What Is the Malta Tax Treaty and How Could I Benefit from It?
Executed in 2008 and effective from 2011, the US-Malta Income Treaty creates tax-advantageous retirement savings opportunities for US citizens. In this article, we look at how US citizens can benefit from the treaty and use it to make their retirement savings go further.
Under the US-Malta Income Treaty, Maltese pensions are non-taxable.
Under the Treaty, distributions from Maltese pensions to US citizens are only taxable to the extent that they would have been taxed under Maltese tax law if the investor had been resident in that country.
A Maltese pension is effectively a form of grantor trust. A US citizen investing in a Maltese pension must disclose the asset to US tax authorities if the aggregate value of the asset exceeds $50,000 using an IRS Form 8938.
In addition, the US taxpayer will also need to file IRS Forms 3520 and 3520-A, declaring the foreign grantor trust.
Maltese pensions are a tax-efficient savings vehicle for high-net-worth US citizens.
Under article 4, paragraph 2 of the US-Malta Income Treaty, if a pension fund established in either Malta or the United States is “resident” for the purposes of the Treaty, all or part of any gains or income derived from such pension may be considered tax-exempt under the domestic tax laws of the relevant country.
Article 17(1)(b) of the US-Malta Income Treaty effectively limits the rights of US tax authorities to tax distributions made from Maltese pension plans. As a result, this creates significant tax-saving opportunities for US taxpayers investing in Maltese pension plans.
Investments in Maltese pension plans do not need to be made in cash.
Unlike most retirement savings plans, investments in Maltese plans may consist of alternative assets, such as securities or real estate.
Distributions from Maltese pension plans may be taken from the age of 50.
Since the US-Malta Income Treaty mandates the application of Maltese law to Maltese pension plans, investors can begin drawing on their plan from the age of 50, making Maltese pension plans much more flexible than Roth IRAs or traditional pension plans.
Maltese pension plans have significant advantages over Roth IRAs.
If an investor draws an income on their Roth IRA before attaining the age of 59 1/2 years, that income will be subject to a 10 percent early withdrawal penalty. In addition, the distribution will be taxable, except when it is made to a first-time buyer, a disabled taxpayer, or a beneficiary following the death of the investor. Maltese pension plans can be drawn on almost a decade sooner.
In addition, whereas Roth IRAs carry a contribution limitation of $7,000 per annum, or $6,000 per annum for savers aged under 50, Maltese pension plans are not subject to the same restrictions.
Conclusion
The US-Malta Income Treaty confers significant tax-saving benefits to US retirement savers investing in Maltese pension plans, particularly high-net-worth individuals. Rather than being restricted to cash-only investments, individuals investing in Maltese pension plans can contribute alternative assets, such as real estate and works of art, growing and withdrawing their retirement savings tax-efficiently.
