Malta introduces formal Transfer Pricing Rules

On 18 November 2022 Malta published subsidiary legislation implementing formal Transfer Pricing Rules (the “Rules”).

The Rules will be effective from 1 January 2024 and apply to related party arrangements entered into on or after such date, including any arrangements entered into before that date which would have been materially changed thereafter.

The Rules will apply to arrangements between related parties (associated entities) defined as having 50% or more common direct or indirect participation rights in large multinational groups in scope for Country-by-Country reporting, or 75% in the case of large multinationals excluded from such reporting. SMEs as defined by the EU State Aid Regulations fall outside scope in all cases.

The Rules will apply by reference to transactions or arrangements which are cross-border in nature, in the sense of taking place between a resident company and a non-resident company, or effectively connected to a PE of a company outside of Malta and a resident company, or between a non-resident company and the PE of another non-resident company in Malta to which the transaction is effectively connected.

The Rules provide for a de-minimis threshold for total related party cross-border transactions of EUR 6 million and EUR 20 million revenue and capital respectively measured in the preceding financial year. They also contain a carve out for securitization transactions.

The introduction of transfer pricing rules means that 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. In other words, for tax purposes related party transactions should fall within an arm’s length market price range, because transactions outside said range could result in tax losses for one or more of the relevant jurisdictions.

The Rules introduce a computational requirement, in that, for in scope entities for tax purposes the total income would be computed under a deeming provision as though instead of the actual amount incurred, due, accrued or derived, the arm’s length amount in relation to that arrangement would have been incurred, due, accrued or derived. Furthermore, the Rules expressly indicate that their impact is limited to income tax on corporate profits.

Further guidance is expected on the Rules, on the preferred transfer pricing methodologies, as well as on the relevant documentation obligations.

Renewable advance pricing arrangements, both unilateral and multilateral, with roll-back periods, are catered for.

With the introduction of Transfer Pricing Rules, tax and finance teams of in-scope groups present in Malta are expected to work more closely together to ensure harmony between tax and accounting reporting.