In mid-November this year the subsidiary legislation for the implementation of formal Transfer Pricing Rules (TPRs) was introduced in Malta. These rules will come into effect as of 1st January 2024 and are set to have a significant impact on businesses operating in the country. The new rules are designed to align Malta with the best practices currently used internationally and will require businesses to provide more detailed documentation on their cross-border transactions.
What are Malta’s transfer pricing rules?
Malta’s Transfer Pricing Rules are created to ensure that transactions between related parties are conducted at arm’s length. This means that prices must be set as if the parties were unrelated so that no preferential treatment is given to either party.
The Transfer Pricing Rules will apply when determining the tax base of a company derived from “cross-border arrangement” between “associated enterprises” having directly or indirectly more than 75% or 50% in the participating rights, depending on if the entities are part of an MNE (Multinational Enterprises) group falling within the scope of the Country-by-Country Report.
When will the new transfer pricing rules be introduced in Malta?
As mentioned earlier, the rules will apply to all transactions entered into on or after January 1, 2024, as well as to pre-existing transactions that are significantly changed on or after that date.
Which companies are affected by Malta’s latest Transfer Pricing Rules?
These rules will not apply to micro, small, or medium-sized enterprises, which, by their definition in Annex I of Commission Regulation (EU) 651/2014, are companies that employ fewer than 250 persons and have an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million. Therefore, Malta’s upcoming pricing rules will only apply to larger corporations as well as MNEs (Multinational Enterprises).
What defines a cross-border arrangement?
Cross-border arrangements mean an agreement between associated enterprises, where any one of the following conditions is satisfied and the arrangement is relevant to ascertaining the total income of that company:
- 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;
- At least one party to the arrangement maintains a permanent establishment situated outside Malta, and at least one party to the arrangement is a company resident in Malta;
- At least one party to the arrangement is not resident in Malta, and at least one other party, also not resident in Malta, is a company which maintains a permanent establishment situated in Malta, or otherwise derives income or gains arising in Malta.
What do unilateral Transfer Pricing Rules and advance pricing agreements consist of?
A unilateral transfer pricing ruling means a ruling issued by the CfR that determines, in advance of an arrangement, an appropriate set of criteria for the determination of the transfer pricing arrangement, which shall remain binding on the Commissioner for a period of 5 years from the date the unilateral transfer ruling takes effect unless directed otherwise.
On the other hand, advance pricing arrangements (APA) include arrangements where the Maltese competent authority may enter into an APA with the relevant foreign competent authority. An APA may be of a bilateral or multilateral nature.
Transfer Pricing Exceptions
The exceptions applicable to the TPRs cover the following;
- The arrangement comprises a securitisation transaction in terms of the Securitisation Transactions (Deductions) Rules, or
- The aggregate value of all items of income and expenditure of a revenue nature related to cross-border arrangements that occurred in the year preceding the year of assessment (i.e., the applicable basis year) does not exceed €6,000,000 and the aggregate value of all items of income and expenditure of a capital nature related to cross-border arrangements that occurred in the year before the assessment period does not exceed €20,000,000.
Three ways you can prepare for Malta’s latest Transfer Pricing Rules
- Evaluate related party transactions: Identify related party transactions within your group of companies that could be affected by these rules.
- Prepare the necessary documents: One is to ensure that the proper documentation is in place to support the transfer pricing arrangement. If not, one is to take steps to document the arrangement and the reasoning behind the pricing. If there is already documentation in place, consider improving accordingly.
- Consider corporate restructuring: Any changes made to the business operation, no matter how small, could have transfer pricing implications. This means that any agreements that are not in line with the legal form of the transactions need to be updated or terminated.
ADVITAC is here to help during every step of your journey. We will assist you in identifying transactions that may fall within the remits of the TPRs, assist you in the preparation of any relevant documentation, and propose practical restructuring, if necessary.
Transfer Pricing Rules for Malta FAQs
What is arm’s length price in transfer pricing?
In the case of an arm’s length transaction, the amount agreed upon would be what two independent parties would have been willing to pay or accept, had they been entering into the same arrangement under comparable circumstances.
What are the 5 methods of transfer pricing?
The five widely used transfer pricing methods include the following;
- Cost plus method
- CUP method
- Resale minus method
- TNMM (transaction net margin method)
- Profit split
Further guidance is yet to be published on the preferred transfer pricing methodologies, as well as on the relevant documentation obligations.
Are any fees payable applicable to rulings and/or agreements?
For unilateral transfer pricing ruling, a €3,000 non-refundable fee for the initial request and a €1,000 non-refundable fee for a renewal shall be paid. For an advanced pricing agreement, a €5,000 non-refundable fee for the initial request and a €2,000 non-refundable fee for a renewal shall be paid.
What are the implications for arrangements entered into prior to the 1st of January 2024?
The rules will apply to those arrangements commencing on or after the 1st of January 2024 (in relation to basis years), however, for arrangements that were entered into prior to the 1st of January 2024, the new TPRs will still apply if such arrangement is materially altered on or after such date. Guidance is yet to be issued in order to define the term ‘materially altered’.
