Transfer pricing considerations for business restructuring

Restructuring usually involves changing an organisational set-up or business model. This requires proper documentation and might induce changes to the Transfer Pricing (TP) model, require compensation and/or trigger exit tax. Such TP and related implications must be assessed early in the process in order to avoid further complexities at a later stage.

Some countries have specific legislation, regulations or guidelines on this, but in most cases many rely on the guidance included in the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines (OECD TPG). The Guidelines include a specific chapter on the TP aspects of business restructurings and, among other things, propose a methodology to implement a business restructuring in accordance with the arm’s length principle.

Currently there are no sophisticated TP rules in Malta, however the Commissioner for Revenue is expected to publish TP Rules during the last quarter of 2022. It is expected that such TP Rules (or local official guidelines) will also make reference to the OECD TPG.

Some key TP considerations for business restructurings

Reallocation of functions and profits

In cases where functions are reallocated between the entities within a group, one also needs to assess the reallocation of profits and any potential compensation payment to the entity giving up such potential in the form of transferred functions and/or risks.

Transfer of assets and business activities

Business restructurings often involve the transfer of tangible assets, intangible assets (or the rights to such assets) as well as business activities.

As a result, business restructurings generally involves the determination of whether an arm’s length payment would be warranted for the transfer of such assets or business activities, or for the termination or substantial renegotiation of commercial arrangements between associated enterprises, and if so what the amounts of such arm’s length consideration would be.

Termination of existing agreements

When agreements are terminated or renegotiated, it has to be assessed whether an indemnification needs to be paid to ensure arm’s length conditions. Not only the terms and conditions of agreements between related parties need to be concluded on an arm’s length basis, but any change, renegotiation or termination of such contracts needs to be carried out under arm’s length conditions.

Apart from TP implications, one also needs to ensure that other matters are considered from a direct taxation, indirect taxation and reporting perspective for example exit taxation, VAT, stamp duty and DAC 6.

Business restructurings invariably give rise to Maltese tax implications and TP matters will now also need to be included in the Maltese fiscal analysis.