Watch Out: Malta Pension Plans Become Listed Transaction

Last week, in a government notice of proposed rulemaking (REG-106227-22), US Treasury and the IRS issued proposed regulations that identify any transaction that is similar to a Malta personal retirement scheme as a “listed transaction.” 

A listed transaction is a tax avoidance scheme that has been identified by the IRS. Participants in listed transactions must file a disclosure statement with the IRS and may be subject to significant penalties if they do not.  Penalties that may be imposed on taxpayers who participate in a listed transaction: Accuracy-related penalty of 20% of the underpayment of tax attributable to the listed transaction; Fraud penalty of 75% of the underpayment of tax attributable to the listed transaction; Failure-to-disclose penalty of 75% of the underpayment of tax attributable to the listed transaction, plus $10,000.

The IRS previously placed Malta personal retirement schemes on its “Dirty Dozen” list in July 2021. According to the IRS, individuals that engage in such arrangements misconstrue the pension provisions of the Treaty to improperly claim an exemption from U.S. income tax, often on transfers of appreciated assets such as securities, annuities, or partnership interests and typically lacking a local connection in Malta. Such individuals may also fail to comply with their U.S. information reporting requirements. In December 2021, the IRS published a competent authority arrangement in which the U.S. and Maltese competent authorities agreed that individual retirement arrangements established under Malta’s Retirement Pensions Act of 2011 are not considered “pension funds” and that distributions from such arrangements are not “pensions or other similar remuneration” for purposes of relevant provisions of the Treaty.

Affected persons should watch out because the proposed regulations make clear that the IRS will take the position that taxpayers are not entitled to the purported tax benefits. A tax attorney with experience in the Malta plans can assist taxpayers in compliance.

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