Malta does not operate a specific transfer pricing regime and has no rules, court cases or guidelines on the subject (however, see the Planning Point below).
There are, 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.
The Maltese tax authorities expect that transactions between residents and nonresident-related parties adhere to the arm’s-length principle, i.e., such transactions are equivalent to what would have been agreed between independent parties.
There are only two specific references to the arm’s-length principle in Maltese tax law, which unfortunately is not defined. The first mention is that transactions between a PE and its head office (i.e., the entity outside Malta) are required to be entered into at arm’s length, and the second is that the profits that would be attributed to the controlling entity in the case of a controlled foreign company (CFC) should be calculated at arm’s length.
However, various provisions assimilating the arm’s-length concept are found in the Income Tax Act and the Income Tax Management Act, notably:
- Article 5(6) of the Income Tax Management Act applies to the situation where a close connection exists between a resident person and a nonresident person, and where substantial control is exercised by the nonresident person resulting in either no profit or less than ordinary profit;
- Article 5(7) of the Income Tax Management Act applies to charge to tax nonresidents on their dealings with resident persons when the profit or gain of the resident entity on specific transactions is not considered to be fair and reasonable having regard to the nature of the business;
- Article 51(1) of the Income Tax Act allows the authorities to disregard any scheme which is considered as artificial (not genuine), which has the effect of avoiding, reducing or postponing liability to tax and as a result has obtained a tax advantage; and
- Article 2(1) and 12(1)(u)(2) of the Income Tax Act requires that profits or gains of a PE are calculated as if the PE was an independent enterprise operating in similar conditions and at arm’s length.
These provisions are very seldom applied by the tax authorities to tackle transfer pricing schemes.
Planning Point: In 2021, Article 51A was introduced into the Income Tax Act enabling the making of rules in relation to transfer pricing and advance pricing agreements. Consequently, the Commissioner for Revenue issued Draft Transfer Pricing Rules for public consultation. The consultation period ended on February 28, 2022.
It is expected that the proposed transfer pricing rules will be introduced with effect for financial years commencing on or after January 1, 2024, and that they will apply to cross-border transactions between associated enterprises.11117
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 introduction of the proposed transfer pricing rules.