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7.1 Application

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.

7.2 Permissible Pricing Methods

There are currently no provisions in Maltese law on how pricing should be calculated. However, see Planning Point in Section 7.1.

As Maltese law makes no reference to the OECD Transfer Pricing Guidelines for Multinational Enterprise and Tax Administrations, these guidelines have no legal effect in Malta. However, the Maltese tax authorities may refer to the OECD Guidelines as a means of interpreting the relevant provisions under domestic law.

In principle, therefore, it is possible to challenge a transfer pricing question by utilizing commercially justified methods, which may or may not be allowed under the OECD Guidelines.

7.3 Penalties for Improper Pricing

There are currently no provisions in Maltese law that deal specifically with the pricing of a transaction. However, see Planning Point in Section 7.1.

It is possible for the tax authorities to challenge the profit or gain from a transaction. The penalties that apply in such a case are the same as for all other tax adjustments.

As there are currently no transfer pricing documentation requirements, there are no penalties for lack or improper documentation.

7.4 Advance Rulings or Pricing Agreements

It is possible to request an advanced ruling in cases falling under Article 52 of the Income Tax Act.

Advanced rulings are only available in specific cases, namely on:

  • 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.

It is currently not possible to request an advanced pricing arrangement unless it is in the form of an advanced ruling as explained above (however, see Planning Point in Section 7.1).

It is, however, possible to negotiate a multilateral advanced pricing arrangement on the basis of the application of the relevant provision (typically Article 9) on tax treaties entered into by Malta.

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

7.5 Documentation

There are currently no specific requirements for a company in Malta to draw up or maintain contemporaneous documentation for transfer pricing (however, see Planning Point in Section 7.1).

However, 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.

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