IRS formally proposes flagging Malta ‘tax avoidance‘ retirement funds

Following years of warnings over abusive pension plans taking advantage of the US-Malta tax treaty, the US Internal Revenue Service has now proposed new rules that will require the disclosure of any tax-free Maltese retirement account held by a US citizen.

The number of such schemes appears to have mushroomed since Malta and the US struck a new taxation agreement in December 2021.

The IRS agency is currently seeking feedback on the proposed rules to designate certain Maltese personal retirement funds and similar arrangements as listed transactions that would have to be reported to the IRS.

A failure to report, once the new rules come into force, will land account holders with stiff penalties.

The US Treasury and the IRS “believe that transactions involving a Malta personal retirement scheme described in the proposed regulations, and substantially similar transactions involving a retirement arrangement established in Malta, unless specifically excepted, are tax avoidance transactions and should be identified as listed transactions,” the agency said in a statement on the new rules being proposed.
The US and Malta had struck an agreement in December 2021  on investment arrangements that allowed non-cash contributions.

Earlier in 2021, the IRS placed Maltese pension plans on its ‘Dirty Dozen’ list of abusive tax shelters, along with syndicated conservation easements and abusive micro-captive arrangements.
Malta retirement arrangements that would be listed under the new proposed rules would involve a US citizen or resident alien who doesn’t include earned or gained income in a personal retirement account established under Malta’s Retirement Pensions Act of 2011 in their US federal taxable income – due to an interpretation that the treaty exempts such transactions.

They also involve a US citizen or resident alien not reporting a distribution from a Malta personal retirement account in federal taxable income due to a similar interpretation of the tax treaty, according to proposed rules.

The IRS plans to exempt policyholders that transferred their foreign pension or retirement arrangements to a Malta retirement account in accordance with foreign law and claimed exemption from US income tax for earnings or distribution filed before the publication of the proposal, according to proposed rules.

Treasury and the IRS “are aware that the United Kingdom allows tax-deferred transfers from its pension or retirement schemes to certain ‘qualified recognized overseas pension schemes’ (or QROPS), including Malta personal retirement schemes,” the proposed rules said.
The IRS has scheduled a public hearing for 21 September on the proposed rules.