U.S. competent authority arrangement concerning pension fund retirement schemes in Malta

Understanding of the meaning of pension funds for purposes of the United States-Malta income tax treaty

Meaning of pension funds for purposes of the United States-Malta income tax treaty

The IRS today announced that the competent authorities of the United States and Malta have signed a competent authority arrangement (CAA) confirming their understanding of the meaning of pension funds for purposes of the United States-Malta income tax treaty.

Read the CAA [PDF 78 KB] which also appears in Announcement 2021-19 as published in the Internal Revenue Bulletin 2021-52 [PDF 546 KB] (dated December 27, 2021).

According to today’s IRS release—IR-2021-253 (December 21, 2021):

  • The competent authorities entered into the CAA after becoming aware that U.S. taxpayers with no connection to Malta were misconstruing the pension provisions of the income tax treaty to avoid income tax on the earnings of, and distributions from, personal retirement schemes established in Malta.
  • The CAA confirms the understanding of U.S. and Malta competent authorities that a fund, scheme or arrangement is not operated principally to provide pension or retirement benefits if it allows participants to contribute property other than cash, or does not limit contributions by reference to income earned from employment and self-employment activities. There is an exception to this rule for a qualified rollover from a pension fund in the same country.
  • The IRS explained that because Maltese personal retirement schemes contain these features, they are not properly treated as a pension fund for treaty purposes, and distributions from these schemes are not pensions or other similar remuneration.
  • The IRS stated that it had put taxpayers on notice earlier this year that it was reviewing the use of Malta personal retirement schemes.
  • The IRS further reported that it is actively examining taxpayers who have set up these arrangements and recognized that other taxpayers may have filed tax returns claiming tax treaty benefits as a result of their participation in these arrangements.
  • The IRS cautioned taxpayers against entering into any substantially similar arrangements that would seek to misconstrue the provisions of a bilateral income tax treaty of the United States to avoid income tax. 


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