The Malta Transfer Pricing Rules

The Transfer Pricing Rules, (S.L. 123.207) (‘TP Rules’) were introduced in Malta on 18 November 2022 via Legal Notice 284 of 2022 (‘LN 284/22’). The TP Rules were introduced pursuant to article 51A of the Income Tax Act, Cap. 123 of the Laws of Malta (‘Malta ITA’) and were subsequently amended via Legal Notice 9 of 2024 (‘LN 9/24’). In addition, and as empowered by the TP Rules, the Commissioner for Tax and Customs (the ‘Commissioner’) has issued guidelines in relation to the TP Rules (‘TP Guidelines’).

The TP Rules apply as from any financial year commencing on or after 1 January 2024 and vis-à-vis any arrangement entered into on or after the said date and any other arrangement which, albeit was entered into before the said date, was materially altered on or after that date. By virtue of LN 9/24, the TP Rules were amended to the effect that arrangements entered into before 1 January 2024 and which were not materially altered on or after that date, such TP Rules shall apply from financial year commencing on or after 1 January 2027.

The TP Rules can be split into three parts. The core transfer pricing rules are provided for in the first part, whereas in the second and third parts the TP Rules provide for the introduction of mechanisms related to formal unilateral transfer pricing rulings and advance pricing agreements respectively.

A. Core transfer pricing provisions

The core transfer pricing provisions revolve around rule 3 of the TP Rules, which will basically ensure that in ascertaining the total income of any company in accordance with the Malta ITA, any amount arising from a cross-border arrangement (‘CBA’) entered into with an associated enterprise will be at arm’s length. As hinted from the above, the TP Rules will not apply across the board, but, rather, will only apply vis-à-vis certain transactions entered into by certain taxpayers.

First and foremost, the core transfer pricing provisions only apply to companies which are subject to income tax in Malta and are not a micro, small or medium-sized enterprise as defined in Annex I of Commission Regulation (EU) No 651/2014. As noted above, the provisions of rule 3 are such that such companies would be required to ensure that any CBA entered with an associated enterprise is at arm’s length, provided that the amount receivable or payable under the said CBA is relevant in ascertaining its total income.

However, notwithstanding the above, a company should not be required to abide to the provisions of rule 3 if either:

• the arrangement comprises a securitisation transaction in terms of the Securitisation Transaction (Deductions) Rules, (SL 123.128); or
• unless the taxpayer opts otherwise, the de-minimis threshold applies on the basis that the aggregate arm’s length value of those items of income and expenditure stemming from a CBA in the relevant financial year does not exceed the amounts below (dividends are to be excluded but distributions in kind may need to also be considered when determining such amounts):

If rule 3 applies and hence the taxpayer is required to determine the arm’s length, the arm’s length must be determined in line with Transfer Pricing methodologies. As per the TP Guidelines, the preferred methodologies to be applied are those outlined in Chapter II of the OECD Transfer Pricing Guidelines. In line with the TP Guidelines, other methods may be accepted and the use of more than one method in complex cases may also be considered.

In addition, the TP Guidelines also provide that the arm’s length remuneration for low value adding intra-group services may be determined in line with the OECD Transfer Pricing Guidelines and EU Joint Transfer Pricing Forum Guidelines.

Furthermore, a taxpayer which is subject to the TP Rules is also required to prepare and retain transfer pricing documentation which as per the TP Guidelines should include the Master file and Local file in line with Chapter V of the OECD Transfer Pricing Guidelines (Country by Country Reporting was separately introduced in Malta and would also apply if certain criteria is met). The taxpayer would be required to make available its Transfer Pricing documentation upon request from the Malta Tax and Customs Administration, within a reasonable timeframe.

The same provisions also extend the requirements above vis-à-vis notional arrangements entered into between a company tax resident in Malta and a permanent establishment located outside of Malta or vice versa. In the latter case, however, the core transfer pricing provisions will apply to all body of persons operating a permanent established located in Malta and not just companies. Moreover, in applying the TP Rules in the context of such notional arrangements, the TP Rules also require reference to the 2010 Report on the Attribution of Profits to Permanent Establishments approved on 22 June 2010 by the Committee on Fiscal Affairs and by the OECD Council on 22 July 2010.

B. Transfer pricing rulings

The TP Rules also put in place two programmes dedicated to transfer pricing agreements. One concerns unilateral transfer pricing rulings (‘Unilateral TPRs’) that may be requested from the Commissioner, whereas the other empowers the Malta Competent Authority (‘CA’) to enter into bilateral or multilateral advance pricing agreements (‘APAs’) with competent authorities of other states.

The provisions underpinning the two programmes are broadly similar but do diverge in certain aspects. They are both binding for a maximum period of 5 years, provided that there weren’t any material changes. Both contemplate a roll-back period and are subject to the payment of a varying non-refundable fee. An application for a Unilateral TPR is subject to a non-refundable fee of €3,000 whereas an application for an APA is subject to a non-refundable fee of €5,000. A Unilateral TPR and an APA can also be renewed, subject to the payment of a non-refundable fee of €1,000 and €2,000 respectively.

Whether an APA is issued or not is conditional on the Maltese CA coming into agreement with the other competent authority/ies, whereas the issuance of a Unilateral TPR is chiefly at the discretion of the Commissioner. Indeed, the Commissioner is empowered to refuse the issuance of a Unilateral TPR if either the applicant is not up-to-date with its tax filings or, in his view, the Malta Income Tax Acts clearly provide sufficient certainty with regard to the tax treatment of the CBA.

Where Unilateral TPRs are concerned, the TP Rules also lay down a procedure allowing any directly interested party who has submitted an application for Unilateral TPR to refer any matter relating thereto, including the Commissioner’s refusal to issue a Unilateral TPR, to the Administrative Review Tribunal.

The TP Guidelines also provide the conditions that are required to be met in case no primary adjustment is initiated by another jurisdiction and the adjustment concerns a downward adjustment. The conditions which must be met for the Commissioner to consider a request for the issuance of Unilateral TPR are the following:

• the downward adjustment is consistent with the arm’s length principle both in principle and as regards the amount; and
• in the absence of a downward adjustment in Malta, the taxpayer will otherwise face issues of double taxation; and
• the Unilateral TPR is spontaneously exchanged with the tax administration of the relevant jurisdiction who is in turn notified of such Ruling together with all the factual and legal circumstances necessary to evaluate the downward adjustment under the arm’s length principle.

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