Malta-United States International Income Tax Treaty Explained

Malta-United States International Income Tax Treaty Explained

US Malta Tax Treaty

The US Malta Tax Treaty was entered into back in 2008 between the United States and the Government of Malta. Over the past 50+ years, the United States has entered into several tax treaties with different countries across the globe. There are many US taxpayers who are either originally from Malta or have invested in Malta — and/or still maintain offshore accounts, assets & investments that require reporting in the US and which may generate income. The purpose o the United States and Malta tax treaty is so Taxpayers can determine what their tax liability is for certain sources of taxable income. While the treaty is not the final word on how items of income will be taxed, it does help residents better understand how either the IRS and/or Malta will tax certain sources of income – and whether or not the saving clause will further impact the outcome. Let’s review the basics of the United States-Government of Malta Income Tax Treaty – and how the income tax treaty between US and Malta works.

US Malta Income Tax Treaty Basics

In general, the default position is that a Taxpayer who is a US person such as a US Citizen, Legal Permanent Resident, or Foreign National who meets Substantial Presence Test is taxed on their worldwide income. This would also include income that is being generated in Malta, and may be tax-free or exempt under the tax rules of Malta — unless an exception, exclusion, or limitation applies (such as with pension).

Saving Clause in US Malta Tax Treaty

As we work through the United States-Government of Malta Tax Treaty, one important thing to keep in mind is the saving clause. The saving clause is inserted in tax treaties in order to limit the application of the treaty to certain residents/citizens. With the saving clause, each country retains the right to tax certain citizens and residents as they would otherwise tax under general tax principles in their respective countries — absent the tax treaty taking effect.

What does the Saving Clause Say?

      • Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens.

      • Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may, for the period of ten years following the loss of such status, be taxed in accordance with the laws of that Contracting State.

Limitations on the Saving Clause

Despite any limitation created by the saving clause, certain portions of the tax treaty are still immune from the saving clause — which means the tax treaty will stand on issues involving the following tax matters:

      • The provisions of paragraph 4 shall not affect: 

        • a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), paragraphs 1 b), 2, and 5 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), and Articles 18 (Pension Funds), 23 (Relief from Double Taxation), 24 (Non-Discrimination), and 25 (Mutual Agreement Procedure); and

        • b) the benefits conferred by a Contracting State under Articles 19 (Government Service), 20 (Students and Trainees), and 27 (Members of Diplomatic Missions and Consular Posts), upon individuals who are neither citizens of, nor have been admitted for permanent residence in, 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.

      • 2. Notwithstanding the provisions of paragraph 1, payments made by a Contracting State under provisions of the social security or similar legislation of that State to a resident of the other Contracting State or to a citizen of the United States shall be taxable only in the first-mentioned State.

      • 3. Annuities derived and beneficially owned by an individual resident of a Contracting State shall be taxable only in that State. The term “annuities” as used in this paragraph means a stated sum paid periodically at stated times during a specified number of years, or for life, under an obligation to make the payments in return for adequate and full consideration (other than services rendered).

      • 4. Alimony paid by a resident of a Contracting State to a resident of the other Contracting State shall be taxable only in that other State. The term “alimony” as used in this paragraph means periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support, which payments are taxable to the recipient under the laws of the State of which he is a resident.

      • 5. Periodic payments, not dealt with in paragraph 4, for the support of a child made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support, paid by a resident of a Contracting State to a resident of the other Contracting State, shall be exempt from tax in both Contracting States.

What does this Mean?

The general rule is that when a Taxpayer resides in one country and receives a pension from employment – only that country of Residence can collect tax. In other words, if a US person resides in  Malta and receives payments for services rendered, only Malta would be the only contracting state to have the opportunity to tax the taxpayer. The same rule applies to annuities and alimony. It should be noted that there is a distinction between paragraph 1, which refers to pension for past employment, and paragraph 3 which refers to annuities but do not necessarily need to be the result of employment.

*The IRS recently published a CAA limiting the application of US persons investing in foreign Malta Personal Pension Schemes in order to try to treat them as a type of Roth-IRA

Social Security Payments: ARTICLE 17(2) of US Malta Tax Treaty

      • 2. Notwithstanding the provisions of paragraph 1, payments made by a Contracting State under provisions of the social security or similar legislation of that State to a resident of the other Contracting State or to a citizen of the United States shall be taxable only in the first-mentioned State.

What does this Mean?

It means that when it comes to Social Security and other public pensions, they will only be taxed in the first-mentioned state. In other words, if the United States pays Social Security to a US person who resides in Malta, then only the United States will be able to tax that Social Security income.

Article 6 INCOME FROM REAL (IMMOVABLE) PROPERTY

      • 1. Income derived by a resident of a Contracting State from real (immovable) property, including income from agriculture or forestry, situated in the other Contracting State may be taxed in that other State.

      • 2. The term “real (immovable) property” shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to real (immovable) property (including livestock and equipment used in agriculture and forestry), rights to which the provisions of general law respecting landed property apply, usufruct of real (immovable) property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources. Ships and aircraft shall not be regarded as real (immovable) property.

      • 3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of real (immovable) property.

      • 4. The provisions of paragraphs 1 and 3 shall also apply to the income from real (immovable) property of an enterprise.

      • 5. A resident of a Contracting State who is liable to tax in the other Contracting State on income from real (immovable) property situated in the other Contracting State may elect for any taxable year to compute the tax on such income on a net basis as if such income were business profits attributable to a permanent establishment in such other State. In the case of income from real (immovable) property situated in the United States, any such election shall be binding for the taxable year of the election and all subsequent taxable years unless the competent authority of the United States agrees to terminate the election.

What does this Mean?

Of importance is that this paragraph of United States-Government of Malta Tax Treaty, which uses the words “may be taxed” and not shall be taxed or shall only be taxed. Therefore, this paragraph it is essentially saying that either contracting state has the opportunity to tax real property income.

Dividend, Interest & Royalties Under the United States-Government of Malta Tax Treaty

When it comes to passive income such as dividends, interest, and royalties the Malta/US tax treaty is similar to many other tax treaties on this specific issue, and each country gets the opportunity to tax the income — but with limitations. For example, a US citizen who is earning dividend income from the United States but resides overseas can be taxed by both contracting states on the income.

But, there is a limitation on the amount of tax that can be imposed when the contract as in this example (United States) is taxing dividend income derived from sources within the United States by a resident of Malta.

These sections can get very complicated, but the most important takeaway is that there is a limitation to the amount of tax that can be issued and of course, the double taxation rules will further limit any duplication in taxation.

Offshore Reporting (FBAR & FATCA) & United States-Government of Malta Tax Treaty

When a US person has various Accounts, Assets, or Investments in Malta, they have to report to the United States each year on various different forms depending on the value of and category of the assets/accounts.

Here are some common forms which may need to be filed:

5 International Tax Forms You May Have Missed

The following is a summary of five (5) common international tax forms.

FBAR (FinCEN 114)

The FBAR is used to report “Foreign Financial Accounts.” This includes investment funds, and certain foreign life insurance policies.

The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?

If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.

Form 8938

This form is used to report “Specified Foreign Financial Assets.”

There are four main thresholds for individuals is as follows:.

      • Single or Filing Separate (in the U.S.): $50,000/$75,000

      • Married with a Joint Returns (In the U.S): $100,000/$150,000

      • Single or Filing Separate (Outside the U.S.): $200,000/$300,000

      • Married with a Joint Returns (Outside the U.S.): $400,000/$600,000

Form 3520

Form 3520 is filed when a person receives a Gift, Inheritance, or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:

      • Gift from a Foreign Person: More than $100,000.

      • Gift from a Foreign Business: More than $16,076.

      • Foreign Trust: Various threshold requirements involving foreign Trusts

Form 5471

Form 5471 is filed in any year that you have an ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:

      • Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.

      • Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.

      • Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.

      • Category 4: Control of a foreign corporation for at least 30 days during the accounting period.

      • Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).

Form 8621

Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).

The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.

*There are some exceptions, exclusions, and limitations to filing.

Receiving a Gift or Inheritance From Malta

If you are a U.S. Person and receive a gift from a Foreign Person, Foreign Business or Foreign Trust, you may have to file a Form 3520. The failure to file these forms may lead to IRS Fines and Penalties (see below).

Which Banks in Malta Report U.S. Account Holders?

As of now, there are nearly 2000 Foreign Financial Institutions, within Malta that report US account holder information to the IRS. The list can be found here: Malta FFI List:.

What is important to note, is that the list is not limited to just bank accounts. Rather, when it comes to FATCA or FBAR reporting, it may involve a much more broad spectrum of assets and accounts, including:

      • Bank Accounts

      • Investment Accounts

      • Retirement Accounts

      • Direct Stock Ownership

      • ETF and Mutual Fund Accounts

      • Pension Accounts

      • Life Insurance or Life Assurance Policies

Totalization Agreement & the United States-Government of Malta Tax Treaty

The purpose of a Totalization Agreement is to help individuals avoid double taxation on Social Security (aka U.S. individuals living abroad and who might be subject to both US and foreign Social Security tax [especially self-employed individuals] from having to pay Social Security taxes to both countries).

As provided by the IRS:

      • “The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes.

        These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country”

The United States has entered into 26 Totalization Agreements, but not Malta.

United States-Government of Malta Tax Treaty is Complex

In conclusion, The US and Malta tax treaty is a great source of information to help better understand how certain income may be taxed by either country depending on the source of income, the type of income, and the residence of the taxpayer. The tax outcome may be changed depending on whether or not the savings clause impacts how tax rules will be applied for certain types of income.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure on matters involving the United States-Government of Malta Tax Treaty.

Contact our firm for assistance.