In proposed regulations (REG-106228-22), the IRS identifies certain Malta personal retirement schemes as listed transactions under Treas. Reg. Section 1.6011-4(b)(2). Listed transactions are those that the IRS has determined to be abusive tax avoidance transactions. Participants and material advisors involved in these transactions would be required to file disclosures with the IRS or face penalties.

Once the proposed regulations are finalized, participants would report transactions on Form 8886, Reportable Transaction Disclosure Statement, for all tax periods open for assessment under the statute of limitations. Material advisors would have to report the transactions on Form 8918, Material Advisor Disclosure Statement.

Structure of the transaction

The IRS described a Malta personal retirement scheme transaction in proposed Treas. Reg. Section 1.6011-12(b)(1) as one where a US citizen or a US resident alien directly or indirectly:

• Transfers (within the meaning of Treas. Reg. Sections 1.679-3 or 1.684-2) cash or other property to, or receives a distribution from, a personal retirement scheme established under Malta's Retirement Pension Act of 2011
• Takes the position on a US federal income tax return that under the US-Malta treaty:
• Income earned or gain realized by the Malta personal retirement scheme is not includible in income on a current basis for US federal income tax purposes
  Or
• US tax does not apply to earnings or gains that are distributed from a Malta personal retirement scheme and have not previously been included in income for US federal income tax purposes

Unlike US individual savings arrangements, Malta individual retirement schemes do not (1) require contributions to be limited by reference to income earned from employment or self-employment activities, (2) limit contributions, or (3) restrict the types of assets (such as securities) that may be contributed. Distributions may begin when an individual member is 50 but must start no later than age 75. The distributions may be exempt from Maltese income tax if the individual elects to receive an initial cash lump-sum distribution and further distributions in the future.

Previous IRS guidance

The IRS added Maltese pension plans to its "dirty dozen" list in 2021 and has kept it on the list for 2022 and 2023. To address the tax avoidance issue, the US and Malta competent authorities, in a competent authority arrangement (CAA) executed on December 21, 2021, confirmed their understanding that a "fund, scheme or arrangement" is not operated principally to provide pension or retirement benefits. Therefore, the US-Malta Treaty benefits do not apply if the scheme allows participants to contribute property other than cash or does not limit contributions based on a taxpayer's employment or self-employment income (see Tax Alert 2022-0010).

IRS concerns

In the summary of the proposed regulations, the IRS referred to its earlier CCA and added that these types of transactions are intended to permanently avoid US tax on (1) the built-in-gain of appreciated property transferred to personal retirement schemes established in Malta, (2) distributions from or income earned by, and accumulated in, these schemes.

The IRS noted that a limited exemption applies for US individuals who may have (1) transferred their foreign pension or retirement arrangements to Malta personal retirement schemes as allowed by foreign law, and (2) claimed an exemption from US income tax for earnings in, or distributions from, such schemes on US federal income tax returns filed before the proposed regulations were published in the Federal Register. The IRS added that this "limited exemption" will apply if all of the following criteria are present:

• A US citizen or US resident alien (transferor) established the Malta personal retirement scheme by transferring or rolling over a pension or other retirement arrangement established in a country other than Malta or the United States (for example, a pension scheme established in the United Kingdom), in compliance with that country's tax laws
• The transferor was, at that time, a resident of the other country under that country's tax law
• The transferor's contributions to the pension or retirement arrangement consisted solely of cash in an amount that bears a relationship to the transferor's income earned from the performance of personal services

Implications

Malta individual retirement schemes have been the subject of IRS scrutiny as abusive transactions. The proposed regulations reflect the IRS's continued focus on these transactions. Taxpayers that are contemplating participating, or have participated, in a Malta individual retirement plan should be aware that they are closely scrutinized by the IRS as being abusive and should consult with a tax adviser.

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Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor