The US Malta Pension “Loophole” That Never Was
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Many US citizens were led astray by the promise of a tax-free pension if it was established in Malta.
Many were told there was a loophole and that the income tax treaty contained unique language that exempted US citizens from income tax on the earnings and distributions from certain personal retirement schemes established in Malta.
“No US or Maltese tax on my pension? Yes please!” said many.
We don’t blame investors and savers, especially those advised by a “professional”, but there’s an old saying that goes something like this “If it sounds too good to be true, it probably is”.
And it was.
The truth is, there never was a loophole, perhaps only the promise of such by so-called tax compliance experts or perhaps their marketing and sales gurus.
Now, the IRS has some news for you.
In late December 2021, while many of us were preparing for the holidays, the IRS announced that a Competent Authority Arrangement (“CAA”) was signed by the US and Malta.
The CAA clarified the definition of a “pension fund” for the purposes of the income tax treaty between the US and Malta by specifically stating that a pension fund does not include a fund, scheme, or arrangement that allows participants to contribute property other than cash, or does not limit contributions to income earned from personal services (including self-employment) of the participant or the participant’s spouse.
Personal retirement schemes set up in Malta contain the above features and the CAA makes it crystal clear that such schemes are not considered “pension funds” for purposes of the income tax treaty. Therefore, they do not qualify for any of the benefits granted to a “pension fund” under the income tax treaty, including the benefits conferred by Articles 17 and 18.
I want to know more about US taxes abroad
Be under no illusion that the IRS is changing what was there before. It’s quite the opposite. The IRS is simply clarifying that the alleged loophole never existed in the first place.
But what does this really mean to those that went along with the “loophole” position on their tax return?
In essence, their tax returns are not correct and what’s worse, there is likely to be tax due on those previous tax returns that have already been filed.
Will the IRS be lenient on taxpayers when it comes to late filing penalties and back-dated interest? Probably not.
It gets worse… if the pension fund is considered a Foreign Grantor Trust, which is likely for many, that needs to be reported on Forms 3520 and 3520-A. That’s a problem because Form 3520-A carries an automatic late-filing penalty starting at US$10,000.
If you’re in the “Foreign Grantor Trust” boat, and you’re thinking about filing Forms 3520 and 3520-A for tax year 2021, you need to know the deadline to file Form 3520-A is March 15; not April 18 or June 15 (for those residing abroad).
So how do you fix this and get back on track with the IRS, without it costing you a fortune?
The first thing to do is get excellent advice from an international US tax specialist that truly understands how tax treaties work and how the IRS looks at pensions established in Malta.
Book a consultation with one of our specialists today.
The consultation aims to achieve three specific outcomes:
- Understand your situation as it is now (what has been filed?);
- What should have been disclosed and filed?; and
- The most efficient method to correct your situation.
You’ll then have a clear plan that illustrates how to get back on the right foot with the IRS. We’ll provide you with a quote to do that work for you, which you have no obligation to move forward with.
