Malta Pension Loophole Closed with Competency Authority Arrangement

IRS Rejects Malta Personal Retirement Scheme Under Treaty

This is a brief article to update an article we published earlier this year on the issue of Malta Pensions and US Tax planning of retirement funds. Recently, the IRS published a Competent Authority Arrangement (CAA) that was entered into between the United States and Malta on the issue of pension and rollovers. The issue stemmed from the fact that some Taxpayers were claiming the Malta/US tax Treaty to mean that they could form a Malta Pension under the Retirement Pensions Act of 2011 and obtain significant tax-exempt pension benefits (similar to a Roth IRA) when distributions were properly staggered. Taxpayers would open a Malta Pension and strategically contribute and withdraw funds in order to obtain pension benefits under the treaty without a maximum contribution limitation — resulting in a windfall for Taxpayers.

The link to the CAA is here, but here are some of the highlights:

• • • “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 in the United States about whether these personal retirement schemes are “pension funds” for purposes of applying 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.”

What does this mean?

The competent authorities of the US and Malta are aware that some US residents and citizens created personal retirement plans in Malta in accordance with the Malta Pension Acts that contradicts the spirit of the act — and this was not the intended goal of the treaty. These US Residents and Citizens were contributing vast amounts of money as well as non-cash/securities contributions to Malta Pension Plans, in order to bolster the value of the fund outside the purported scope of the act and receive staggered tax-free distributions. Then, they would claim tax-exempt status under the treaty in the same fashion as a Roth IRA would receive. This was presumably not the intended purpose of the act, and as a result, the CAA confirms that personal pensions/retirement schemes do not qualify for preferred tax treatment for pensions under Articles 17 and 18.

Taxpayers who have already taken this type of tax position in prior years may want to consider consulting with a Board-Certified Tax Law Specialist to assess their options.

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