Transfer Pricing

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On 18th November 2022 Malta has published Legal Notice 284 of 2022 hereby implementing Transfer Pricing Rules in to legislation.

The Transfer Pricing Rules shall come in to effect as from 1st January 2024 in relation to any arrangement entered into on or after that date, and for those arrangements entered into before that date, the Transfer Pricing Rules shall apply to those arrangements that are materially altered on or after that date.

The rules shall apply to cross border arrangements carried out between associated parties. Associated entities are defined as having 50% or more of common direct or indirect participation rights in large multinational groups in scope for Country-by-Country reporting or 75% in the case of large multinationals which are excluded from such reporting, however, such rules shall not apply to micro, small or medium-sized enterprises fulfilling the criteria laid down in Annex I of the Commission regulation (EU) 651/2014.

The Rules shall apply to cross border arrangements between associated companies where any one of the following conditions are met;

  • “at least one (1) party to the arrangement is not resident in Malta and  at  least  one  (1)  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 (1) party to the arrangement maintains a permanent establishment situated outside Malta to which the arrangement is effectively connected and at least one (1) 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 (1) party to the arrangement is not resident in Malta and at least one (1) other party, not being resident in Malta, is a company which 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;”

The Rules are being introduced to ensure that any cross-border transactions between associated companies falling within the scope are carried out at arm’s length whereby any amounts 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 accrued, due or derived.

Arm’s length transaction in such case refer to an amount that independent parties would have agreed to in relation to the arrangement had those independent parties entered into that arrangement in comparable circumstances.

It is important to note that the Transfer Pricing Rules are only taken in to consideration for income tax purposes and not for VAT. 

There are exceptions to the rules which are catered for under such legal notice, with these being;

  • Securitisation transactions or;
  • 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 six million euro (€6,000,000); and (ii) 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 twenty million euro (€20,000,000)

It is also possible to enter in to an advance pricing arrangement with the relevant foreign component authority. In the meantime, further guidance is expected on the Rules, on the preferred transfer pricing methodologies, as well as on the relevant documentation obligations.

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Franklin Cachia

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