Exception to Malta Retirement Scheme as Listed Transaction

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Exception to Malta Retirement Scheme as Listed Transaction

Exception to Malta Retirement Scheme as Listed Transaction

Exception to Malta Retirement Scheme as Listed Transaction

Unfortunately, due to recent information from the IRS about the enforcement of improperly funded Malta retirement schemes, some taxpayers are being fear-mongered into believing that all Malta pension plans are bad and that having a QROPS means they have violated U.S. tax law, but that is incorrect. For example, it is very common for UK taxpayers who have accumulated a pension in the UK to roll it over into a QROPS (Qualified Recognised Overseas Pension Scheme) — a common type of personal retirement scheme in Malta. Thus, you can envision the situation in which a taxpayer, either as a US person or before becoming a US person, transferred their UK pension to a QROPS — and is now a US person for tax purposes, owning a Malta retirement scheme.  While there is a proposed regulation for the Malta retirement scheme to become a listed transaction, it is also very important to note that the proposed regulation includes an exception for taxpayers who find themselves in this UK rollover/QROPS situation.

Malta Personal Retirement Scheme as a Listed Transaction

Back in 2023, the US government proposed regulations that would require certain Malta pension retirement scheme transactions to be treated as listed transactions. As a listed transaction, it would subject a taxpayer to potential fines and penalties if they did not properly include the listed transaction on Form 8886.

*At the time of this article, the regulations are still proposed regulations and not finalized.

QROPS Exception for UK ‘Rollovers’

As part of the proposed regulations, the US government carved out an exception for the situation identified above, in which a taxpayer who resides in the UK and accumulated a UK pension plan rolled that pension plan over into a QROPS Malta Personal Retirement Scheme.

Proposed Exception

 

  • The Treasury Department and the IRS are aware that the United Kingdom allows tax-deferred transfers from its pension or retirement schemes to certain “qualified recognised overseas pension schemes” (or QROPS), including Malta personal retirement schemes.

 

  • The Treasury Department and the IRS believe that certain U.S. individuals who may have transferred their foreign pension or retirement arrangements to Malta personal retirement schemes in accordance with foreign law and claimed an exemption from U.S. income tax for earnings in or distributions from such schemes on U.S. Federal income tax returns filed before the date these proposed regulations are published in the Federal Register should not be treated as participating in a listed transaction described in proposed §1.6011-12(b)(1) provided certain requirements are met.

 

  • Accordingly, proposed § 1.6011-12(b)(2) provides that if a U.S. citizen or resident alien described in proposed §?1.6011-12(b)(1)(i) takes a position described in proposed §?1.6011-12(b)(1)(ii) on a U.S. Federal income tax return filed before June 6, 2023, such U.S. citizen or U.S. resident alien will not be treated as participating in a listed transaction for the taxable year to which the U.S. Federal income tax return relates provided that

 

  • Such U.S. citizen or U.S. resident alien (the transferor) established the Malta personal retirement scheme with a transfer (or rollover) of a pension or other retirement arrangement established in a country other than Malta or the United States (for example, a pension scheme established in the United Kingdom), and in compliance with the tax laws of such country, the transferor was, when such pension or retirement arrangement was established and such rollover occurred, a resident of the other country under that country’s tax law, including under Article 4 (Residency) of such country’s income tax treaty with the United States, if applicable (for example, a tax resident of the United Kingdom), and the transferor’s contributions to such pension or retirement arrangement consisted solely of cash in an amount that bears a relationship to the transferor’s income earned from the performance of personal services.

 

  • This exception does not apply to a U.S. citizen or U.S. resident alien who takes a position described in proposed ?1.6011-12(b)(1)(ii) on a U.S. Federal income tax return filed on or after June 6, 2023, when U.S. citizens or U.S. resident aliens who own foreign pension or retirement arrangements and their material advisors are on notice that the Treasury Department and the IRS have proposed identifying Malta personal retirement scheme transactions as listed transactions for purposes of §?1.6011-4(b)(2) and sections 6111 and 6112.

 

  • For example, assume Taxpayer B, a U.S. citizen, was a resident of Country Y when Taxpayer B established a Country Y pension plan in compliance with Country Y’s laws. Taxpayer B made cash contributions from wages to the Country Y pension plan. Taxpayer B, while a U.S. citizen and resident of Country Y, transferred the Country Y pension plan to a Malta personal retirement scheme in accordance with Country Y tax law.

 

  • In Year 1, Taxpayer B’s Malta personal retirement scheme earned income. On Taxpayer B’s Year 1 U.S. Federal income tax return, which is filed before June 6, 2023, Taxpayer B took a position described in proposed §1.6011-12(b)(1)(ii). Under proposed §?1.6011-12(b)(2), Taxpayer B would not be treated as participating in a listed transaction with respect to such year.

 

  • A U.S. citizen or U.S. resident alien who is described in proposed §?1.6011-12(b)(2), however, may be subject to U.S. income tax as a result of the transfer from a pension or retirement arrangement established in a country other than Malta to a Malta personal retirement scheme, as well as U.S. information reporting requirements under, for example, section 6048(a) and (c). See IRS INFO 2011-0096 (Dec. 30, 2011). U.S. citizens and U.S. residents who are described in proposed §1.6011-12(b)(2) are subject to U.S. income tax on income earned and gain realized by their Malta personal retirement schemes, as described in section IV of the Background section of this preamble.

 

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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 who 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. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.