In 2022, Malta introduced its first transfer pricing system through Legal Notice 284 of 2022, with effect from 2024. This system signified a major development in the country’s tax framework in an effort to align Malta with international standards and the Organisation for Economic Cooperation and Development (‘OECD’) Transfer Pricing Guidelines.
The main aim of the Transfer Pricing Rules is to ensure that profits in cross-border transactions involving related parties are taxed adequately, preventing tax base erosion through artificial pricing. By ‘transfer pricing’, one refers to the pricing of goods, services or other assets which are transferred between associated enterprises, which typically occurs between a parent company and its foreign subsidiary. The new rules are only applicable vis-à-vis related parties, meaning that domestic transactions within Malta are specifically excluded.
The arm’s length principle is at the heart of this new regime. This principle requires that related-party transactions are priced as if they were conducted between unrelated entities on the open market, ensuring that profits are taxed where economic activity and value creation occur. If a transaction does not comply with this principle, Malta’s tax authorities may adjust the company’s taxable income to reflect typical arm’s length amount.
To support full compliance, entities falling within scope are to prepare transfer pricing documentation in line with the following structure: a Master File and a Local File, following OECD’s BEPS Action 13 standards. The Master File focuses on the multinational group’s business, policies and global value distribution. On the other hand, the Local File focuses on the Maltese entity’s specific transactions and encapsulates detailed pricing analysis. Documentation must be kept in either English or Maltese and are to be submitted to tax authorities upon request, but are not to be filed with the company’s annual tax returns.
In an effort not to place too many burdens on smaller businesses, one can find important exemptions within the rules. In this regard, small and medium-sized enterprises, as defined by EU standards, are specifically exempt. Moreover, a de minimis threshold is applicable: if total revenue from a cross-border arrangement does not exceed €6 million (or €20 million in capital assets) yearly, the arrangement would not fall within the scope of the Rules. Simplified methods are also provided for, specifically in relation to low value-adding services, such as shared administrative support, in accordance with OECD and EU guidance.
Moreover, Malta makes use of each of the primary OECD-approved pricing methods: Comparable Uncontrolled Price, Resale Price, Cost Plus, Transactional Net Margin and Profit Split. The tax authorities cater for a certain element of flexibility or method combinations where a complex situation arises to ensure accurate pricing.
The rules are applicable to financial years starting on, or after, 1 January 2024. However, the Rules cater for temporary grandfathering of pre-existing arrangements, meaning that they are not subject to the new requirements, provided that they remain unchanged. This grandfathering ends on 1 January 2027, after which date they fall under the new regime. All material changes to an older agreement on, or after 1 January 2024 triggers immediate application of the new rules.
Malta’s transfer pricing legislation introduces a robust framework for multinationals, ensuring tax compliance and fairness without burdening small businesses or transactions which are of a low value. Companies engaged in cross-border dealings with related parties must now ensure that their pricing reflects open-market conditions and that documentation is adequately compiled and maintained. With these changes, Malta preserves the integrity of its fiscal systems, ensuring alignment with globally-accepted tax practices.
For any further information or assistance, please contact us at info@gtg.com.mt
Author: Dr Karl Cauchi