Capital Gains Taxation May Not be as Inevitable As Most Think

August 31, 2017

Most taxpayers are familiar with tax deferral options that the US Tax Code provides such as (i) like-kind exchanges in which capital gains are deferred when appreciated real estate is exchanged for similar real estate, or (ii) selling real estate on an installment sale basis so that capital gains are deferred over the life of the installment note.

A relatively recent development that has been brought to the attention of advisors addresses the tax treatment of the sale of appreciated assets (as well as earnings on any retained assets) that have been placed, tax-free, into a retirement plan administered by a Maltese pension administrator. Specifically, the United States entered into a tax treaty with Malta, effective as of 2010, which treats the otherwise taxable events and transactions that occur inside such a pension as non-taxable.

Similar in some ways to a Roth IRA, analysts of this strategy believe that the realized gains and income inside the pension (even if the assets are located in the United States) not only avoid taxation in the United States (and elsewhere), but can also receive favorable tax status treatment when the US participant withdraws payments from the plan for retirement (commencing at an age designated by the taxpayer, so long as the commencement date cannot be earlier than the attainment of age 50 or later than the age of 75). In other words, these withdrawal payments, under the terms of the US-Malta Treaty, can be treated mostly, in essence, like a return of capital (i.e., non-taxable) as opposed to taxable income. These tax-free withdrawals can be received by the US taxpayer tax-free initially with respect to 30% of the value of the pension (upon as early as attaining age 50) and subsequently (after an additional three-year seasoning period) with respect to all further lump-sum payment amounts from the plan.

Unlike a Roth IRA, however, the Malta pension is not subject to the same rules that apply to Roth IRAs that impose certain restrictions such as (i) requiring the taxpayer to not have an adjusted gross income over a certain amount, and (ii) being limited in the amount and type of assets that can be contributed to the plan. The Malta pension has no such limitations.

As you would suspect, one must follow closely the rules that apply to pensions and avoid entering into such a retirement plan strategy purely as an attempt to dodge taxes. For example, this is not a tool for one to fund with assets that have a large inherent gain, with the pension then immediately selling the assets, with the US participant then commencing retirement withdrawals right on the heels of the asset sale.

In short, before one decides to participate in a Malta pension, he or she should have a tax adviser apply the legal requirements of the treaty benefits to his or her specific situation to determine what issues may need to be addressed. The above summary cannot be relied upon as legal advice since every person’s situation is unique and other interpretations could be asserted.

By Edward D. Brown, Esq., LLM. CPA

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