Malta’s transfer pricing (TP) laws align with the Guidelines set by the Organization for Economic Co-operation and Development (OECD). Currently, the TP rules are incorporated in the Income Tax Management Act, Income Tax Act, and Patent Box Regime (Deduction) Rules.
Arm’s Length Principle
If a non-resident controls a Maltese resident business and arranges their business so that the resident earns little or no profit less than what would be expected in a normal, independent transaction, the Commissioner near the relevant tax authority can intervene. In such cases, the non-resident can be taxed as if the resident were acting as their agent.
This aligns with the arm’s length principle, which says that related parties must deal with each other as if they were unrelated, charging fair market prices and earning reasonable profits. If they don’t, tax authorities can adjust things to reflect what would have happened between independent parties.
Related Party Definition
The definition of “related parties” in Malta aligns with Article 9 of double tax treaties (based on OECD models) or similar wording in those treaties. According to the law, parties are considered as associated when they are connected through control. A company controls another if it – directly or indirectly, holds more than 75% of the voting rights or ordinary shares, or has control through rules in the company’s governing documents. However, the law provides that if companies are part of a multinational enterprise (MNE) group, then the control threshold will be lowered to 50%.
In addition, the law stipulates that in the case when the same person or group of people controls two or more companies, such companies will be considered as associated.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Malta are:
- Comparable Uncontrolled Price Method (hereinafter: CUP)
- Resale Price Method (hereinafter: RPM)
- Cost Plus Method (hereinafter: CPM)
- Transactional Net Margin Method (hereinafter: TNMM)
- Profit Split Method (hereinafter: PSM)
Malta does not have a formal rule like a fixed hierarchy written in its laws for choosing a TP method. Instead, it follows the OECD TPG, which specifies that the most appropriate method can be used depending on the situation.
Comparability Analysis
Malta doesn’t have its own detailed transfer pricing rules; however, it relies on the OECD TPG as the main reference for how to handle these matters. Chapter III of the OECD Transfer Pricing Guidelines regulations outlines key factors in the analysis, including comparability between controlled and uncontrolled transactions, accuracy and completeness of data, reliability of assumptions, and sensitivity to potential data deficiencies. This ensures that calculating arm’s length pricing involves a structured comparison between related-party and independent transactions.
While both domestic and foreign comparables are used to determine the arm’s length principle the Maltese law does not have a preference between the two; neither does it allow for the usage of secret comparables during auditing.
Documentation Requirements
Multinational enterprises in Malta are requested to provide a master file and a local file to meet transfer pricing requirements. The master file includes general information, such as its structure, business operations, intangibles, financial activities, and tax positions. Meanwhile, the local file refocused on detailed information for the Malta-based entity, covering its management, competitors, controlled transactions, transfer pricing method, intercompany agreements, and financial data. Both files must be available in Maltese or English when requested by the tax authorities.
Country-by-Country Reporting
Malta has adopted EU rules requiring large multinational groups (with yearly revenue over €750 million) to report certain tax information (Country-by-Country or CbC reporting). If the group’s main parent company is based in Malta, it must file this report with the Maltese tax authority within 9 months after the financial year ends. Other Maltese companies in the group may also need to file the report in some cases unless an exception applies.
The CbC report includes important financial information for each country in which the group operates. Among others, the report reports on how much revenue comes from related and unrelated parties, the total revenue, and the profit or loss before tax. It must also include information on income tax paid and accrued during the year, the number of employees, stated capital, and accumulated earnings.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
In Malta, Taxpayers can request transfer pricing rulings to clarify how cross-border deals with related companies are taxed.
Unilateral Ruling: Request in writing to the tax authority (TCA) for €3,000. It’s binding for 5 years and can be renewed for €1,000 if no major changes occur.
Bilateral/Multilateral APAs: These can be requested for €5,000, covering cross-border deals with related companies. Valid for up to 5 years and can be renewed for €2,000 if no major changes.
Both types of rulings and agreements must be requested before starting the arrangement or for existing ones under certain conditions.
Mutual Agreement Program (MAP)
Malta’s Mutual Agreement Procedure (MAP) allows taxpayers to settle tax disputes through discussions between tax authorities. Taxpayers can request MAP assistance for issues covered under Malta’s tax treaties, including transfer pricing disputes. The requests should be submitted within the time limits specified in the relevant treaty. While no fees are charged for MAP requests, taxpayers must follow guidelines for documentation and any agreements reached through MAP are implemented promptly.
Approach to Transfer Pricing Audits
If an audit occurs, the Maltese tax authorities will likely focus on whether companies have adhered to the arm’s length principle and if their documentation is in order to support intra-group transactions.
Penalties
Maltese entities responsible for reporting (like the ultimate parent entity, surrogate parent entity, or constituent entity) can face penalties if they don’t follow the rules for collecting, keeping, and reporting data as required by the EU’s Administrative Cooperation Directive. For instance, failure to comply with the CbC reporting requirements can result in a penalty ranging from 200 euros to 50,000 euros.
Taxation at a Glance
Malta is a parliamentary republic and EU member. Its official languages are Maltese and English. Companies are taxed like individuals under a system based on old English tax law. Key tax laws include the Income Tax Act, VAT Act, and others. Malta follows EU rules and adapts EU directives into its laws.
The currency of Malta is the Euro (EUR).
The official name of the Malta tax authority is the Office of the Commissioner for Revenue.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 35% |
VAT | 18% |
Withholding tax on dividends to non-residents | 0% |
Withholding tax on interest to non-residents | 0% |
Withholding tax on royalties to non-residents | 0% |
Our firm provides our clients with comprehensive assistance in their transfer pricing needs globally. To contact a team member, please click here.
