IRS Watchlist – Abusive Use of U.S.-Malta Tax Treaty:

Each year, the IRS produces a list of “Dirty Dozen Tax Scams” to warn the public of the worst ways taxpayers are being scammed. The IRS has placed certain Malta-based pension plan arrangements on this list. The IRS warns that it is evaluating the validity of such arrangements and may challenge the tax treatment of Maltese pension plan contributions and distributions. IR-2021-144 (July 1, 2021).

The types of pension arrangements that have attracted IRS attention involve a U.S. citizen or resident who contributes appreciated assets to a Maltese pension plan, sells the assets within the plan, and receives a distribution of proceeds relating to the asset sales from the plan. Relying on an interpretation of the U.S.-Malta Income Tax Treaty, U.S. citizens and residents, and their advisors, take the position that the transactions, both the realized gain and distributions, are not subject to tax.

Participants in Maltese pension plans should be aware that the IRS is scrutinising tax positions and treaty interpretations related to these plans. The appearance of an arrangement on the “Dirty Dozen” leads to increased IRS activity, and participants in Maltese pension plans should prepare to defend their tax reporting positions.