ew things scare a taxpayer more than the IRS knocking on their door. But when the taxpayer realizes that the person knocking on the door is a Special Agent of the Criminal Investigation Division (“CID”) of the IRS, well…

For those taxpayers involved in “Malta Pension Plans,” this feeling is familiar or soon will be. Under the Malta Pension Plan, taxpayers sought to take advantage of certain language provided by the U.S.-Malta Tax Treaty. The general idea was that taxpayers could properly make tax-free contributions to a pension plan based under Malta law and grow these contributions free of taxes. This assumed that taxpayers could make any type of contribution–for example, appreciated property. Moreover, taxpayers could take lump-sum distributions, which were deemed to be tax free.

This interpretation was based on the language under article 17 of the U.S.-Malta Tax Treaty. Given the incredible tax benefits (no tax on contributions, and free tax distributions), numerous taxpayers entered into Malta Pension Plan arrangements.

The IRS has since issued guidance on the matter. First, the IRS included Malta Pension Plans within its annual list of the “Dirty Dozen” tax scams in 2021. The IRS went further and entered into a Competent Authority Agreement (CAA) with Malta at the end of 2021, in which it clarified that the intent of the language of the U.S.-Malta Tax Treaty was not to be interpreted to allow U.S. residents and their personal retirement schemes to obtain the benefits provided for Malta-based pension plans.
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