By: Eli Akhavan
Malta Pension Plan
The Malta Pension Plan (the “Malta Plan”) is a technique that allows U.S. and certain foreign taxpayers to contribute cash, appreciated real estate and securities to a “retirement plan” and pay zero taxes on certain distributions from such plan.
The Malta Plan is a “retirement plan” in the sense that distributions can start only when the recipient attains a certain minimum age. Malta law allows a distribution to be made as early as the age of 50. However, the Malta Plan is a much more flexible retirement plan than a traditional or Roth IRA.
Tax Opportunities with a Malta Plan
The Malta Plan pension account is considered a foreign “grantor trust” for income tax purposes and as such, no income tax obligation arises from the transfer of assets to the Malta Plan. Assume that a U.S. taxpayer contributes either appreciated real property or securities (private or public) to a Malta Plan pension account. Further assume a tax basis of $1 million and a fair market value of $10 million in total for these assets. Due to the Malta pension account’s status as a foreign grantor trust, the transfer of appreciated assets to the account does not result in a taxable event.
Subsequently, when the real property and the securities are sold for $10 million, there is a potential taxable gain of $9 million. However, since the sale occurred within the Malta Plan, there should be no taxable gain recognized. Furthermore, on a tax-free basis, the Malta Plan allows an initial lump sum payment of up to 30% of the pension assets as early as when the recipient attains the age of 50. Due to the U.S.-Malta income tax treaty there is no taxable event for both U.S. and Malta income tax purposes upon the distribution of this lump sum payment. In our example, that means $3 million can be distributed tax-free to the pension account holder as an initial lump sum distribution upon the recipient attaining the selected retirement age.
Additional Tax-Free Distributions
If the U.S. taxpayer wants further tax-free distributions, he has to wait until year 4 (measured from time of the initial lump sum distribution which is year 1). This distribution must consider the recipient’s “sufficient retirement income” which is based on the annual national minimum wage in the taxpayer’s jurisdiction. If the Malta Plan holds assets that are in excess of such amount, 50% of this excess value can be distributed tax-free.
Applying the example above, assume that the sufficient retirement income amount is $1 million for the taxpayer’s jurisdiction. Since there is $7 million left in the pension account (assuming no growth and taking into consideration that $3 million has already been distributed at age 50), $3 million can be distributed in year 4 free of Malta and U.S. income taxes to the U.S. taxpayer (50% of the excess of $7 million over $1 million sufficient retirement account). If the $7 million had grown to $8 million in four years, then $3.5 million can be distributed tax-free.
While additional annual payments are taxable to the recipient, the tax burden is limited and is dependent on the applicable minimum wage standards in the taxpayer’s home jurisdiction. Beyond those minimum wage amounts, excess lump sum distributions of up to 50 percent of the balance of the plan can generally be made free of Malta and U.S. taxes.
It is noteworthy that while the entire proceeds of the pension account cannot be distributed tax-free, a significant portion of a Malta Plan’s assets can be distributed tax-free.
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.
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 8938 assuming 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 3520 and IRS Form 3520-A with respect to transactions with the Malta Plan. There may also be some possible PFIC issues to consider as well.
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.
Should you have any questions or desire further insight, feel free to contact one of the members of our Tax Department: