Navigating the Newly Introduced Maltese Transfer Pricing Landscape

In recent years, the mispricing of intercompany transactions and the serious risk this poses to tax revenues, tax sovereignty and tax fairness has gained significant traction across the globe – and Malta is no exception. Against the backdrop of an increasingly challenging and complex economic environment, Malta has actively committed towards implementing transfer pricing legislation in accordance with current international standards. In this article, we will explore the evolving transfer pricing landscape in Malta and provide insights into effectively navigating the new legislative framework.

Pre-2022, Malta did not enforce sophisticated transfer pricing legislation. Following updates to the Maltese Income Tax Act in 2021, authorising the Minister for Finance to make rules in connection with transfer pricing in general, in November 2022 Malta introduced formal transfer pricing rules aligned with global standards, through Legal Notice 284 of 2022 (the “Rules”).

The Rules, which apply for basis years commencing on or after 1 January 2023, are largely based on the draft rules that were published alongside the public consultation carried out by the Commissioner for Tax and Customs in December 2021. From a temporal point of view, the Rules apply in relation to arrangements entered into on or after 1 January 2024; and for arrangements entered into before that date, the rules limitedly apply to those arrangements that are materially altered on or after that date.

The arm’s length principle forms the bedrock of the newly introduced transfer pricing rules in Malta. According to this principle, related party transactions should be priced as if they were conducted between unrelated entities entering into a similar arrangement under comparable circumstances.

To this end, the Rules implement the requirement for the application of the arm’s length principle for the pricing of transactions between in-scope entities, through a computational rule introduced for income tax purposes (ie, that does not apply for VAT purposes). Accordingly, the core transfer pricing provision under the Rules prescribes that, where any amount incurred, accrued, due or derived in the year preceding the year of assessment under any cross-border arrangement to which the Rules apply differs from the arm’s length amount, the arm’s length amount shall be deemed incurred or due instead of the actual amount incurred, accrued, due or derived. The arm’s length amount shall be determined on the basis of such methodologies as are yet to be designated in guidelines issued by the Commissioner for Tax and Customs in Malta.

As has already been intimated above, the new transfer pricing rules have not been enacted with the intention of serving as a catch-all for any and all types of transactions. On the contrary, the Rules find application only vis-à-vis certain specific arrangements entered into by specific taxpayers, as will be elaborated further below.

One of the key elements for the applicability of the new Rules to Maltese companies is that said rules are solely applicable to cross-border arrangements entered into between associated enterprises. On this basis, it is therefore immediately evident that arrangements being conducted purely between Maltese resident entities do not fall within the purview of the Maltese transfer pricing provisions.

The Rules then go a step further by requiring any such cross-border arrangement to be one entered into between entities which qualify as associated enterprises. In terms of the applicable definition under the Rules, this would be the case mainly where there is direct or indirect control through a holding of more than 75% 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. Companies subject to common control by virtue of such 75% threshold will also fall within the scope of the Rules.

It is also pertinent to note that the Rules specifically carve out the applicability of the transfer pricing provisions vis-à-vis certain enterprises. In this respect, the Rules do not apply to micro, small or medium-sized enterprises as defined in Annex I of Commission Regulation (EU) No 651/2014.

Moreover, in-scope entities are not under the obligation to adhere with the provisions of the Rules where the arrangement comprises a securitisation transaction, or in the case of certain de minimis thresholds for the arm’s length value-finding application.

The Rules also set out a mechanism for taxpayers to seek certainty and assurance from the tax authorities regarding the appropriate transfer pricing method and pricing for specific transactions. In this respect, the Rules distinguish between two different mechanisms that may be resorted to, namely:

When availed of, both mechanisms outlined above remain binding on the Commissioner for Tax and Customs for a period of five years, with the possibility of a renewal being acceded to provided there have not been any relevant material changes since the date of issuance of the ruling or agreement, and provided that the relevant foreign competent authority confirms the requested renewal in the case of the latter.

As Malta aligns itself with international transfer pricing standards, businesses operating locally must necessarily adapt to the evolving landscape, as they face both challenges and new opportunities. Compliance with the arm’s length principle and ensuring that comprehensive transfer pricing documentation supporting a particular cross-border arrangement and its pricing rationale is in place should undoubtedly be at the top of any local business’s agenda going forward. To mitigate risks and ensure continued smooth operations, seeking professional advice and considering unilateral transfer rulings and advance pricing agreements can provide certainty and clarity vis-à-vis any related party transaction.