Understanding the Malta Pension Plan Tax Strategy: A Deep Dive into IRS Scrutiny

Every taxpayer dreads a surprise from the IRS. But the anxiety amplifies when a Special Agent from the Criminal Investigation Division (CID) gets involved, particularly with the recent focus on the so-called “Malta Pension Plan IRS Investigation.”

The Malta Pension Plan Explained

While most Americans are familiar with retirement options like the 401k, traditional IRA, and Roth IRA, the Malta Pension Plan remains less renowned. It has surfaced as a strategic wealth planning tool, allowing high-income U.S. taxpayers to gain tax deferral and avoidance benefits via the U.S.-Malta Income Tax Treaty.

Under this strategy, taxpayers believed they could make tax-free contributions to a Malta-based pension plan, enjoying tax-free growth. Even lump-sum distributions from these plans were perceived as tax-exempt based on Article 17 of the U.S.-Malta Tax Treaty.

IRS’s Take on Malta Pension Plans

However, this interpretation soon caught the IRS’s attention. In 2021, they flagged the Malta Pension Plan in their “Dirty Dozen” list of tax scams. Signifying their stance, the IRS collaborated with Malta to ink a Competent Authority Agreement (CAA) later that year. This agreement clarified that the U.S.-Malta Tax Treaty’s language shouldn’t permit U.S. residents to leverage Malta-based pension plans’ benefits for their personal retirement schemes.

This led to extensive civil examinations on taxpayers involved in such setups. The IRS’s inquiries initially centered on the civil implications, like ensuring income accrued in the Malta Pension Plan was duly reported in the U.S. and verifying the filing of necessary informational returns.

By June 2023, the IRS heightened its efforts. The CID launched an expansive investigation drive. Taxpayers now faced interactions with IRS CID Special Agents, including summons and in-person interviews. Given the gravity, taxpayers are advised to consult their legal counsel about their Fifth Amendment rights and potential privileges during such interactions.

For those untouched by the IRS’s lens yet, seeking legal counsel remains paramount. It’s crucial to understand the steps for revealing their involvement in such arrangements and mitigating any possible risks.

US-Malta Treaty Abuse

In December 2021, the IRS issued its Dirty Dozen list of tax scams for 2021. The potentially abusive use of the US-Malta tax treaty is among them. According to the IRS, some U.S. citizens and residents rely on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to claim they can contribute appreciated property tax-free to certain Maltese pension plans and that there are no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Normally, the gain is reported on plan asset sales and distributions. The IRS is investigating whether these agreements are valid and whether Treaty benefits should be provided, and may contest the accompanying tax treatment.

Earlier this year, the Maltese pension again made it to the IRS Dirty Dozen list as one of the potentially abusive transactions to watch out for. 

This perceived threat appears sufficient to prompt a reasonably quick response, as the United States and the Republic of Malta concluded a Competent Authority Agreement (CAA) addressing the term “pension fund.”

US-Malta Competent Authority Agreement (CAA)

In December 2021, the US and Malta signed a Competent Authority Agreement (CAA) to confirm their understanding of the “pension fund” under the US-Malta income tax treaty (Treaty). According to the CAA, a fund, scheme, or arrangement is not operated principally to provide pension or retirement benefits if:

• it permits participants to contribute non-cash assets and
• does not place restrictions on contributions based on income from employment and self-employment activities

Maltese personal retirement plans have these features, so you can’t properly treat them as pension funds for treaty purposes. You can also not treat the distributions from these funds as pension distributions for tax purposes and the application of Articles 17 and 18 of the US-Malta tax treaty.

The CAA prevents US citizens from unlawfully setting up and using personal retirement schemes in Malta to receive Treaty benefits. Typically, these US taxpayers had no ties to Malta. They misconstrued the pension provisions of the Treaty to evade income tax on personal retirement scheme profits and distributions.

Proceed With Caution

With a myriad of financial strategies circulating in today’s digital realm— from infinite banking and the use of trusts for tax avoidance to the misuse of the Employment Retention Credit (ERC) program and questionable crypto losses— taxpayers must stay vigilant. The consequences of the Malta Pension Plan IRS Investigation serve as a stark reminder.

If you find yourself tangled in allegations related to international tax fraud, including the Malta Pension Plan or other complex financial arrangements, we advise you to act quickly and seek the guidance of a qualified tax professional before filing your tax returns and take any necessary corrective action with respect to your earlier tax filings.