Transfer Pricing in Malta: Navigating the Current Framework

Transfer Pricing in Malta: Transfer Pricing in Malta: Navigating the Current Framework

1. Introduction – From EU Principles to Maltese Law

Transfer pricing has long been a cornerstone of international tax law, rooted in the arm’s length principle: the idea that the terms and conditions of transactions carried out between associated enterprises should be consistent with those that would be agreed upon between independent enterprises under comparable circumstances.

The implementation of the Transfer Pricing Rules S.L. 123.207 of the Laws of Malta, (the ‘Rules’) establishes Malta’s formal transfer pricing framework. With effect from the 1st January 2024, Malta applies internationally accepted transfer pricing principles as part of domestic law.  Transactions between associated enterprises that fall within the scope of transfer pricing legislation in Malta must now be assessed in light of the requirements of the Rules and taxpayers must ensure that they carry out the necessary assessments to determine their applicability to their intra-group transactions.

The result is a rules-based system which brings clarity and added legal certainty to the taxpayer, but also new compliance obligations in Malta for qualifying taxpayers operating in cross-border group structures.

2. The SME Exemption – Understanding Who Is Out of Scope

An important feature of the Maltese transfer pricing framework is that it does not apply across the board. Under the current Rules, the transfer pricing framework applies only to cross‑border transactions between associated enterprises. These include situations where one entity holds or controls more than 75% of another, as well as cases where the same person or group of persons holds or controls more than 75% in two or more entities. This covers both parent–subsidiary relationships and entities under common control (such as sister companies). Additionally, the Rules as they currently stand exclude micro, small and medium-sized enterprises (SMEs).

The definition of an SME for Maltese transfer pricing purposes directly refers to Annex I of Commission Regulation (EU) No 651/2014 of 17 June 2014. This EU Regulation sets out a harmonised definition of SMEs based on three key criteria:

• Number of employees;
• Annual turnover; and
• Annual balance sheet total.

In broad terms:

• Micro enterprises employ fewer than 10 persons and have less than a €2 million turnover or balance sheet total;
• Small enterprises employ fewer than 50 persons and have less than a €10 million turnover or balance sheet total; and
• Medium-sized enterprises employ fewer than 250 persons and, have less than €50 million turnover or a €43 million balance sheet total.

However, these thresholds do not apply solely on the basis of the figures of the individual entity. Under Annex I of the Regulation, an enterprise must also take into account the headcount, turnover and balance sheet totals of any partner or linked enterprises when assessing SME status. Accordingly, the SME qualification must be determined at group level, after aggregating or proportionally consolidating the financial and employee data of related companies, depending on the nature of the relationship.

The Maltese Transfer Pricing Rules adopt this EU definition by reference. As a result, a group falls outside the scope of the transfer pricing rules only where the aggregated figures of the enterprise, including those of partner and linked entities, meet the SME thresholds under the Regulation. This ensures that the reduced compliance burden applies only to genuinely small and medium‑sized groups.

3. When Do the Transfer Pricing Rules Apply?

• While the Rules have now entered into effect, the timing of a particular arrangement should be considered due to the introduction of a ‘grandfathering’ clause. The rules apply from 1 January 2024 in respect of:
  • New cross-border arrangements entered into on or after that date; and
  • Pre-existing arrangements which are materially altered on or after 1 January 2024.
• For arrangements entered into before 1 January 2024 which are not materially altered, the rules will only apply from basis years commencing on or after 1 January 2027.

Whether an arrangement has been “materially altered” is assessed on a case-by-case basis, with focus placed on changes to the functions performed, assets used and risks assumed by the parties, rather than purely formal or administrative amendments.

The De Minimis Exception

Even where the SME thresholds are met, the Rules may still not apply if certain quantitative thresholds are not exceeded.

The rules shall not apply in a financial period where:

• The aggregate arm’s length value of revenue items forming part of cross-border arrangements does not exceed €6 million; and
• The aggregate arm’s length value of capital items forming part of cross-border arrangements does not exceed €20 million.

These thresholds are assessed annually and provide a further layer of proportionality, ensuring that the transfer pricing framework is targeted primarily at arrangements that are material in value. Where the thresholds are exceeded in a particular year, the company would be expected to comply with the transfer pricing rules from that period in question.

4. What Does Being Subject to Transfer Pricing Mean in Practice?

Once a Maltese company falls within the scope of the Rules, the practical implications can be significant.

At a high level, being subject to transfer pricing rules in Malta requires ensuring that the relevant cross-border arrangements with associated enterprises are priced in accordance with the arm’s length principle. In addition to ensuring that the necessary compliance documentation is in place, it is advisable to take an approach that mitigates the risk of any tax audit issues by ensuring that commercially sound transfer pricing policies are in place. Such measures can help ensure clarity and foresight in an environment subject to increased scrutiny. When the pricing of related‑party transactions departs from the arm’s‑length parameters observable between unrelated parties, taxpayers should proactively record the necessary transfer pricing adjustment. Failure to align reported results with arm’s‑length conditions empowers the MTCA to apply unilateral adjustments during the tax assessment process. Such interventions highlight both the analytical importance of robust, contemporaneous transfer pricing documentation and the practical need for taxpayers to proactively mitigate exposure to audit challenges, secondary tax implications, and broader compliance risks.

In order to determine the transfer price and ensure that the transactions are at arm’s length, as a matter of good practice, a number of steps should be taken:

• Perform a functional analysis of each cross-border arrangement to identify the key characteristics of the transaction and understand the conditions under which comparable transactions would be carried out, taking into consideration the functions performed, assets employed and risks assumed by each of the parties to the transaction;
• Analyse comparables and other determining factors in order to be able to perform a comparability analysis and make the necessary comparability adjustments;
• Select and apply the most appropriate transfer pricing methodology;
• Determination of the arm’s length remuneration, supported by a robust economic analysis, typically by undertaking a benchmarking study and compiling relevant transfer pricing policies.

Arriving at the arm’s length price is therefore not a one-size-fits-all exercise and depends on various factors surrounding the intra-group transactions and the behaviour of the parties. The selection of the most appropriate method is crucial to arrive at the arm’s length price. The Maltese Rules defer to methodologies designated by the Commissioner through published guidelines, which in turn refer directly to the methods outlined in Chapter II of the OECD Transfer Pricing Guidelines.

The approved methods are five, consisting of three traditional methods and two transactional profit methods :

• The Comparable Uncontrolled Price (CUP) Method;
• The Resale Price Method;
• The Cost Plus Method;
• The Transactional Net Margin Method (TNMM); and
• The Transactional Profit Split Method.

The choice of method depends on the nature of the transaction, the availability of reliable comparables, and the functional profile of the parties involved. In practice, the goal is to identify the method that provides the most reliable approximation of an arm’s length outcome given the facts and circumstances.

From a compliance perspective, taxpayers should expect to prepare and retain transfer pricing documentation.

In line with OECD standards, this documentation typically takes the form of:

• A Master File, prepared by the parent entity of the group, providing a high-level overview of the group, its business activities and transfer pricing policies; and
• A Local File, prepared by each associated enterprise, its specific transactions and the arm’s length nature of those transactions.

While this documentation is not submitted automatically with the tax return, it must be prepared on a timely basis and made available to the MTCA upon request.

5. Certainty Through Rulings – APAs and Unilateral Transfer Pricing Rulings

Recognising that transfer pricing can involve complex judgement calls, the Maltese framework offers taxpayers the possibility of obtaining upfront certainty.

Two key mechanisms are available under the Rules:

• Unilateral Transfer Pricing Rulings These allow a taxpayer to agree in advance with the MTCA on the appropriate transfer pricing treatment of a specific cross-border arrangement.
• Advance Pricing Agreements (APAs): These are entered into between the Maltese competent authority and one or more foreign tax authorities, providing bilateral or multilateral certainty and reducing the risk of double taxation.

Both tools can be particularly valuable for taxpayers with material or complex cross-border arrangements, offering certainty and reducing future dispute risk.

Final Thoughts

Malta’s transfer pricing rules mark a significant evolution in the local tax landscape. While they introduce additional complexity, they also bring Malta firmly in line with international standards.

For businesses operating cross-border structures, understanding when the rules apply, who is in scope, and what is required from a compliance and documentation perspective is essential. With the right preparation and support, transfer pricing can be managed proactively rather than reactively – turning a potential risk area into a well-controlled part of a group’s tax governance framework.

Although transfer pricing is often viewed as an added administrative burden, it also presents valuable opportunities for businesses. A well‑designed transfer pricing framework gives management greater visibility over how value is created within the group, allowing for more informed decision‑making. It can help streamline intra-group arrangements, align pricing with economic reality, and ensure that profit allocations reflect commercial substance. This not only mitigates tax risk but can also support operational efficiency, improve transparency with stakeholders, and strengthen the overall governance of the group. In many cases, transfer pricing becomes a tool for driving strategic improvements rather than simply a compliance cost.

How AE Can Help

At AE, we support clients at every stage of the transfer pricing journey. Our team provides clear, practical guidance on the applicability of the Maltese transfer pricing rules, assists in mapping intra‑group transactions, and develops robust documentation tailored to each business’s operations. We also help design or refine transfer pricing policies, coordinate benchmarking analyses through our international networks, and advise on implementation to ensure alignment between tax, finance, and operational teams. Whether your group is seeking to understand its obligations or to turn transfer pricing into a strategic advantage, AE offers the expertise and hands‑on support needed to navigate the new framework effectively.