The Maltese Individual Retirement Arrangement Loophole Closed

Malta Retirement Funds are Under the US Tax Microscope

Malta Retirement Funds

Initial Publication Date: 2/2022

Recently, the Internal Revenue Service has been aggressively investigating US Taxpayers who they believe have improperly invested in Malta retirement funds. For Taxpayers who may have recently received a John Doe Summons — even if their investment into the Malta pension fund was based on the advice of a tax attorney or promoter — it is important to note that the IRS continues to vigorously pursue enforcement. This is due to the fact that the IRS has come to learn about wealthy Taxpayers who have been investing tens of millions of dollars into foreign retirement plans which are not employment based in nature and artificially reducing their tax rate by claiming treaty benefits similar to the how a Roth IRA is treated in the U.S. Under most circumstances, this type of personal investment would be categorized as a passive investment with significant tax implications — including potential PFIC (if the treaty exception does not apply) and not receive tax-deferred treatment.  Let’s look at the basics.

UK Pension Transfers to QROPS are Common

For Taxpayers living in the UK as a resident or nationals of the UK, it is quite common to transition their UK pension into a QROPS (Qualifying Recognised Overseas Pension Scheme (QROPS). This is not the type of transaction the IRS is actively pursuing.

US and Malta Tax Treaty Definition of Pension

The term pension is referenced throughout the treaty, but here are a few of the definitions.

Article 3, 1K

• • • (k) the term “pension fund” means any person established in a Contracting State that is: i) in the case of pension funds established in the United States, generally exempt from income taxation, and in the case of pension funds established in Malta, a licensed fund or scheme subject to tax only on income derived from immovable property situated in Malta; and ii) operated principally either: A) to administer or provide pension or retirement benefits; or B) to earn income for the benefit of one or more persons meeting the requirements of subparagraph i) and clause A) of this subparagraph.

Article 4 Resident

• • • For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or of profits attributable to a permanent establishment in that State. . 2. The term “resident of a Contracting State” includes: a) a pension fund established in that State; and b) an organization that is established and maintained in that State exclusively for religious, charitable, scientific, artistic, cultural, or educational purposes, notwithstanding that all or part of its income or gains may be exempt from tax under the domestic law of that State.

Article 17 Pensions, Social Security, Annuities, Alimony, and Child Support

• • • 1. a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State. b) Notwithstanding subparagraph a), the amount of any such pension or remuneration arising in a Contracting State that, when received, would be exempt from taxation in that State if the beneficial owner were a resident thereof shall be exempt from taxation in the Contracting State of which the beneficial owner is a resident.Article 18

Pension Funds

• • • Where an individual who is a resident of one of the States is a member or beneficiary of, or participant in, a pension fund that is a resident of the other State, income earned by the pension fund may be taxed as income of that individual only when, and, subject to the provisions of paragraph 1 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), to the extent that, it is paid to, or for the benefit of, that individual from the pension fund (and not transferred to another pension fund in that other State).

Loopholes with Prior CAA

It has come to the attention of the competent authorities that U.S. Citizens and residents are establishing personal retirement schemes in Malta under the Retirement Pensions Act of 2011 with no limitation based on earnings from employment or self-employment, and are making contributions to these schemes in forms other than cash (e.g., securities). Questions have arisen as to whether these personal retirement schemes are “pension funds” for purposes of applying the Treaty — and the IRS now seeks to close the loophole.

Updated CAA

• • • Under paragraph 3 of Article 25 of the Treaty, the competent authorities may resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Treaty.

    • Accordingly, U.S. citizens and residents may not claim benefits under paragraph 1(b) of Article 17 and Article 18 of the Treaty with respect to the type of fund, scheme or arrangement described in the paragraph immediately above, including a personal retirement scheme established in Malta under the Retirement Pensions Act of 2011. Additionally, these funds, schemes or arrangements may not apply paragraph 2(e) of Article 22 of the Treaty to be treated as a qualified resident and may not claim the benefits of paragraph 3 of Article 10 of the Treaty. The competent authorities confirm that the interpretation in this Arrangement reflects the original intent of the Contracting States regarding the definition of “pension fund” for purposes of the Treaty. Any fund, scheme or arrangement, or any participant thereof, established in Malta that is not described in this Arrangement, including any fund, scheme or arrangement established pursuant to Maltese legislation enacted after the date of signature of this Arrangement, may present its case to the U.S. or Maltese competent authority under Article 25 of the Treaty to determine whether the fund, scheme or arrangement qualifies as a “pension fund” within the meaning of paragraph 1(k) of Article 3 of the Treaty. Any such determination will be made only by the mutual agreement of the competent authorities.

What Happens Next?

In recent months, the IRS has been issuing John Doe Summons against taxpayers they believe may have acted improperly with contributions, growth, and distributions from a Malta Retirement Fund. In addition, there is the concern that Taxpayers have not properly reported their Malta pension plan for reporting purposes on the FBAR or Form 8938.  This may lead to civil and criminal fines and penalties, and Taxpayers may want to consider submitting to the Streamlined Procedures or Voluntary Disclosure Program with a Board-Certified Tax Law Specialist who specializes in offshore disclosure matters.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.