Malta Pension Plan arrangements under the United States-Malta Income Tax Treaty are a top enforcement priority of the IRS, finding their way onto the annual Dirty Dozen list. Yesterday, the IRS intensified its efforts as Special Agents from IRS Criminal Investigation (IRS-CI) descended on numerous participants in the Malta Pension Plan space in what appears to be a coordinated or task force-type criminal investigation.
Under the plain reading of the U.S.-Malta Income Tax Treaty, U.S. taxpayers can establish tax-favorable pension plans in the island jurisdiction. Promoters of Malta Pension Plans have used the Treaty to structure pensions for wealthy U.S. taxpayers that allow for significant tax savings. The structures operate by directing the U.S. taxpayer to establish a pension plan that qualifies as a “resident” of Malta. The U.S. taxpayer then contributes appreciated assets to the pension plan. When the assets are sold by the pension plan, the gains are not subject to tax in Malta or in the U.S. Further, distributions out of the pension plan may not be subject to tax when paid out to the plan participants.
Too Good To Be True?
While the language of the Treaty and Maltese law (upon which certain treaty benefits hinge) seems to allow for this result, the IRS and Treasury have taken the approach that such a result is simply too good to be true and was not intended by the Treaty drafters. As noted, the IRS’s first salvo on this front was adding the Malta Pension Plan arrangement to its “Dirty Dozen” list of abusive tax schemes in July 2021. Specifically, the IRS noted:
“Some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily, gain would be recognized upon disposition of the plan’s assets and distributions of the proceeds.”
Importantly, the IRS did not say that all Malta Pension Plans were abusive and noted that it was still reviewing the matter. Shortly thereafter, in December 2021, Treasury published a Competent Authority Arrangement (“CAA”) purportedly reflecting the United States and Malta’s mutual understanding of the term “pension fund” for purposes of the Treaty. At the time, the IRS noted that “U.S. taxpayers with no connection to Malta were misconstruing the pension provisions of the Treaty to avoid income tax on the earnings of, and distributions from, personal retirement schemes established in Malta.” The CAA, if valid, severely narrowed the definition of what qualifies as a pension and thus the overall tax benefits possible under the Treaty. Of note, the CAA took the position that it reflected “the original intent” of the United States and Malta, implying that the CAA’s limitations would apply retroactively.
More recently, in early June 2023, the Treasury Department proposed regulations that would designate Malta Pension Plan arrangements as “listed transactions.” If the regulations are finalized, Malta Pension Plan arrangements will be subject to the same additional scrutiny applicable to all listed transactions, including certain disclosure requirements, increased penalty exposure, and record-keeping requirements for material advisors.
The New Criminal Investigation
Prior to this week, enforcement efforts with respect to Malta Pension Plans were predominantly civil in nature – audits of taxpayers, issuing the CAA, and proposing regulations. That all changed yesterday when numerous IRS-CI Special Agents began visiting taxpayers and advisors who have participated in, or advised on, Malta Pension Plans. The involvement of IRS-CI makes clear that the IRS believes that at least some Malta Pension Plan arrangements are not only invalid, but also the product of criminal or fraudulent conduct. As the IRS seeks to determine whether those involved with Malta Pension Plans engaged in wrongful criminal conduct, they will seek to speak with various players within the Malta Pension Plan industry, including attorneys, accountants, estate planners, and other financial advisors. IRS-CI Special Agents are trained in getting people to talk. Taxpayers and their professional advisors should keep in mind that there is no obligation to speak with an IRS-CI Special Agent and that anything disclosed to the IRS can be used in a criminal or civil case against them. Such individuals should consult with experienced tax controversy counsel who can advise them on their rights and obligations in responding to an IRS inquiry. Counsel can also advise on matters relating to one’s rights under the Fifth Amendment of the U.S. Constitution and any privileges that may apply with respect to the information being sought by the IRS.
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