Malta ‘tax haven’ used to defraud US tax authorities of hundreds of millions of dollars

Billions of dollars stashed in Maltese offshore companies and secretive accounts have cost the US Internal Revenue Service hundreds of millions of dollars as unscrupulous tax planners counted on the authorities being “too stupid” to understand what was happening, according to an investigation by Bloomberg.

The Bloomberg article by Michael Bologna described several online meetings between wealth advisers, lawyers, and accountants to discuss strategies to ensure protection for millionaires and billionaires who stash their assets in Malta accounts under the guise of retirement. According to the report, which calls Malta a “tax shelter”, the same group of professionals would lose millions in fees and risk criminal sanctions should the IRS cotton on to what they were doing.

“The feeling had been that the IRS was too simple, lazy, or stupid to figure out what we were doing,” said one prominent wealth adviser who attended several of the online “townhall meetings”.

In 2008, the US and Malta negotiated a new tax treaty, and in 2011, it was approved by the Senate and became effective. Between 2015 and 2021, Malta pension plans were actively promoted in the US to circumvent taxation and retain more capital.

In July 2021, the IRS listed Malta pension plans on a list of “bogus tax avoidance strategies, ” or the “Dirty Dozen,” and advised taxpayers to avoid them.

In December of the same year, the US and Malta published a Competent Authority Arrangement clarifying the treaty’s provisions. But by January 2022, service providers and promoters of the plans were plotting to circumvent federal intervention, the article states.

In June 2023, the IRS and US Treasury suggested a rule that makes Malta schemes a ‘listed transaction’ and, therefore, subject to more scrutiny. They also started serving criminal summons to beneficiaries and Maltese schemes’ promoters.

The Bloomberg report said that hundreds of individuals had ploughed billions of dollars into Maltese accounts, with one Maltese trust company holding some $1.5 billion of unreported income. This alone, as undeclared to the IRS, equates to $360 million in federal tax loss and $180 million at a state level.

“Every one of us knew this was a sham as it lacked any economic substance, especially the taxpayers who came to us looking for a way to evade taxes,” an adviser told Bloomberg on condition of anonymity. “Because of the large fees, we played audit roulette and hoped that the IRS would never challenge it,” they added.

The Bloomberg investigation reviewed a number of solicitation documents, including pitches and legal opinions on Malta structures. What they found was significant efforts spanning a decade to target wealthy Americans and persuade them to deposit their wealth into Maltese tax structures while avoiding taxes on interest, dividends and capital gains.

According to an online article published by two former tax attorneys to promote the jurisdiction, Malta plans differ from US pensions and retirement accounts. This includes no restrictions on income earned from employment, no upper limits on contributions, and no restrictions on asset classes; for example, cash, business interests, real estate, securities, and cryptocurrencies were all allowed. In addition, any income earned from interest, dividends, and capital gains also remains untaxed, the report notes.

These, as well as other tax benefits, were described by the attorneys as “too good to be true” and were not foreseen by the US authorities.

The Bloomberg article gives a hypothetical explanation of how the scheme works. For example, a US citizen living in New York earns a $5 million interest in a software company but wants to sell it to a private equity firm. He sells it for $50 million, making $45 million in profit, but doesn’t want to pay the $16.4 million tax on his capital gain. Through the help of an advisor, Seth puts the business in a Malta pension plan member account, liquidating the business and distributing the funds tax-free.

Instead of receiving $33.6 million after the sale, the individual would receive $50 million, not paying a single cent of tax.

But not all wealth managers believed in the Malta schemes, with some that spoke to Bloomberg describing it as “toxic” and functioning as an “audit roulette” with the IRS. They said the plans are not legitimate under US law or the terms of the double taxation treaty and also violate the Internal Revenue Code, which prohibits transactions that do not have a true economic or business purpose and exist just to avoid tax.

“On its face, it just never passed the smell test with me,” Jimmy Sexton, founder and head of Dubai-based tax advisory Esquire Group, told Bloomberg. “I made a decision that, for me, this is just too risky.”

At the end of 2021, the US and Malta sought to clarify the definition of the term “pension fund” after concerns that US taxpayers were using Malta to avoid tax without connection to the country.

The competent authority agreement (CAA) between the two countries confirmed that the plans could not be considered true pension funds under the tax treaty.  

A Google search of ‘Malta pension plans’ brings up a number of companies offering assistance in setting up Malta private pension plans, extolling the virtues of “customised structures that suit the requirements of the individual.”

They also reference that “Retirement schemes and their administrators are licensed and fully regulated by the Malta Financial Services Authority (MFSA). A strong regulatory framework ensures the integrity of the plan and provides peace of mind to a scheme’s members.”