Overview

Over the course of time I have ranted and raved about my love of Afro-Cuban aka Salsa. It wasn’t my dancing ability which attracted me to Latin music. For  the record, I am not a good dancer. Not even in my own mind. Maybe it was growing up in the Panama Canal Zone. Panama is a great place for Salsa. Harvard-educated Ruben Blades who was a former Minister of Tourism and an actor in a number of Hollywood films, is a great Salsa singer and Gabino Pampini, another Panamanian who made his mark in Colombia as a Salsa singer.

Maybe it was my lack of academic ability in engineering at West Point that drove me to be a Spanish and Portuguese major at West Point. Or it could have been my Mom (of blessed memory) who was always a world music fan. I remember my Mom listening to Bossa Nova and Miriam Makeba’s Pata Pata when I was three four years old. In the Canal Zone she was a strong Spanish speaker with a lot of Panamanian friends. My German dad was a soccer player in his youth and a good one at that who continued to play soccer in Panama’s top league into his early thirties. He was known as “El Tanque Aleman”, the German tank. I have never outgrown my musical taste in Afr0-Cuban music. It is still my “go to” music. My wife cannot endure it so listening has been relegated to workouts. Fortunately, I work out a lot.

So what about the title? Malta Vigor is a soft drink from Panama from my youth that still exists. It is brewed from barley and hops but it is non-alcoholic. Malta drinks are popular in  number of the Caribbean Latin countries. Unfortunately, my gringo taste buds never adapted to the taste of Malta Vigor.  

The question is, so what!  The Malta Pension Play masquerading as a Roth alternative is actually better than a Roth IRA. It does not require any “window dressing” to make it more attractive planning to taxpayers but the question arises, “what if it were actually deductible’? 

This article focuses on the use of two strategies together – the Pooled Income Fund and Malta Pension Plan. The contribution to a pooled income fund is a tax deductible contribution to the taxpayer. A contribution to the Malta Pension Plan is not deductible. The article demonstrates how the two strategies can be implemented together so that the combined strategy delivers a significant tax deduction while the Malta Pension Plan captures the investment growth of the contribution to the Pooled Income Fund without taxation. The taxpayer is able to distribute funds from the Malta Pension Plan on a mostly tax-free basis.

Components of the Partially Deductible Malta Pension Plan

For some people, “enough is never enough”.  The Malta Pension Plan (“Plan”)  as the foreign cousin of the American Roth IRA, has many positive attributes. The Plan has no contribution limits and allows for non-cash or in kind contributions of appreciated property to the Plan without triggering the built in gain. Property within the Plan can be sold without tax consequences. Income and gains can be reinvested on a tax deferred basis within the Plan. Distributions can be made from the Plan on a substantially tax-free basis. Somehow that is not enough for some taxpayers to form  

Overview of Malta Pension Plans (PLAN)

The Malta Pension Scheme is a surrogate to the Roth IRA. The taxpayer is able to make an unlimited contribution to the Malta Pension Plan. Unlike the Roth IRA, the taxpayer may make in kind contributions to the PLAN through the contribution of the asset or an interest in an entity holding the asset.

All of the income within the Malta Pension Plan is tax-deferred. The Plan is not subject to unrelated business taxable income (UBTI). The Plan is treated as a grantor trust from a federal income tax perspective. As a result, the contribution of an appreciated asset will not trigger any tax consequences on the transfer of an asset.  As a result, of the foreign grantor status treatment, the Plan will avoid UBTI treatment of debt financed real estate and business income within the PLAN. This is significant advantage in favor of the PLAN over the Roth or traditional IRA.

Malta law permits distributions to be made from such plans as early as age 50.The rules allow an initial lump sum payment of up to 30% of the value of the member’s pension fund to be made free of Maltese tax. Based on treaty provisions, distributions that are non-taxable for Malta tax purposes are also non-taxable in the United States. Under Malta law, three years must pass after the initial lump sum distribution before additional lump sum distributions could be made to a resident of Malta tax-free. In Year 4, the PLAN may distribute additional funds to the participant. Lump sum distributions in excess of a minimum annuity amount may be made every year. Fifty percent of the distribution in excess of the annuity amount is tax-exempt, and fifty percent is taxable.

U.S. Tax Compliance Requirements

Participation in the PLAN requires compliance with the FinCEN reporting requirements for foreign bank and financial accounts. FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) must be filed annually with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury.

Code Section 6038D, also enacted as part of FATCA, requires that any individual who holds any interest in a “specified foreign financial asset” must disclose such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amounts as may be prescribed).

IRS Form 8938 is used to report specified foreign financial assets if the total value of all the specified foreign financial assets in which you have an interest is more than the appropriate reporting threshold. As a foreign grantor trust, the taxpayer will most likely be required to file Form 3520.

Summary

The Malta Pension Plan is a powerful vehicle designed to provide for substantial tax deferral in a manner similar to the Roth IRA. The PLAN advantage with respect to real estate investment is much greater due to the ability to use debt-financing without subjecting the plan to the UBTI rules. The Plan has no contribution limits. The taxpayer may contribute real estate assets. At distribution a substantial portion of the deferred income may be distributed without taxation in Malta or the United States. Taxpayers looking for a long-term tax deferral without contribution limitations and complicated tax hurdles such as UBTI, should consider the Plan as a planning structure for real estate investments.

Similar to the CRT, the Plan provides the opportunity to dispose of appreciated assets without the necessity of leaving a minimum of ten percent of the value of the asset to charity. Investment income within the Plan avoids current taxation. The taxation of distributions from the Plan is more favorable than the CRT without any fear of adverse taxation related to UBTI.