IRS Shutting Down Malta Pension Plan Scheme Used by US Taxpayers

The Internal Revenue Service (IRS) recently announced the United States and Malta have signed an agreement confirming the meaning of pension fund for purposes of the two countries’ income tax treaty.

This agreement comes after the IRS learned US taxpayers have been misinterpreting the pension provisions of the treaty to avoid income tax on the earnings of, and distributions from, Maltese personal retirement schemes.

In this scheme, US taxpayers with no connection to Malta interpret the treaty to allow them to contribute appreciated property tax-free to certain Maltese personal retirement schemes. The taxpayers then claim there were no tax consequences when the scheme distributed the proceeds. Under US tax law, gains ordinarily would be recognized upon the sale or other disposition of a plan’s assets and distribution of the proceeds of such sale or disposition.

Except in the case of a qualified rollover from a pension fund in the same country, a fund, scheme or arrangement is not considered a pension fund if it:

  • Allows participants to contribute property other than cash.
  • Does not limit contributions by reference to income earned from employment and self-employment activities.

Examinations Underway

The IRS is actively examining taxpayers who have set up these arrangements. The tax agency recognizes other taxpayers may have filed tax returns claiming treaty benefits because of their participation in these arrangements. These arrangements may have been promoted to US taxpayers who were working in Europe because of their proximity to Malta. The IRS has recommended taxpayers who have participated in a Maltese personal retirement schedule consult an independent tax advisor before filing their 2021 Form 1040.

Review Your Accounts

Taxpayers should be very careful about considering any arrangement that would seek to misconstrue the provisions of a US bilateral income tax treaty to avoid income tax. If you have a retirement account based in Malta, or anywhere overseas, and would like to discuss this issue, contact our Moore Doeren Mayhew international tax advisors.



Steve Wedge


Chad Hatalla


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