07. Transfer Pricing Policies

Malta has introduced transfer pricing rules (the “Rules”) with effect for basis years commencing on or after January 1, 2024. The Rules apply both to arrangements entered into on or after that date and to arrangements entered into before January 1, 2024 that are materially altered on or after that date.

The Rules apply to “cross-border arrangements” and effectively require in-scope companies to determine any amount incurred, due, accrued or derived with respect to such arrangements in accordance with the arm’s length principle.

“Cross-border arrangement” means an arrangement between “associated enterprises” where any one of the following conditions is satisfied:

•  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;
•  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;
•  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.

“Associated enterprises” are defined as bodies of persons where:

•  one body of person controls the other body of persons through a direct or indirect holding of more than 75 percent of the voting rights or ordinary share capital of the other body, or by virtue of any powers conferred by the articles of association or other document regulating the other body of persons; or
•  the same person or persons controls two or more bodies of persons, applying the tests of control referred to above.

The holding threshold is lowered to 50 percent where the bodies of persons are constituent entities of an MNE group, as defined in item 3 of Section I of Annex III of the Cooperation with Other Jurisdictions on Tax Matters Regulations.

Micro, small or medium-sized enterprises, as defined in Annex I of Commission Regulation (EU) No. 651/2014, are excluded from the scope of the Rules.

Additionally, unless the taxpayer requests otherwise and that request is granted by the Commissioner, the rules do not apply where:

•  the arrangement comprises a securitization transaction in terms of the Securitisation Transactions (Deductions) Rules; or
•  the aggregate arm’s length value of all items of income and expenditure forming part of cross-border arrangements in the year preceding the year of assessment does not exceed the following thresholds:

o 6 million euros for items of revenue nature; and

o 20 million euros for items of capital nature.

Planning Point: Companies operating in Malta are advised to evaluate their current setup, including their existing contractual arrangements, to assess their exposure and implement any actions required prior to the applicability of the new transfer pricing rules.

Rules applicable before January 1, 2024

Prior to the rules taking effect, Malta did not have specific transfer pricing legislation, court cases or guidelines on the subject.

There were, however, both general and specific anti-avoidance provisions applicable to transactions between related parties that require the application of the arm’s length or a similar principle.

As discussed in Section 7.1, Malta has introduced new transfer pricing rules (the “Rules”) with effect from January 1, 2024. The Rules define the arm’s length amount, in relation to an arrangement, as the price that independent parties would have agreed to if they had entered into that arrangement in comparable circumstances.

The Rules do not specify the methods for computing the arm’s length amount. Instead, they provide that the arm’s length price must be determined based on methodologies set out in . The Guidelines specify that the preferred methodology shall be those outlined in Chapter II of the OECD Transfer Pricing Guidelines . Other methods may be accepted in accordance with Paragraph 2.9 of the OECD Transfer Pricing Guidelines.

As discussed in Section 7.1, Malta has introduced new transfer pricing rules (the “Rules”) with effect from January 1, 2024. There are no separate penalties for improper pricing under the Rules

Transfer Pricing Rulings and Advance Pricing Agreements

As discussed in Section 7.1, Malta has introduced new transfer pricing rules (the “Rules”) with effect from January 1, 2024. The Rules provide for “unilateral transfer pricing rulings” and multilateral or bilateral “advance pricing agreements”.

Unilateral Transfer Pricing Rulings

A unilateral transfer pricing ruling can be requested by a party to the transaction, or their authorized representative, in connection with the tax treatment of a specific cross-border arrangement commencing on or after the date that the request was made and also, in certain circumstances, in connection with that of an existing arrangement.¹²⁹

The request must be made in writing and is subject to the payment of a non-refundable fee of 3,000 euros. The ruling is generally binding on the Commissioner for five years from its effective date. A ruling may be renewed, provided there has not been any material change since the date it was issued. A request for renewal must be made in writing during the six months preceding the expiry of the relevant ruling and is subject to the payment of a non-refundable fee of 1,000 euros.

Advance Pricing Agreements

Under the Rules, the Commissioner can enter into a bilateral or multilateral advance pricing agreement (APA) with a foreign competent authority.¹³⁰ A request for an APA may be made in connection with the tax treatment of a specific cross-border arrangement commencing on or after the date that the request was made and also, in certain circumstances, in connection with that of an existing arrangement. The request must be made in writing and is subject to the payment of a non-refundable fee of 5,000 euros.

The APA may be entered into for a period not exceeding five years from its effective date. If requested by a party to the arrangement, the agreement can also cover a period not exceeding the previous three basis years. An APA may be renewed, provided there has not been any material change since the date it was issued. A request for renewal must be made in writing during the six months preceding the expiry of the relevant agreement and is subject to a non-refundable fee of 2,000 euros.

Advance Revenue Rulings

Article 52 of the Income Tax Act allows taxpayers to request an advance revenue ruling in respect of the following:

•  the application of the general anti-avoidance provisions found in Article 51 of the Act;
•  the applicability of the participation exemption;
•  the tax treatment of any financial instrument or other security; and
•  the tax treatment of any transaction which involves international business.

Rulings are subject to automatic exchange of information within the EU.

As discussed in Section 7.1, Malta has introduced new transfer pricing rules (the “Rules”) with effect from January 1, 2024. Under the Rules, in-scope companies are required to prepare records on a timely basis and retain them for as long as reasonably required for the purposes of determining whether, in relation to an arrangement, the total income of the company has been computed in accordance with the transfer pricing rules.¹³¹

The documentation which is required to be held by taxpayers is in line with Chapter V of the OECD Transfer Pricing Guidelines, as follows:

Master file: The Master file shall include the information outlined in Annex I to Chapter V of the OECD Transfer Pricing Guidelines. If the Master file is requested by the MTCA , it shall be made available in English or Maltese.

Local file: The Local file shall include the information outlined in Annex II to Chapter V of the OECD Transfer Pricing Guidelines. If the Local file is requested by the MTCA , it shall be made available in English or Maltese.

Country-by-Country Reporting

Malta has enacted legislation to implement the provisions of Directive 2016/881/EU (DAC4) (amending Directive 2011/16/EU (DAC)) on Country-by-Country (“CbC”) reporting and exchange of CbC reports within the EU. The Directive is based on the Final Report on Action 13 of the OECD/G20 BEPS Project and has been extended to exchange such information also with non-EU jurisdictions.

Malta imposes annual CbC reporting requirements on multinational enterprise (MNE) groups with consolidated turnover of at least 750 million euros in the preceding fiscal year. If the ultimate parent entity is tax-resident in Malta, it is required to file an annual CbC report with the Maltese tax authorities no later than nine months after the end of the fiscal year of the MNE group. Subject to an exception set out below, an MNE group company that is not the ultimate parent company, but is tax-resident in Malta, is required by the Directive to submit the CbC report where:

•  the ultimate parent company is not subject to a similar CbC reporting requirement in its jurisdiction of residence;
•  the jurisdiction in which the ultimate parent company is resident does not have in effect a qualifying competent authority agreement with Malta for the automatic exchange of CbC reports; or
•  there has been a systemic failure by the jurisdiction of tax residence of the ultimate parent company to provide the CbC reports in its possession, and the tax authorities of Malta have provided notification of that failure to the resident group company.

If there is more than one group company tax resident in the EU, the MNE group can select the company that is to administer the CbC report. The appointment of a group company must be notified to the tax authorities of its country of residence, and notice given that filing is on behalf of all the members of the group resident in the EU.

Even though one of the above conditions applies, a group company tax resident in an EU member state is not required by the Directive to file a CbC report if the MNE group submits the report through a surrogate parent company (i.e., an entity that files the CbC report on behalf of the MNE group as a sole substitute for the ultimate parent company) to the tax authority where the surrogate is resident. Where the surrogate parent company is tax resident outside the EU, the following conditions also need to be satisfied:

•  the jurisdiction where the surrogate parent company is tax resident requires CbC reporting;
•  the jurisdiction where the surrogate parent company is tax resident has an exchange of information agreement covering the automatic exchange of CbC reports in effect with Malta;
•  the jurisdiction where the surrogate parent company is tax resident has not notified Malta of a systemic failure;
•  the jurisdiction where the surrogate parent company is tax resident has received notification that the company is a surrogate parent company; and
•  the group company has notified Malta of (i) the identity of the company required to submit a CbC report, and (ii) its country of tax residence.

The CbC report for an MNE group must contain the following information, on an aggregate basis, for each jurisdiction in which the MNE group operates:

•  revenue — related-party revenue, unrelated-party revenue and total revenue;
•  profit or loss before income tax;
•  income tax paid (on a cash basis) and income tax accrued for the current year;
•  number of employees;
•  stated capital;
•  accumulated earnings; and
•  value of tangible assets other than cash or cash equivalents, as well as cash.

Each constituent entity within the group carrying on a business, or tax-resident in a particular tax jurisdiction must be identified, together with the nature of the main business activities engaged in by each entity and, where different from the jurisdiction of tax residence, the jurisdiction under whose laws a constituent entity is organized.

The tax authorities of Malta receiving the CbC report must automatically exchange it with any other member state in which the MNE has operations within 15 months of the end of the period to which it relates (extended to 18 months for the first period only). Exchange is made electronically.

Malta has provided penalties for infringement of CbC reporting requirements.

Malta is a signatory to the Multilateral Competent Authority Agreement on the Automatic Exchange of CbC Reports, facilitating implementation of the transfer pricing reporting standards developed under Action 13 of the OECD/G20 BEPS Project.