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Malta's New Transfer Pricing Rules Effective 2024 — Orbitax Tax News & Alerts

Malta published Legal Notice 284 of 2022 in the Official Gazette on 18 November 2022, which contains the Transfer Pricing Rules 2022. The rules provide for the establishment of a transfer pricing regime in Malta, including relevant definitions, provisions regarding the application of the arm's length principle and transfer pricing methods, exceptions from the rules, and provisions for transfer pricing rulings and advance pricing agreements. The rules apply for basis years commencing on or after 1 January 2024 in relation to any arrangement entered into on or after that date. For arrangements entered into before that date, the rules apply where such arrangements are materially altered on or after that date. Some of the key points of the Transfer Pricing Rules 2022 are summarized as follows:

Definitions

For the purpose of the transfer pricing rules, two of the key definitions are for the term "associated (related) enterprises" and the term "cross-border arrangement". "Associated enterprises" means bodies of persons where:

  • one of the bodies of persons controls the other body of persons whether as a result of the fact that it holds, directly or indirectly, a participation of more than 75% in the voting rights, or the ordinary capital, of the other body of persons 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 whether as a result of the fact that it holds, directly or indirectly, a participation of more than 75% in the voting rights, or the ordinary capital, of the two or more bodies of persons or by virtue of any powers conferred by the articles of association or other document regulating the two or more bodies of persons.

However, where such bodies of persons are constituent entities of an MNE group, the percentage interest in the voting rights or the ordinary capital shall be 50%.

"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; or
  • 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 that 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.

Note that for the purpose of the rules, the term "company" excludes any micro, small, or medium-sized enterprise.

Ascertainment of Total Income and Adjustments

With regard to the ascertainment of the total income of a company and adjustments, it is provided that:

  • where any amount incurred or due in the year preceding the year of assessment under any cross-border arrangement to which these rules apply differs from the arm's length amount, it shall be deemed that the arm's length amount was incurred or due instead of the actual amount incurred or due; and
  • where any amount accrued or derived in the year preceding the year of assessment under any cross-border arrangement to which these rules apply differs from the arm's length amount, it shall be deemed that the arm's length amount was accrued or derived instead of the actual amount accrued or derived.

It is further provided that any adjustment made in terms of the above shall apply exclusively for the purpose of ascertaining the total income of one or more parties to the cross-border arrangement as the case may be and shall not affect any other person. Provisions are also included for the application of the transfer pricing rules in relation to cross-border arrangements between a non-resident and its permanent establishment in Malta.

Transfer Pricing Methods and Records

With regard to transfer pricing methods, it is provided that the arm's length amount shall be determined on the basis of such methodologies as shall be designated by the Commissioner, which is expected to be in line with OECD guidelines. With regard to records (documentation), it is provided that a company, in relation to an arrangement to which the rules apply, shall prepare on a timely basis, and retain such records as may reasonably be required for the purposes of determining whether, in relation to the arrangement, the total income of the company has been ascertained in accordance with the provisions of these rules. Although specifics are not provided, it is also expected that detailed record requirements will be in line with OECD guidelines.

Exceptions

With regard to exceptions, it is provided that the transfer pricing rules shall not apply where an arrangement comprises a securitization transaction in terms of the Securitization Transactions (Deductions) Rules. Further, the rules shall not apply where:

  • the aggregate arm's length value of all items of income and expenditure of a revenue nature forming part of cross-border arrangements in the year preceding the year of assessment does not exceed EUR 6,000,000; and
  • the aggregate arm's length value of all items of income and expenditure of a capital nature forming part of cross-border arrangements in the year preceding the year of assessment does not exceed EUR 20,000,000.

However, it is also provided that the parties to cross-border arrangements referred to above may make a request in writing to the Commissioner for the issuance of a determination stipulating that the provisions of the transfer pricing rules shall apply, in which case the rules shall apply as may be determined.

Transfer Pricing Rulings and APAs

Provisions are included in the transfer pricing rules to allow requests for a unilateral transfer pricing ruling by a party to an arrangement or their authorized representative. In general, a request for a unilateral transfer pricing ruling may be made in connection with the tax treatment of a cross-border arrangement commencing on or after the date that the request was made. However, the scope of a request may be extended as follows for an arrangement that has already commenced:

  • to transactions, agreements, and dealings taking place in the year preceding the year of assessment in which the request was made, in the case of a cross-border arrangement that does not consist of a series of transactions, agreements, and dealings to transactions; and
  • in any other case, to transactions, agreements, and dealings that took place within the three previous basis years and that form part of the arrangement.

A unilateral transfer pricing ruling shall remain binding on the Commissioner for a period of five years from the date the unilateral transfer ruling takes effect, although a shorter period may apply depending on the circumstances of the request. Further, a unilateral transfer pricing ruling may also cover an earlier period for arrangements that have already commenced. Rulings may also be renewed as long there are no material changes.

Provisions are also included in the transfer pricing rules to allow requests for bilateral or multilateral advance pricing agreements (APAs) with relevant foreign competent authorities. As with unilateral transfer pricing rulings, a request for an APA may be made in connection with the tax treatment of a cross-border arrangement commencing on or after the date that the request was made. However, the scope of a request may also be extended to transactions that took place during the previous three basis years. An APA may be entered into for up to five years from the date the APA takes effect as determined during the relevant mutual agreement procedure. An APA may also cover a period not exceeding three basis years preceding the date of request. APAs may also be renewed as long there are no material changes.