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Transfer pricing regulations have been in force in Malta since January 2024, introduced by Legal Notice 284 of 2022. After 18 months of operation, we can assess how these regulations affect international business structures and compliance requirements.
Malta was the last major EU jurisdiction without formal transfer pricing rules. The introduction of OECD-compliant regulations means the end of flexible approaches to documenting transactions between related parties.
Pressure from the OECD and European Commission, especially after the implementation of BEPS Action 13, forced Malta to adapt to international standards. Regulation 284/2022 announced on November 18, 2022, directly implements OECD Transfer Pricing Guidelines.
Additionally, Legal Notice 9 of 2024 clarified transitional periods and established that from January 1, 2027, all transactions will be covered by the regulations, regardless of their conclusion date.
The regulations cover transactions concluded from January 1, 2024, and transactions concluded earlier that have been materially modified after that date. For transactions concluded before January 1, 2024, that have not been modified, a transitional period applies until January 1, 2027.
The rules apply exclusively to large enterprises that do not qualify as micro, small, or medium-sized enterprises under EU definition. Crucially, the regulations cover only cross-border transactions between related parties - domestic Malta-to-Malta transactions are excluded.
Malta established a two-tier threshold system below which the rules do not apply. For revenue-nature transactions, the threshold is EUR 6 million, and for capital transactions EUR 20 million in the year preceding the tax year.
These thresholds encompass the total value of all transactions of a given type, so a company receiving EUR 4 million from Germany and EUR 3 million from France exceeds the EUR 6 million threshold and becomes subject to documentation obligations.
The rules require preparation of documentation compliant with Chapter V of OECD Guidelines, comprising master file and local file. The master file contains organizational structure description, business description, intangibles, financial transactions, and financial and tax position.
The local file focuses on detailed description of controlled transactions, financial information, and justification of applied valuation methodology. Documentation must be made available to tax authorities upon request.
Maltese rules prefer methods specified in Chapter II of OECD Transfer Pricing Guidelines. In practice, this means applying method hierarchy: Comparable Uncontrolled Price, Resale Price Method, Cost Plus Method, Profit Split Method, and Transactional Net Margin Method.
Method selection depends on transaction nature, comparable data availability, and specificity of functions, assets, and risks of each entity. Malta, as a small market, creates particular challenges in finding local comparable transactions.
Under Maltese regulations, taxpayers are obligated to conduct benchmarking analysis as an integral part of transfer pricing documentation. This analysis aims to establish whether conditions of transactions between related parties correspond to the arm's length principle.
Due to limited comparable transactions in Malta's local market, extending searches to European markets or other jurisdictions is recommended. However, the quality of comparable data and appropriate adjustment of differences between transactions remains crucial.
The rules provide for obtaining unilateral tax interpretations (rulings) and concluding advance pricing agreements (APAs) for periods up to five years. These instruments can significantly increase legal certainty for taxpayers conducting complex cross-border transactions.
APAs allow agreement with tax administration on valuation methodology before the tax year begins, eliminating risk of subsequent adjustments. The procedure requires detailed documentation and analysis but can ensure tax stability for several years.
The biggest challenge for companies is preparing OECD-compliant documentation in situations of limited comparable data availability in Malta's market. This often requires using data from other jurisdictions while maintaining appropriate diligence in analysis.
Companies must also adapt their accounting systems and internal procedures to new documentation requirements. This means investments in IT systems, staff training, and often using external advisors specializing in transfer pricing.
Failure to fulfill obligations related to transfer pricing documentation may result in tax adjustments according to the arm's length principle. Malta has not yet published a detailed penalty catalog, but penalties proportional to the scale of irregularities can be expected.
Additionally, lack of proper documentation may lead to additional reporting obligations and increased scrutiny from tax authorities in subsequent years.
The end of the transitional period in 2027 means that all transactions between related parties will need to be documented according to transfer pricing rules. This may mean a significant increase in compliance burdens for companies that have previously benefited from grandfathering provisions.
Malta will likely also harmonize its rules with new OECD and EU initiatives regarding tax transparency and substance requirements.
Companies operating through Maltese structures should conduct comprehensive analysis of their cross-border transactions and assess which are subject to the new rules. Preparing appropriate documentation before deadlines and considering APA options for high-value transactions is crucial.
It's also worthwhile to monitor the development of Malta's administrative practice and adapt compliance procedures to emerging best practices. Investment in professional transfer pricing support may prove significantly less costly than subsequent non-compliance costs.
The introduction of transfer pricing rules does not eliminate the tax benefits offered by Malta. The jurisdiction still offers an attractive tax system for international structures, provided compliance with new documentation requirements is maintained.
The key to success is a professional approach to documentation preparation and proactive management of compliance requirements. Companies that invest in solid transfer pricing infrastructure can continue to benefit from Maltese advantages while maintaining compliance with international standards.
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