What’s Going on with Malta Pension Plans, Who’s at Risk
What’s Going on with Malta Pension Plans?
In the past several years, the Malta retirement scheme/pension fund has become a key compliance issue for the Internal Revenue Service. In fact, the IRS is proposing that the Malta pension plan become a listed transaction, which is generally bad for U.S. taxpayers who own a Malta pension plan. But it is also important to keep in mind that the IRS does not allege that all Malta pension plans are bad. For example, a U.S. person taxpayer who worked in the U.K. for many years and then transferred their U.K. pension into a QROPS or other Malta retirement scheme will not be treatedt he same as a person who never worked in Malta and then decides to open a Malta retirement scheme and transfer millions of dollars of unrealized gain assets into this scheme for the sole purpose of withdrawing the money at a reduced tax rate.
Taxpayers, beware.
These days, self-proclaimed ‘expert international tax lawyers,’ who do not really specialize in international tax, but claim to be international tax experts, convince unsuspecting taxpayers that all Malta pensions are bad, and the Taxpayer must immediately prepare remedial procedures to avoid criminal prosecution, costing the taxpayer tens if not hundreds of thousands of dollars in tax and legal fees.
Let’s take a brief look at five key facts about Malta pension plans.
First, is Your ‘Malta Pension Plan’ a QROPS?
Many taxpayers with pension plans in Malta own a QROPS. A QROPS is a Qualifying Recognised Overseas Pension Scheme. Typically, a taxpayer will work in a country such as the U.K. for many years and then move the pension outside into a QROPS in countries such as Malta, which is perfectly valid, legal, and regulated by the U.K. government — and sometimes, the U.K. person is also a U.S. person.
These types of pension plans are not the type of pension plans that the IRS refers to when discussing Malta pension plans that run afoul of U.S. tax law. Stated another way, if a taxpayer legitimately worked in a country such as the U.K. and formed a QROPS in a country such as Malta under U.K. law – and they also happen to be a U.S. person — this does not mean they have done anything illegal.
Malta Pension Plan from Working in Malta
For taxpayers who worked in Malta for an employer who funded a Malta pension plan, these taxpayers also have also done nothing wrong. Technically, just having a pension plan in Malta from legitimate employment does not make a taxpayer in violation of the IRS. This is very important, as you will see in the next FAQ, because it impacts the extent of reporting necessary.
PFIC Exception for Treaty Countries
Most retirement plans in foreign countries are similar to those in the U.S., in that they contain various mutual funds and ETFs. Unfortunately, this may lead the investments contained within the pension to be considered PFIC. Taxpayers who have PFIC funds will find themselves inundated with reporting requirements that are overwhelming and unfair on forms such as Form 8621. However, there is a regulation that allows taxpayers to forego having to report PFICs when the investment is treated as a pension fund in the foreign country, and there is an income tax treaty in place with that foreign country. Thus, for many taxpayers who have a legitimate Malta pension plan from employment in Malta, they may be able to qualify under this regulation to avoid having to parse out all the individual investment funds they have contained within their legitimate pension plan, which just happens to be in Malta because they worked in Malta.
Malta Retirement Scheme with no Employment
When it comes to Malta Pension Plans, what the IRS is upset about is that some taxpayers from Malta retirement schemes are manipulating verbiage in the U.S. Malta treaty agreement and treating a Malta retirement scheme similar to a Roth IRA — only, instead of having the limitations as in the United States, there were no limitations placed upon these Malta retirement schemes. Thus, some taxpayers were investing tens of millions of dollars into their personal Malta retirement schemes and then taking advantage of the tax benefits, which would reduce or potentially eliminate certain tax liabilities, leaving millions of dollars in uncollected taxes. This is the type of arrangement that the IRS is upset about and cracking down on.
As provided by the IRS:
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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).
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The competent authorities confirm that a fund, scheme or arrangement established in a Contracting State that, except in the case of a qualified rollover from a pension fund established in the same Contracting State, (a) is allowed to accept contributions from a participant in a form other than cash, or (b) does not limit contributions by reference to earned income from personal services (including self-employment) of the participant or the participant’s spouse, is not operated principally to administer or provide pension or retirement benefits within the meaning of paragraph 1(k) of Article 3 of the Treaty, and is therefore not a “pension fund”.
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The competent authorities therefore also confirm that distributions from this type of fund, scheme or arrangement are not “pensions or other similar remuneration” in consideration of past employment for purposes of paragraph 1(b) of Article 17 of the Treaty. This type of fund, scheme, or arrangement includes a personal retirement scheme established in Malta under the Retirement Pensions Act of 2011.
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Malta Pension Plans Still Require Reporting (and Tax)
Taxpayers with Malta pension plans should keep in mind that they are required to report and disclose the foreign pension plan on various international reporting forms, such as the FBAR, Form 8938, and possibly Form 8621. If the taxpayer has a legitimate retirement plan in Malta, they should take a step back before being goaded into some compliance strategy that will cost them hundreds of thousands of dollars and may not even be necessary. If they are out of compliance for reporting or paying income tax, they should get into compliance (SDOP, RC, Delinquency, or VDP), but they should be sure to carefully assess the parameters of their pension plan in Malta.
On the other hand, for taxpayers who never worked in Malta but have funded high-dollar Malta retirement schemes comprised of assets that were transferred into the fund, even though the taxpayer has no relation to Malta, they may want to consider the potential IRS enforcement protocols and what steps to take to get into compliance.
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.