Overview of the U.S. – Malta Tax Treaty
The U.S.-Malta Income Treaty was executed in 2008 and became effective in 2011. Article 4, paragraph 2 of the Treaty provides that a pension fund established in either the United States or Malta is a “resident” for purposes of the Treaty, allowing all or part of the income or gains of such a pension may be exempt from tax under the domestic laws of the relevant country.
The Retirement Pensions Act (Chapter 514 of the Laws of Malta) came into force on 1st January 2015. The new Regulations and Pension Rules also came into force on 1st January 2015.
A new set of Regulations and Pensions Rules have been issued under the Act to supplement the legal framework for the licensing and regulation of Retirement Structures (both Occupational and Personal), Retirement Funds and Service Providers related thereto, as well as for the requirement of recognition for persons carrying on back-office administrative services.
Article 18 of the treaty provides for the deferral of income and applies to all income including U.S. real estate or income that is effectively connected to a U.S. trade or business.
Article 17(1) (b) of the treaty provides for equivalent taxation limiting the right of the United States to tax distributions from Maltese pension plans to the amount that would have been taxable if distributed to a Maltese individual. Article 1(5) provides that Articles 17(1)(b) and Article 18 are exempt from the savings clause. As a result, the treaty does not prevent a U.S. taxpayer from qualifying for treaty benefits.
The savings clause of most income tax treaties would allow the U.S. tax its citizens as though the tax treaty had not come into effect. Article 1(5) provides a carve-out for pensions. Consequently, the United States is prevented from imposing tax on foreign pensions that are covered by such treaty provisions until a distribution is made to a U.S. taxpayer; and even then, the United States may only tax the distribution to the extent it would have been taxable in the foreign country if made to a resident of that country.
Comparing a Malta Plan to a Roth IRA
A Roth IRA generally has a contribution limitation of $7,000 per year ($6,000 if under the age of 50). Additionally, a contribution to a Roth IRA can only be made in cash–a Roth IRA cannot own real estate, foreign investments, artworks or life insurance. Furthermore, distributions from a Roth IRA before age 59 ½ are subject to a 10 percent early withdrawal penalty as well as normal tax treatment on the distribution with exceptions for a distribution for a first-time home buyer, a distribution to a disabled taxpayer, or a distribution to a beneficiary on account of the taxpayer's death.
The Malta Pension Plan is a powerful vehicle to provide for substantial tax deferral in a manner similar to the Roth IRA. However, it has planning benefits that far exceed the Roth IRA. Namely, the plan is not handcuffed by the contribution limits of the Roth IRA or prohibited transaction rules that would otherwise limit the ability to own an interest in the taxpayer's business. Additionally, the UBTI tax rules do not apply. Roth owners may contribute real estate with debt financing or business interests that produce active business income that would otherwise be treated as UBTI within a Roth IRA. FIRTPA for real estate holdings does not apply. The taxpayer may also contribute assets or business interests in kind. At distribution a substantial portion of the deferred income may be distributed without taxation in Malta or the United States. Taxpayers looking for a long-term tax deferral without contribution limitations and complicated tax hurdles such as UBTI, should consider the MPP as a planning structure for long term investments.
Reporting Obligations for U.S. Taxpayers
U.S. taxpayers must comply with the FinCEN reporting requirements for foreign bank and financial accounts. Additionally, under FATCA, individuals who hold any interest in a “specified foreign financial asset” must disclose such asset if the aggregate value of all such assets exceeds $50,000 (or higher threshold as specified). The Malta Plan pension account will have to be reported on IRS Form 8938assuming the thresholds are met. Additionally, since the Malta Plan is going to be considered a foreign grantor trust, the taxpayer will most likely be required to file IRS Form 3520and IRS Form 3520-A. reporting for Passive Foreign Investment Companies (PFICs) may also need to be filed to report underlying investments if the pension is classified as a grantor trust.
The Malta Plan structure provides significant benefits to U.S. residents as well as foreign investors with taxable U.S. source income (e.g., real estate). If you have significant investments that are either highly appreciated or are structured as income producing assets we strongly recommend consulting an advisor as to how a Malta Plan structure can help reduce your tax burden. Additionally, please note that the Malta Plan benefits are based on a certain interpretation of the U.S.-Malta Tax Treaty. This interpretation is not necessarily held by all tax practitioners.