Malta QROPS Tax Reporting for US Residents

If you hold a Malta QROPS and you are a US Resident and/or US Taxpayer, you will likely have received communication from your existing trustees or seen coverage in the media regarding the IRS treatment of Malta pensions and the increased scrutiny they are now under.

STM Malta, one of the largest trustees operating Malta QROPS arrangements for US residents, has recently written to affected members to confirm the tax position they have been advised on: that their QROPS scheme is a foreign trust, and that Form 3520 will be required to be filed annually. We believe that characterisation is correct, but it does not address the full picture.

Malta QROPS were established under rules that gave them pension recognition in the UK, but they have never satisfied the IRS definition of a qualifying foreign pension plan. The IRS has said as much publicly, and the position has become increasingly untenable for US residents who have continued to file on the basis that their QROPS are foreign pensions.

Why a Standalone Form 3520 Is Not Enough

Filing a Form 3520 in isolation,  without addressing the broader tax history of the arrangement, is likely to create more problems than it solves. A standalone 3520 signals to the IRS that a foreign trust exists and has been making distributions or receiving contributions, which immediately raises the question of why this was not reported in prior years. Without a structured approach to engaging with the IRS about the arrangement’s back history, filing 3520 alone can serve as a red flag rather than a resolution. The right approach is to deal with the whole position, not just the current year.

Three Paths Forward — and Only One That Makes Sense in our view.

US residents affected by this issue effectively face three options, though as we explain below, only one of them holds up under scrutiny. We would also like to reiterate that we are not tax advisers, but have spoken extensively with specialist tax advisers who are actively advising in this area, and the below is based on their feedback. Regardless of the course of action you choose to take, you should seek out independent specialist tax advice, and we have contacts to assist you with that search.

Option 1: Continue filing as a qualifying foreign pension. 

We want to be direct: this is extremely high risk. The IRS has publicly stated its position that Malta QROPS do not meet the criteria for pension treatment under US tax law. Persisting with that filing position is very risky as it maintains a stance the IRS has already publicly rejected, with potential penalties and interest exposure that can be severe, and in wilful cases theoretically rising to the level of criminal liability. This is not a path we would recommend to any client.

Option 2: Continue reporting as a pension and transfer back to a UK pension scheme. 

This is a variation on option one that some advisers have floated: report the arrangement as a pension and simultaneously seek to transfer the funds back to a UK pension, on the basis that this resolves the problem going forward. We have discussed this approach with the specialist tax advisers we work with, and their view is that it is both very risky and likely to be counterproductive.

Reporting as a pension to facilitate a transfer back does nothing to resolve the prior years of non-compliance, and in fact, it potentially compounds them. It also assumes that the act of transferring back to a UK scheme neutralises the IRS’s position. The IRS’s concern is with how the arrangement has been held and reported historically, not simply with where the funds end up.

Regardless, even if this were signed off and a move back to a UK pension approved by the IRS, that is likely suboptimal, as the funds would go back to being subject to income tax on withdrawal. However, as explained below for option 3, it is very possible that retaining the funds in a QROPS, along with proper disclosure and engagement with the IRS, could result in a much superior tax position, which is a very welcome surprise for those affected.

But beyond the income tax, there is a further reason to think carefully before pursuing a return UK pension transfer: from April 2027, UK pension funds will fall within the scope of UK inheritance tax. Funds currently held in a Malta QROPS, if restructured correctly through the streamlined process, may well remain outside that net. Transferring back to a UK pension would bring those assets directly into the scope of a significant new inheritance tax charge (although there are allowances).

The specialist tax advisers we work with are clear: this route is likely to leave clients worse off on multiple fronts.

Option 3: Proactively engage with the IRS through the Streamlined Filing Compliance Procedures. 

This is the option we are actively encouraging affected clients to explore with specialist tax advisers by declaring that the arrangement is now understood to be a foreign trust and addressing the back history through a structured amnesty process. This is both the legally safer route and, for many people, one that could produce a better long-term outcome than they might expect.

The IRS Streamlined Filing Compliance Procedures Explained

The Streamlined Filing Compliance Procedures are an IRS amnesty programme specifically designed for US taxpayers who have failed to report foreign financial assets or income not out of wilful intent, but through a genuine lack of awareness or misunderstanding of their obligations. There are two variants: the Streamlined Foreign Offshore Procedures (SFOP) for US persons residing outside the United States, and the Streamlined Domestic Offshore Procedures (SDOP) for US residents living stateside.

Under the streamlined process, eligible taxpayers file amended or original returns for the relevant prior years, pay any tax owed with interest, and, in the case of SFOP, pay no penalty at all. Under SDOP, a miscellaneous offshore penalty of 5% applies, but there is no accuracy-related penalty and no FBAR penalty. Crucially, the programme provides a degree of finality by offering a clean break from prior non-compliance, provided the taxpayer can demonstrate that the failure was non-wilful.

For many Malta QROPS holders, the non-wilful argument is genuinely strong. These arrangements were marketed by regulated advisers as pension-compliant vehicles. Members transferred in good faith. The foreign trust characterisation was not always obvious, and in some cases, was actively disputed by the financial planning community for years. That context matters when making a non-wilful certification.

The result of going through the streamlined process correctly, with good specialist tax advice, could be considerably better than many people fear. There will be some financial outlay, including amended returns, potential tax on growth that should have been reported, and professional fees, but at the end of that process, you could have a clean, confirmed tax position, clarity on how future distributions will be treated, and no outstanding IRS exposure hanging over you.

The funds would also remain outside the scope of UK inheritance tax as it applies from April 2027, something a transfer back to a UK pension would almost certainly undo. For many people, that combination of outcomes will look significantly better than they expected when they first heard the words “foreign trust.”

Then, fast forward a few years, once the coast is clear, and there is no evidence that the IRS has any issue and is not looking to retrospectively disregard the streamlining that was done, it could be possible to liquidate the funds and withdraw from a QROPS structure entirely, although that should involve formal tax advice and be made with a high degree of confidence.

What Cameron James Is Doing to Help

Cameron James is working with US residents affected by the Malta QROPS reclassification to help them navigate what comes next. Our role covers several key areas.

We are helping clients access independent, specialist tax advice from qualified CPAs and cross-border tax advisers who have experience with the streamlined procedures and with foreign trust reporting. We do not provide tax advice ourselves, but we have relationships with advisers who do this work well and who understand the specific context of Malta QROPS arrangements. We would also like to reiterate that we do not have any sort of commercial relationship with any of these tax specialists. We do not receive any sort of introducer’s fee, etc.

Whilst the tax situation is being addressed, the investment question becomes equally important. A foreign trust does not benefit from the same PFIC exemptions that apply to qualified pension arrangements like a UK SIPP, which means the underlying funds held inside the arrangement need to be reviewed. UCITS funds and many UK-domiciled investments will be classified as PFICs if held by a US person through a foreign trust structure (including a Malta QROPS), carrying punitive tax treatment on gains and distributions. We are helping clients restructure their investments into non-PFIC portfolios (such as U.S.-domiciled funds and ETFs) appropriate to their situation.

We are also reviewing whether a transfer to a more appropriate QROPS trustee with improved death benefits, customer service, and a more modern structure is a viable and beneficial option, where that is in a client’s interest.

And beyond the immediate situation, we are helping clients look at their broader financial picture: retirement income planning, pension consolidation, tax-efficient drawdown strategy, and long-term wealth and estate planning, which are particularly important given their cross-border position.

This is a difficult situation, and we understand that receiving a letter from your trustee about foreign trust status and Form 3520 can feel alarming. But for clients who engage with the process properly, with the right tax and investment advisers in place, this can be the moment that finally brings clarity and a clean path forward rather than ongoing uncertainty.

If you hold a Malta QROPS and you are a US person and/or resident, we would encourage you to get in touch. The right time to act was some months ago. The next best time is now.