takes effect. In case the transactions have already commenced on the date of the request, the scope of the request may be extended to such transactions that took place during the previous three basis years. When the Commissioner declines to issue such a ruling, he shall issue a notice in writing and this refusal may apply where the interested party is not up to date in relation to the obligations in relation to tax returns and tax payments, at the time that such request is made. Aggrieved taxpayers may have recourse to the Administrative Review Tribunal.
What are the benefits to the international investor who chooses Malta as a domicile? One such benefit is that advance pricing agreements offer certainty of outcomes for taxpayers engaged in cross-border transactions. Who is impacted? The proposed law will target bodies of persons who will fall within the purport of associated enterprises, when there is a direct or indirect control, through a minimum holding of more than 50% of the voting rights, or ordinary share capital, or by virtue of any powers conferred by the articles of association, or other document regulating the controlled body of persons.
Specific provisions relating to dealings and arrangements between a company and its permanent establishment shall be included. It is a relief that micro, small or medium-sized enterprises shall be excluded from scope of transfer pricing rules. Readers may be pleased to know that the income chargeable to tax of companies that fall within scope of the proposed rules will be computed with reference to the arm’s length amounts of incomes and expenditures. The rules provide for corresponding adjustments to be made in computing the chargeable income of other parties to the arrangement where such income falls within the scope of local tax. One needs to assess whether prices are genuine, having regard to all relevant facts and circumstances. The rules do not apply to cross-border arrangements entered into a financial period, where during the said financial period the aggregate arm’s length amount of:
- transactions of a revenue nature do not exceed €6 million; and
- transactions of a capital nature do not exceed €20 million.
Separately, any arrangement between a company with a PE situated in Malta, to which the arrangement is effectively connected, or from which it derives income or gains arising in Malta, and a non-Maltese-resident party, will fall under transfer pricing rule.
In conclusion, one is encouraged to submit recommendations to the proposed transfer pricing rules to better suit the local business configurations.
