IRS Says Tax-Free Maltese Pensions Are Too Good To Be True

A Wall Street Journal article in August reported on the offshore shelters, noting that promoters were saying taxpayers could dramatically lower U.S. taxes on the sale of highly appreciated assets such as stock, real estate or cryptocurrency. The promoters asserted that U.S. taxpayers aged 50 or older could avoid owing federal capital-gains tax of 23.8% by funding a Malta pension with such assets, selling them, and soon withdrawing large chunks of the money tax-free. 

Officials from both countries concluded the agreement after becoming aware that U.S. taxpayers with no connection to Malta were misinterpreting provisions of the U.S.-Malta tax treaty to avoid taxes by using pension and retirement plans based in Malta, the IRS said.  

The two countries agreed that a plan that allows noncash contributions–and doesn’t tie the amount of allowed contributions to earned income–isn’t an actual pension plan for the purposes of the treaty. Many Maltese retirement plans contain these features, which are essential to the tax-avoiding maneuver.

Cautious tax advisers warned clients against them, however. “I’m impressed with what IRS has done. It went straight for the jugular, and it’s hard to see how Malta pension plans will bounce back,” says Andrew Gradman, an international tax-planning lawyer in Los Angeles.  

The IRS, which warned earlier this year that it was reviewing the use of Maltese pensions, also said taxpayers who did set them up should consult an independent tax adviser before filing their 2021 tax return and should correct prior tax filings.

Write to Laura Saunders at Laura.Saunders@wsj.com