Over the years, tax havens have sometimes arisen in connection with the interpretation of some of the pension provisions contained in U.S. tax treaties, encouraged, perhaps, by the lack of guidance on many provisions of the treaty.

One of these ideas was that an American taxpayer could contribute valuable assets to a Maltese personal pension fund, so the assets could be sold without tax (since in a tax-exempt pension fund), with the proceeds distributed. to the U.S. tax-free taxpayer to the extent that the distribution would be tax-free if the person were resident in Malta. This strategy was generally based on Articles 17 and 18 of the U.S.-Malta tax treaty, which contained provisions indicating that a U.S. taxpayer would not be subject to U.S. income tax. Maltese pension fund until it is distributed to them, and also that a distribution from a Maltese pension fund which is exempt from tax to residents of Malta will also be exempt from tax if it is distributed to an American taxpayer. Notably, the definition of a “pension fund” in the US-Malta tax treaty has been looser in relation to Malta’s pension funds than is typical in many US treaties. other tax, where it is limited to strictly regulated funds similar in nature to US 401 (a) plans. In addition to whether this was a proper interpretation, the idea also raised issues of FATCA, FBAR, and the Section 409A Code.

Now, in a competent authority (“CAA”) arrangement between the United States and Malta, this interpretation has effectively been shut down. The CAA does this by stating that it is the understanding of the tax authorities of both countries that a fund, scheme or arrangement is not operated primarily to provide pension or retirement benefits, and therefore not a pension fund for treaty purposes, if it allows participants to contribute property other than cash, or does not limit contributions by reference to income derived from self-employment or self-employment activities. Maltese personal retirement schemes generally have these characteristics, so they are not properly treated as a pension fund for treaty purposes and distributions from these funds are not considered pension distributions for tax purposes. and the application of Articles 17 and 18 of the United States-Malta tax treaty.

The release of the IRS announcing the CAA (IRS Ann. 2021-19) indicates that the IRS is actively examining taxpayers who have set up these arrangements and that these taxpayers should consult a tax advisor. independent tax filers before filing their 2021 tax returns and take appropriate corrective actions. on previous presentations.

The CAA can be found online here.