Malta introduces Transfer Pricing Rules

Micro, small or medium-sized enterprises (SMEs) are excluded from the scope of the Rules (i.e. those entities fulfilling the criteria laid down in Annex I of Commission Regulation (EU) No 651/2014).

The Rules will only apply to enterprises that are classified as large enterprises. For the purpose of such classification, the group as a whole would need to be considered and not the enterprise in isolation.

The Rules apply to cross-border arrangements entered into between associated enterprises, as defined. Any transactions between Maltese-resident entities are excluded from the scope of the Rules. Securitisation transactions are also excluded from the scope of the Rules. 

An anticipated update was the transaction threshold that was still undetermined in the draft rules. The Rules will not apply where the aggregate arm’s length value of all items of income and expenditure of a:

1. revenue nature forming part of cross-border arrangements does not exceed €6m; and

2. capital nature forming part of cross-border arrangements does not exceed €20m; 

in the year preceding the year of assessment.

The definition of associated enterprises has been updated following the public consultation. In terms of the Rules, bodies of persons will be considered associated enterprises when there is direct or indirect control through a holding of more than 75% of the voting rights or ordinary share capital or by virtue of any powers conferred by the articles of association or other document regulating the controlled body of persons.

Bodies of persons subject to common control by virtue of the above-mentioned threshold (75%) will also fall within the scope of the Rules. 

This threshold has been increased from “more than 50%”, which was provided for in the draft rules. However, the “more than 50%” holding/ control threshold has been retained for constituent entities forming part of an MNE group which is subject to the CbCR obligations.

The Rules set out that the following instances constitute a cross-border arrangement:

• An arrangement between a Maltese-resident company and a non-Maltese-resident party; 

• An arrangement between a Maltese-resident company and a permanent establishment situated outside Malta to which the arrangement is effectively connected; and  

• An arrangement between a company that maintains a permanent establishment in Malta to which the arrangement is effectively connected, or otherwise derives income or gains arising in Malta, and a non-Maltese resident party.

The Rules set out that a company, in relation to an arrangement to which the Rules apply, is to prepare on a timely basis and retain such records as may be reasonably be required. 

Further guidance on documentation requirements is expected to be included in the guidelines.

The Rules provide a framework for the request and issuance of unilateral transfer pricing rulings and advance pricing agreements.

A unilateral transfer pricing ruling is binding on the CfR for a period of five years from the date the ruling takes effect. 

The CFR may, however, decline to issue a unilateral transfer pricing ruling where the Income Tax Acts (including any rules, regulations and guidelines issued thereunder) provide sufficient certainty regarding the tax treatment of the relevant transaction.

An advance pricing agreement may also be entered into for a duration not exceeding five years from the date the advance pricing agreement takes effect as determined during the relevant mutual agreement procedure. 

Guidelines are expected to be published to provide more guidance on the application of such Rules. Some examples on where further guidance would be useful include the:

• methodologies that will be accepted to arrive at the arm’s length amount;
  
• acceptance of other established guidance other than the OECD Transfer Pricing Guidelines; and
  
• extent of documentation which is to be prepared and maintained.