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January 5, 2022

New US-Malta competent authority arrangement confirms meaning of 'pension fund' for tax treaty purposes

In a competent authority arrangement (CAA) executed on December 21, 2021, the US and Malta competent authorities have confirmed their understanding of the meaning of "pension fund" for purposes of the US-Malta income tax treaty (Treaty). According to an IRS news release (IR-2021-253), the CAA stems from concerns 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 reflects the competent authorities' understanding that a "fund, scheme or arrangement" is not operated principally to provide pension or retirement benefits, so Treaty benefits do not apply, if it allows participants to contribute property other than cash or does not limit contributions based on a taxpayer's employment or self-employment income. (This understanding does not, however, apply to qualified rollovers from pension funds in the same country.)

Cautioning taxpayers against entering into "substantially similar arrangements that would seek to misconstrue the provisions of a bilateral income tax treaty of the United States to avoid income tax," the IRS notes that it "is actively examining taxpayers who have set up these arrangements and recognizes that other taxpayers may have filed tax returns claiming Treaty benefits as a result of their participation in these arrangements." The Service urges affected taxpayers to consult an independent tax advisor before filing their 2021 tax returns and to take "appropriate corrective actions" before filing.


The CAA is an example of a tool available to the US and its tax treaty partners in preventing unintended uses of tax treaties. It also illustrates that the IRS is not limited to resources under domestic law but can invoke its tax treaty network in its tax enforcement efforts.


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