This week, Malta finally introduced formal rules for transfer pricing, an accounting and taxation practice that allows for invoicing transactions ‘internally’ between companies and subsidiaries that operate under common control or ownership.

Typical transactions include subsidiaries within the same group of companies invoicing management services, the supply of goods or the provision of loans.

Established jurisdictions around the world have had transfer pricing rules in place for some time, providing Governments with the mandate to investigate multinational companies as part of efforts to enforce transfer pricing rules, exposing company shortcomings which often result in fines being levied.

From a private sector perspective, a clever transfer pricing strategy can mean minimising a multinational group’s tax exposure and is perceived as tax avoidance. Indeed, if costs are piled into subsidiaries residing in jurisdictions with a high corporate tax rate, and profits channelled to those in a country with a low corporate tax rate, this would have a positive impact on an organisation’s bottom line.

On 18th November, Malta published subsidiary legislation via a legal notice to implement formal transfer pricing rules (Legal Notice 284 of 2022), effective from 1st January 2024.

The entry into force of the rules come as Government seeks to prevent loss of public revenues through multinationals shopping around for beneficial corporate tax jurisdictions formed part of a number of commitments made by Malta in its Recovery and Resilience Plan, approved by the EU Commission in 2021.

The new rules apply to agreements between companies that fall under common ownership, defined as having 50 per cent or more common direct or indirect participation rights in multinational groups that fall within the scope for Country-by-Country reporting, or 75 per cent in the case of multinationals excluded from such reporting.

SMEs, as defined by EU State Aid Regulations, are not subject to Malta’s transfer pricing rules.

The rules apply to cross border transactions and will apply to companies when surpassing the minimum threshold for total related party cross-border transactions of €6 million in revenue and €20 million in capital.

These rules also mean that for transactions falling within the scope, companies will have to substantiate how that the organisation adhered to an arm’s length principle.

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