The Malta Tax & Customs Administration issues amended Rules and guidelines in relation to Transfer Pricing

February 20, 2024

Amendment to Legal Notice 9 of 2024

An amendment has been made to the Maltese Transfer Pricing Rules (“TP Rules”) whereby a sunset clause to the grandfathering provision has been introduced. Prior to the amendment, only cross border arrangements that were entered into or materially altered on or after 1 January 2024, were in scope. However, as a result of the said amendment all cross-border arrangements, irrespective of when these are entered into, will be in scope with effect from 1 January 2027.

Transfer Pricing Guidelines

The guidelines to the TP Rules provide examples of what should and what should not constitute a “materially altered arrangement”. In summary, the guidelines suggest a case-by-case analysis which must consider the substance of the arrangement by reference to the functions performed, assets used, and risks assumed by each of the parties to the arrangement (not necessarily the form of the arrangement). Changes to the consideration, rights/ obligations or the duration of the arrangement would constitute a material alteration.

The application of the TP rules precedes the application of the Notional Interest Deduction (“NID”) Rules. This means that before determining the risk capital of an entity that falls within the scope of the TP Rules, consideration must be given to whether loans or other debt should bear interest in line with the TP Rules. Any tax attributes brought forward from previous years (e.g., unabsorbed losses or unabsorbed NID), in respect of arrangements that were outside scope, are not required to be restated.

With respect to the methodology to be adopted to determine the arm’s length price, the guidelines refer to those set out in Chapter II of the OECD Transfer Pricing Guidelines. Other methods may also be accepted by the Malta Tax and Customs Administration (“MTCA”) in accordance with the OECD Transfer Pricing Guidelines.

The arm’s length consideration for low value-adding intra-group services may be determined in accordance with the OECD Transfer Pricing Guidelines and the EU Joint Transfer Pricing Forum guidelines.

The guidelines to the TP Rules also provide insight with respect to records that are to be retained by those entities within the scope of the Rules. The documentation requirements set out in Chapter V of the OECD Transfer Pricing Guidelines (i.e., including both a master file and a local file) apply. Such documentation must be made available to the MTCA upon request, within a reasonable timeframe.

Furthermore, more guidance is provided in relation to Rule 9 of the Maltese TP Rules. The guidelines elaborate that dividends paid to an associated enterprise should not be included in determining the mentioned thresholds, however, a distribution in kind may need to be considered.

Finally, in relation to Unilateral Transfer Pricing Rulings, the guidelines set out that in the absence of a primary adjustment initiated by another jurisdiction, the Commissioner will only consider requests for the issuance of a Unilateral Transfer Pricing Ruling performing a downward adjustment, only if certain conditions are met.