XS is Perl-aware glue, and as such, Perl redefines certain functions to Perl-aware functions.

I'd start by separating your Perl-incompatible stuff (non-Perl threads, and the non-Perl memory allocation) from XS. A separate file would be good, but the following might suffice.

#include <pthread.h>

void *thread(void *arg) {
    char *msg = (char*)arg;
    printf("thread: %s\n", msg);
    free(msg);
    return NULL;
}

void test_thread(const char *msg) {
    char *thread_arg = malloc((strlen(msg)+1)*sizeof(char));
    strcpy(thread_arg, msg);
    pthread_t tid;
    pthread_create(&tid, NULL, thread, (void*)thread_arg);
        
    void *rv;
    pthread_join(tid, &rv);
}

#include "EXTERN.h"
#include "perl.h"
#include "XSUB.h"
#include "ppport.h"

MODULE = My    PACKAGE = My

void
test_thread(const char *msg)
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Note that mid-block variable declarations (like thread_arg, tid and rv in your code, and the latter two in mine) aren't legal C89 which Perl supports. Of course, it doesn't mean you have to support it.