IRS Targets Malta Pension Plans: Compliance Options

In recent years the IRS has become aware that U.S. taxpayers are participating in transactions known as "Malta pension plans" (Malta plans). Typically, in these transactions, a U.S. taxpayer sets up what is called a Malta personal retirement scheme (a tax-favored retirement plan under the laws of Malta) and contributes highly appreciated assets to the plan. After the contribution, the Malta plan typically sells the appreciated assets to a third party in exchange for cash, and the cash and any earnings on its investment after the sale are in turn used to make a series of distributions to the U.S. taxpayer.

Although the assets are sold for a significant gain, the U.S. taxpayer claims on his or her U.S. income tax return, relying on the pension fund provisions of the U.S.-Malta tax treaty,¹ that no tax is due on the income from the sale of assets, other income earned by the plan, or the distributions from the plan.