Warning to Individuals with Malta Personal Retirements
The IRS has now issued their opinion on their understanding of the meaning of pension fund for purposes of the United States–Malta income tax treaty (Treaty). The competent authorities, CA, have entered into this agreement on December 23, 2021, after becoming aware that U.S. taxpayers with no connection to Malta were misconstruing the pension provisions of the Treaty to avoid income tax on the earnings of, and distributions from, personal retirement schemes established in Malta.
U.S. and Malta competent authorities’ understanding that (except in the case of a qualified rollover from a pension fund in the same country) a fund, scheme, or arrangement is not operated principally to provide pension or retirement benefits if it allows participants to contribute property other than cash, or does not limit contributions by reference to income earned from employment and self-employment activities. Because Maltese personal retirement schemes contain these features, they are not properly treated as a pension fund for Treaty purposes and distributions from these schemes are not pensions or other similar remuneration.
It seems that some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax-free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily, the gain would be recognized upon disposition of the plan’s assets and distributions of the proceeds.
Therefore, any fund, scheme, or arrangement, or any participant thereof, established in Malta that is not described in the above-described Arrangement, including any fund, scheme, or arrangement established pursuant to Maltese legislation enacted after the date of signature of this Arrangement may still qualify. We, at Michael B. Nelson, Inc., can present your case to the U.S. or Maltese competent authority to seek a determination of whether your fund, scheme, or arrangement qualifies as a “pension fund” within the meaning of paragraph 1(k) of Article 3 of the Treaty. We are also able to advise you about the possible amending of prior filed tax returns to reflect this current understanding of the Internal Revenue Service.
Michael B. Nelson, Esq.