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Sunday, July 04, 2021

Maltese Pension Plan in the Sights of the IRS

The Maltese pension plan is a planning device for U.S. taxpayers to use the U.S. - Malta tax treaty to obtain tax deferral and tax avoidance benefits similar to a Roth IRA, but without many of the limitations of a Roth IRA. For more about it, search "Maltese pension plan" and you will find many sites touting its benefits.

For any of those involved with such plans or contemplating entering into one, they should take note that the IRS has added the arrangement to its 2021 "Dirty Dozen" scams list - at least as to transfers of appreciated property to the plan. Such planning generally treats the contribution of such appreciated property to the plan as a transfer to a "grantor trust," thus avoiding gain generation. However, gain from such disposition is purportedly then not taxed immediately to the participant.

This is what the IRS has to say:

"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. The IRS is evaluating the issue to determine the validity of these arrangements and whether Treaty benefits should be available in such instances and may challenge the associated tax treatment."

This is not an outright determination that such arrangements are abusive, but are a warning that the IRS will be looking more closely at that them and has serious concerns about the claimed tax benefits.

IR-2021-144, July 1, 2021

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