Misusing Foreign Treaties for Pension Plan Arrangements
The United States has entered into about 60 different international tax treaties with different countries across the world. There are many different purposes of an international tax treaty — with the general goal being to reduce the “unknowns” for US and Foreign Taxpayers who may have income generated from outside its borders and/or reside in a foreign country. There are very strict limitations on how tax treaties are applied, with the goal of the US government to avoid taxpayers from exploiting the treaty. One common alleged misuse is with the Maltese Tax Treaty, in which some taxpayers took the language to mean that they could contribute millions of dollars of cash and assets to a Maltese personal pension retirement scheme – similar to a Roth IRA – and then withdraw money tax-free, without the limitations of a Roth IRA (which limits contributions to about $6,000/$7,000. The Internal Revenue Service recently released an updated Competent Authority Agreement confirming that the Maltese tax treaty cannot be used to create non-employment, Roth IRA equivalents (but with no contribution limitation) under the Malta-US tax Treaty. Let’s see what the IRS Provided:
Maltese (or Other Foreign) Pension Arrangements Misusing Treaty
As provided by the IRS:
In these transactions, U.S. citizens or U.S. residents attempt to avoid U.S. tax by making contributions to certain foreign individual retirement arrangements in Malta (or possibly other foreign countries).
In these transactions, the individual typically lacks a local connection, and local law allows contributions in a form other than cash or does not limit the amount of contributions by reference to income earned from employment or self-employment activities.
By improperly asserting the foreign arrangement is a “pension fund” for U.S. tax treaty purposes, the U.S. taxpayer misconstrues the relevant treaty to improperly claim an exemption from U.S. income tax on earnings in, and distributions from, the foreign arrangement.
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