updated 2:57 PM CEST, Sep 21, 2023

IRS warns that some Maltese pension plans may abuse U.S.-Malta tax treaty

Valletta, Malta Valletta, Malta

An undisclosed number of "U.S. citizens and residents" are relying on an interpretation of the U.S.-Malta Income Tax Treaty that could land them in trouble with the American tax authorities, the U.S. Internal Revenue Service has warned.

Such individuals have been discovered to be taking the position that "they may contribute appreciated property tax-free to certain Maltese pension plans," and are also under the impression that hey also would have "no tax consequences" if their pension plan were to sell the property, and distribute the proceeds to the U.S. taxpayer and pension-holder in question, the IRS said earlier this month, in one of its regular missives to the media and tax practitioners around the world.

The warning was included among what the IRS called its "2021 Dirty Dozen scams list," and was quickly picked up by the Times of Malta newspaper.

"The American regulator is worried that people are using such pension schemes to avoid paying tax," the Times of Malta said, in a story on its website.

"Ordinarily, [income gains] would be recognized upon disposition of the plan's assets and distributions of the proceeds."

The article went on to note that the Maltese government had said it was prepared to "tighten up its policies, if needed," and quoted a spokesperson as saying it was "as always, ready to discuss, support and implement any strengthening of policies that would lead to an improvement and fairer framework for all." 

The IRS compiles its "Dirty Dozen" scams list every year, in an effort to call U.S. taxpayers' attention to "a variety of common scams" that it says they may encounter at any time, but which tend to "peak during [tax] filing season." 

Sources familiar with cross-border pension plans sold to Americans as well as individuals of other nationalities told the American Expat Financial News Journal that the IRS warning was likely to apply to a type of retirement product often sold to Americans and those of other nationalities, such as Britons, who are currently living in the U.S., which was designed to take advantage of Malta's tax advantages.

Placed on 'Grey List' 

The IRS's warning about Maltese pension plans held by Americans came weeks after the Paris-based Financial Action Task Force, which monitors countries around the world for their potential to be used by criminal elements for money-laundering and similar purposes, announced that it had included Malta on its "grey list" of countries, a designation that indicates a possible need for greater attention to certain aspects of its financial services and citizenship regimes. 

Haiti, the Philippines and South Sudan were also added to the list, while Pakistan remained on it and Ghana had been removed, reflecting, FATF said, progress it had made. 

Small, crowded archipelago favored by retirees 

Although the IRS's statement this week made it clear that the Americans who owned the ill-conceived Maltese pension plans it was referring to had "no connection to Malta," it is nevertheless true that Malta is one of a number of jurisdictions that have begun attracting American retirees in recent years in a way they previously didn't, in spite of its distance from the U.S. 

Among its attractions to such American retirees are its climate and ambiance – it's located just south of the Italian island of Sicily in the Mediterranean – as well as the fact that, owing to its history as a British colony, it still counts English as one of its two official languages. (It became independent in 1964, and joined the European Union in 2004.) 

As reported, Malta made its way onto International Living's ten "best places" to retire earlier this year, as set out in the magazine and website's annual Global Retirement Index. (LatAm countries accounted for five of the top six.) 

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