United States and Malta agree joint crackdown on pension plan abuse

The US and Malta have signed an agreement confirming their understanding of the meaning of pension fund under the United States-Malta income tax treaty, in a statement by the US Internal Revenue Service.

This came to light after both authorities found that US 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. The IRS said the fix took the form of a “competent authority arrangement”, or CAA, which “confirmed their understanding of the meaning of ‘pension fund’ for [the] purposes of the United States–Malta income tax treaty.”

According to the statement, “The CAA confirms the US 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 operating 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.”

In announcing the agreement with Malta’s government on the matter, the IRS also said it was “actively examining” taxpayers who set up Maltese pensions, suggesting there could be issues ahead for those Americans found to have taken advantage of what may have seemed, to them or their tax advisers, a valid efficiency.

The IRS also cautions taxpayers against entering into any substantially similar arrangements that would seek to misconstrue the provisions of a bilateral income tax treaty of the United States to avoid income tax. IRS enforcement, both the civil and criminal divisions, is committed to pursuing abuse and those who market and participate in abusive transactions.

A local spokesperson for the U.S. Embassy in Malta said,  “The US-Malta Competent Authority Arrangement regarding pension funds is a positive example of our bilateral cooperation. The U.S. Department of the Treasury’s Internal Revenue Service (IRS) worked with Maltese authorities and partners to finalize this agreement with the goal of preventing tax avoidance by American citizens. 

Further information on the agreement on the US Department of the Treasury’s Internal Revenue Service visit the website – https://www.irs.gov/newsroom/united-states-malta-sign-a-competent-authority.