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  • Bernarda Pesantez

US Flags Malta Pension Plans as “Potentially Abusive”

As many of our clients and readers know by now, at BFI, we frequently highlight the importance of seeking expert advice and professional guidance when it comes to navigating legal and tax-related issues. That is especially true for US investors, as they’re subject to a particularly complex framework of rules, as the latest news out of the IRS demonstrates.


In July, the U.S. Internal Revenue Service (IRS) added the Malta-US pension plan scheme to its so-called ‘Dirty Dozen’ list of “tax scams” to avoid for U.S. investors, under the guise that investors may be using these schemes for tax evasion purposes.


In its July 1st, 2020, news release, the IRS warns that it is evaluating the validity of such arrangements and may challenge the tax treatment of Maltese pension plan contributions and distributions.


The IRS comments that some US citizens (and US attorneys/financial advisors) are interpreting the US-Malta Income Tax Treaty in a way as 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 US taxpayer.” In using this interpretation, put bluntly, the IRS has now raised the concern that these investors may be using it to avoid paying tax.


Commenting on the US-Malta pension scheme, as well as other schemes from their “Dirty Dozen” list, IRS commissioner Chuck Rettig said: “We are stepping up our enforcement against abusive arrangements. Don’t be lulled into these shady deals. The IRS recommends that anyone who participated in one of these abusive arrangements should consult independent counsel about coming into compliance.”

In response to the above, the Maltese government said it is ready to tighten up its policies, if needed. A government spokesperson told the local newspaper, Times of Malta, that “without going into the merits of this particular issue, since broader analysis is entailed and ongoing, I can confirm that Malta is, as always, ready to discuss, support and implement any strengthening of policies that would lead to an improved and fairer framework for all.”

BFI has been cautious about these US-Malta pension plans, based on what our counsel has considered as a very light interpretation of the spirit of the double tax treaty between the two countries, especially when it comes to US residents who had no international working history. Therefore, the IRS’s decision did not come as a surprise to us.

It is, of course, still regrettable, as news stories like these tend to have the broader effect of damaging the reputation of proper international planning, which, when done correctly and compliantly, can provide solid benefits to US persons in a compliant way.

We remind our readers to always look for proper legal and tax advice when establishing a wealth-plan structure, domestically or internationally, particularly when a structure looks “too good to be true”.

When it comes to wealth planning and developing solid and effective structures, “preparation is half the battle”, as the adage goes. Countless problems and future headaches can be avoided by taking the time to do one’s due diligence when selecting the right advisors and partners.

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