A new agreement has been signed between Malta and the US in a bid to clamp down on tax avoidance by American citizens and residents using Maltese pension schemes.
The US Internal Revenue Service (IRS) in July identified “potentially abusive” use of the US-Malta tax treaty by some American citizens to avoid property tax by moving properties into Maltese pension plans.
These plans then sell the assets and distribute the proceeds back to the US holder, without taking on any tax burden.
The IRS maintains that such schemes are not operated principally to administer or provide pension or retirements benefits as defined under the treaty but were being used as a means to avoid tax.
In an announcement last week, the IRS said it had signed an agreement with its Maltese counterparts confirming their “understanding” of how the tax treaty defines pension funds.
A fund, scheme or arrangement that allows US residents or citizens to contribute assets other than cash will not be considered as a pension fund under the US-Malta tax treaty.
The IRS warned in its announcement that it is “actively examining” US taxpayers who have set up these arrangements and have applied for tax breaks under the tax treaty.
“These taxpayers should consult an independent tax advisor prior to filing their 2021 tax returns and take appropriate corrective actions on prior filings,” the IRS said.
It further warned that US taxpayers should avoid entering into any similar arrangements that would seek to “misconstrue” provisions in bilateral income tax treaties for the purpose of avoiding income tax.
“IRS enforcement, both the civil and criminal divisions, is committed to pursuing abuse and those who market and participate in abusive transactions”, the statement said.
One of the main reasons behind Malta’s FATF greylisting was a failure to properly clamp down on tax evasion and related crime.
The tightening of these tax rules came on the back of a US State Department notice banning former government officials Konrad Mizzi and Keith Schembri from entering the United States.
Government sources had described the move as pressure from the US due to a perceived lack of court and police action on the island.
The US justified the travel ban on the basis of “credible information” that Mizzi and Schembri were involved in a “corrupt scheme” that entailed the award of a government contract for the construction of a power plant and related services in exchange for kickbacks and bribes.
A US embassy official told Times of Malta last week that American officials will “closely monitor” corruption investigations in Malta.