On 18 November 2022, by virtue of Legal Notice 284 of 2022 entitled Transfer Pricing Rules, 2022 (the “TP Rules”), Malta introduced to its legal system transfer pricing rules, imposing obligations on corporate taxpayers and introducing new legal institutions such as transfer pricing rulings.
The Malta Transfer Pricing Rules shall apply to cross-border arrangements that will be entered into or, for pre-existing arrangements, materially altered on or after 1 January 2024. In the first section of this article, we break down the definition of a “cross-border arrangement” and present the scope of the TP Rules. Subsequently, the main operative provisions of the new legislation are reviewed.
Scope of the Malta Transfer Pricing Rules
Arrangement
The Malta Tranfer Pricing Rules define the arrangement as:
- 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”).
Associated enterprises
As per the above definition, the Malta Transfer Pricing Rules will apply only to arrangements between associated enterprises. Two enterprises shall be considered associated if one holds in the other, directly or indirectly, at least 75% of the voting rights or the ordinary capital; or where such enterprises are commonly controlled by another enterprise subject to the same threshold of 75%, direct or indirect participation rights. In case of multinational groups obliged to file Country-by-Country reports (for instance, by virtue of having total consolidated group revenue of at least EUR 750 million), the participation threshold is reduced to 50%. Micro, small or medium-sized enterprises are carved out from the scope of TP Rules.
The Malta Transfer Pricing Rules will also apply, mutatis mutandis, to arrangements between non-resident enterprises and their Malta PEs (whereby a PE shall be treated as though it were a separate and independent enterprise).
Cross-border nature
To fall within the scope of the Malta Transfer Pricing Rules, the arrangements must be cross-border in nature, and involve at least one corporate taxpayer. This means that the 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.
De-minimis exemption
The Malta Transfer Pricing Rules shall not apply to any cross-border arrangement whose aggregate arm’s length value does not exceed EUR 6 million in revenue, or EUR 20 million in terms of capital.
Operative provisions of the Malta Transfer Pricing Rules
Arm’s Length principle
The Malta Transfer Pricing Rules introduce specific provisions relating to the application of the arm’s length principle in transactions between associated enterprises. The arm’s length principle is a backbone of transfer pricing and requires that the conditions agreed to or imposed between the two associated enterprises in their commercial or financial relations do not differ from those which would be made between independent enterprises.
The Malta Transfer Pricing Rules stipulate that whenever the income of a company will be computed under the Income Tax Act, any amount pertaining to a cross-border arrangement will be deemed to be incurred or due in the amount calculated in accordance with the arm’s length principle. A company falling within the scope of the TP Rules will need to maintain transfer pricing documentation to prove that it correctly applies the arm’s length principle to all its cross-border arrangements.
The TP Rules envisage that the calculation of arm’s length values shall be determined on the basis of such methodologies as shall be designated by the Commissioner in specific Guidelines. As at the date of this article such guidelines have not yet been published.
Malta Transfer Pricing Rulings
One of the novel institutions introduced by the Malta Transfer Pricing Rules are unilateral and advance transfer pricing rulings.
Going forward, taxpayers may request the Commissioner for Revenue to issue a unilateral ruling aimed at providing certainty in relation to the application of the TP Rules to a particular cross-border arrangement.
Such a request must be made in writing, against a fee of EUR 3,000. The applicant is required to provide the necessary information, including the identification of the arrangement participants and their ultimate beneficial owners, and any other relevant information requested by the Commissioner. The unilateral transfer pricing ruling shall remain binding on the Commissioner for a period of five years. The taxpayer may apply for the renewal of a unilateral TP ruling within the six months preceding its expiry, against a fee of EUR 1,000.
Furthermore, the Malta Transfer Pricing Rules permit the Commissioner to enter into binding advance transfer pricing agreements between Malta and foreign tax relating 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 contentious area.
Get in touch with us to learn more about the Malta Transfer Pricing Rules
On 18 November 2022, by virtue of Legal Notice 284 of 2022 entitled Transfer Pricing Rules, 2022 (the “TP Rules”), Malta introduced to its legal system transfer pricing rules, imposing obligations on corporate taxpayers and introducing new legal institutions such as transfer pricing rulings.
The Malta Transfer Pricing Rules shall apply to cross-border arrangements that will be entered into or, for pre-existing arrangements, materially altered on or after 1 January 2024. In the first section of this article, we break down the definition of a “cross-border arrangement” and present the scope of the TP Rules. Subsequently, the main operative provisions of the new legislation are reviewed.
Scope of the Malta Transfer Pricing Rules
Arrangement
The Malta Tranfer Pricing Rules define the arrangement as:
- 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”).
Associated enterprises
As per the above definition, the Malta Transfer Pricing Rules will apply only to arrangements between associated enterprises. Two enterprises shall be considered associated if one holds in the other, directly or indirectly, at least 75% of the voting rights or the ordinary capital; or where such enterprises are commonly controlled by another enterprise subject to the same threshold of 75%, direct or indirect participation rights. In case of multinational groups obliged to file Country-by-Country reports (for instance, by virtue of having total consolidated group revenue of at least EUR 750 million), the participation threshold is reduced to 50%. Micro, small or medium-sized enterprises are carved out from the scope of TP Rules.
The Malta Transfer Pricing Rules will also apply, mutatis mutandis, to arrangements between non-resident enterprises and their Malta PEs (whereby a PE shall be treated as though it were a separate and independent enterprise).
Cross-border nature
To fall within the scope of the Malta Transfer Pricing Rules, the arrangements must be cross-border in nature, and involve at least one corporate taxpayer. This means that the 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.
De-minimis exemption
The Malta Transfer Pricing Rules shall not apply to any cross-border arrangement whose aggregate arm’s length value does not exceed EUR 6 million in revenue, or EUR 20 million in terms of capital.
Operative provisions of the Malta Transfer Pricing Rules
Arm’s Length principle
The Malta Transfer Pricing Rules introduce specific provisions relating to the application of the arm’s length principle in transactions between associated enterprises. The arm’s length principle is a backbone of transfer pricing and requires that the conditions agreed to or imposed between the two associated enterprises in their commercial or financial relations do not differ from those which would be made between independent enterprises.
The Malta Transfer Pricing Rules stipulate that whenever the income of a company will be computed under the Income Tax Act, any amount pertaining to a cross-border arrangement will be deemed to be incurred or due in the amount calculated in accordance with the arm’s length principle. A company falling within the scope of the TP Rules will need to maintain transfer pricing documentation to prove that it correctly applies the arm’s length principle to all its cross-border arrangements.
The TP Rules envisage that the calculation of arm’s length values shall be determined on the basis of such methodologies as shall be designated by the Commissioner in specific Guidelines. As at the date of this article such guidelines have not yet been published.
Malta Transfer Pricing Rulings
One of the novel institutions introduced by the Malta Transfer Pricing Rules are unilateral and advance transfer pricing rulings.
Going forward, taxpayers may request the Commissioner for Revenue to issue a unilateral ruling aimed at providing certainty in relation to the application of the TP Rules to a particular cross-border arrangement.
Such a request must be made in writing, against a fee of EUR 3,000. The applicant is required to provide the necessary information, including the identification of the arrangement participants and their ultimate beneficial owners, and any other relevant information requested by the Commissioner. The unilateral transfer pricing ruling shall remain binding on the Commissioner for a period of five years. The taxpayer may apply for the renewal of a unilateral TP ruling within the six months preceding its expiry, against a fee of EUR 1,000.
Furthermore, the Malta Transfer Pricing Rules permit the Commissioner to enter into binding advance transfer pricing agreements between Malta and foreign tax relating 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 contentious area.
Get in touch with us to learn more about the Malta Transfer Pricing Rules