Although Maltese tax law contains several references to the ‘arm’s length principle’ the Maltese legislator had never introduced a set of formal transfer pricing rules in the Income Tax Act, till the 18th of November 2022. Further to the enactment of enabling legislation namely, Article 51A of the Income Tax Act back in 2021, the Minister has, by means of Legal Notice 284 of 2022 implemented a set of long-anticipated Transfer Pricing Rules (the ‘Rules’) which shall come into effect as from basis year 2024. It is expected that these rules shall be shortly supplemented by a set of guidelines to be issued by the Commissioner for Revenue detailing the methodologies to be used in order to determine the arm’s length amount.
In essence, the Rules introduce deeming and computational provisions requiring companies (excluding those constituting micro, small, or medium-sized enterprises as defined in Article 2 of Annex 1 of Commission Regulation no. 651/2014) to include the arm’s length value of any amount incurred, due, accrued or derived by that company with respect to cross-border arrangements between associated enterprises in ascertaining the total taxable income in the respective basis year.
‘In-Scope’ Cross-Border Arrangements
The Rules define a cross-border arrangement as an arrangement with an associated enterprise (relevant in ascertaining the total income of the company in question) where either of the following conditions are met:
- At least one party to the arrangement is not resident in Malta, and at least one party is a company resident in Malta;
- 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 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 to which the arrangement is effectively connected, or otherwise derived income or gains originating in Malta.
For the purposes of the Rules, associated enterprises are bodies of persons where the either of the following applies:
- One of the bodies of persons controls the other either via a direct or indirect holding of over 75% in voting rights or ordinary capital, or by virtue of any powers conferred by a document regulating the other body of persons;
- The same person or persons control/s two or more bodies of persons whether via direct or indirect holding of over 75% in voting rights or ordinary capital, or by virtue any powers conferred by a document regulating the two or more bodies of persons.
The above thresholds are lowered to 50% where the bodies of persons are constituent entities of an MNE group defined in terms of Malta’s Cooperation with Other Jurisdictions on Tax Matters Regulations. The lower threshold therefore applies to groups having two or more enterprises that are tax resident in one jurisdiction but subject to tax in another (unless otherwise excluded by the same regulations.
Determining the Arm’s Length Amount
The “arm’s length amount” is defined as the amount that independent parties would have agreed to in relation to the arrangement had those independent parties entered into that arrangement in comparable circumstances. The Rules do not specify the methodology for establishing the arm’s length amount. This amount must be determined on the basis of detailed methodologies laid out by the Commissioner in the aforesaid guidelines.
Exceptions
The Rules shall not apply where:
- The arrangement comprises a securitization transaction in terms of Malta’s Securitization Transactions (Deductions) Rules;
- The arrangement in question falls below the de minimis thresholds established by the Rules, that is 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 relevant financial period, does not exceed 6 million euros; 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 relevant financial period, does not exceed 20 million euros.
The parties to excepted cross-border arrangements may, nevertheless, make a request to the Maltese Commissioner for Revenue to issue a determination that the Rules are to be applied regardless of the applicability of these exceptions to said arrangements. Based on, and in accordance with, this determination, the Rules shall apply.
Unilateral Transfer Pricing Rules
In order to achieve certainty in relation to the application of the Rules to a cross-border arrangement, a “directly interested party” or their authorized representative may make a request to the Commissioner for Revenue to issue a unilateral transfer pricing ruling . Ruling requests 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, and for arrangements that are already in effect on the date that the request is made.
A unilateral transfer pricing ruling request is subject to a non-refundable fee of €3,000, and a ruling is binding for a maximum period of 5 years from the date of effect of the ruling, provided that no material change arises. A ruling may be renewed, provided there has not been any material change, and subject to a non-refundable fee of €1,000.
Ruling requests may not be unreasonably withheld by the Commissioner, but may be withheld in such cases where there the law already provides sufficient clarity on the matter. A request may also be held where the tax filings of the interested party are not up to date. Such rulings are subject to the jurisdiction of the Administrative Review Tribunal.
Advance Pricing Agreements
The Rules also empower the Commissioner to enter into an advance transfer pricing agreement with another foreign competent authority. A request for an advance pricing agreement may be made in connection with the tax treatment of a cross-border arrangement commencing on or after the date of the request, and may also be made in terms of already existing arrangements.
An advance pricing agreement request may be made subject to a non-refundable fee of €5,000, and an agreement may be entered into for a maximum period of 5 years, provided that no material change arises. Furthermore, advance pricing agreements may be renewed, provided that there has been no material change, and subject to a non-refundable fee of €2,000.
For further information, please contact:
Silvio Cilia , Lawyer
Corrieri Cilia, Birkirkara
Email: moc.ailicireirroc@oivlis
Michael Gauci , Lawyer
Corrieri Cilia, Birkirkara
Email: moc.ailicireirroc@leahcim
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