NZ Trusts and Wealth Structuring: An alternative to traditional tax structures
Since 1988 New Zealand has operated a trust regime that encompasses exemptions on foreign income, making it a viable option for high net worth individuals looking to minimise their tax exposure.
The pressure being placed by the OECD on countries it perceives to be “tax havens”, whether justified or not, has been on the increase for a number of years. The OECD is making it increasingly more difficult to retain wealth in these jurisdictions and is being more aggressive in its approach to people involved.
Many low tax jurisdictions are blacklisted by OECD nations, who have implemented a wide range of regimes, rules and other measures aiming to prevent citizens from using them.
For example, the European Commission is preparing a policy that will require all EU states to adopt a unified policy in dealing with jurisdictions it deems “Uncooperative”. In the United States the Senate is debating a bill to “Cut Unjustified Tax Loopholes” that will ultimately prevent the use of many offshore jurisdictions.
As a result of this attitude, many practitioners and wealth holders are looking at other jurisdictions, with less scrutiny attached.
One such country is New Zealand.
A well developed and growing nation, New Zealand is part of the OECD and the British Commonwealth. Known for its dairy farming, software, and tourism industries it is a respected member of the international community of nations and one of the least corrupt nations in the world.
New Zealand is a member of the United Nations, World Bank, World Trade Organization, International Monetary Fund, Asia-Pacific Economic Cooperation. It does not face any blacklisting or sanctions by any international regulatory or fiscal bodies.
The legal system operated in New Zealand is based on the English Common Law system and uses many concepts of that law.
Until recently the British Privy Council was the highest court however New Zealand has now established its own Supreme Court, and the majority of New Zealand trust law is inherited from British trust and estate law.
New Zealand is not a tax haven, yet trusts established in New Zealand are increasingly important international tax planning vehicles.
What is a New Zealand Foreign Trust?
In the simplest terms, a New Zealand Foreign Trust is a legal arrangement whereby a non-New Zealand settlor may transfer assets, liabilities, and capital to the management of a New Zealand resident trustee, for the benefit of non-New Zealand based beneficiaries.
A New Zealand Foreign Trust may hold property, trade or operate a business and, by law, is separated from the settlor and the beneficiary.
Based on Common Law, New Zealand Foreign Trusts are recognized by the Hague Convention of 1 July, 1985 on the Law Applicable to Trusts and on their Recognition, and are able to use most Double Taxation Agreements signed by New Zealand.
The relevant provisions in the New Zealand Income Tax Act 2007 are as follows:
The first is section HC 11 which provides a definition of a Foreign Trust:
A trust is a foreign trust in relation to a distribution if no settlor is resident in New Zealand at any time in the period that -
(a) Starts on the later of 17 December 1987 and the date on which a settlement was first made on the trust
The second relevant provision is HC 26, which provides that income of New Zealand resident trustees of Foreign Trusts is exempt:
(1) A foreign-sourced amount that a New Zealand resident trustee derives in an income year is exempt income under section CW 54 if
(a) No settlor of the trust is at any time in the income year a New Zealand resident
New Zealand Resident Trustees
A “resident foreign trustee” is a person who:
- Acts as the trustee of a foreign trust; and
- Is a resident of NZ, within the meaning of section YD 1 or section YD 2 of the Income Tax Act 2007
The trustee must not only be a New Zealand resident but must effectively carry out its functions in New Zealand if it is a company.
To maximise trust asset security the usage of a corporate trustee is generally the preferred option.
Such a trustee company can be formed by a non-New Zealand resident and be wholly foreign owned, but at least one of the trustee company directors has to be a New Zealand resident.
A trustee company is required to file annual returns with the Inland Revenue Department and pay New Zealand taxes on its own operational income, if any.
Depending on the size and ownership, a trustee company may have certain filing obligations with the New Zealand Companies Office.
A trustee company must comply with New Zealand law, in particular:
- The activity of the New Zealand resident trustee may be restricted by the New Zealand source rules,
- Settlement of assets on the Foreign Trust must be carried out outside of NZ,
- In terms of New Zealand’s Financial Reporting Act 1993 certain reporting obligations apply to a New Zealand resident trustee.
Taxation of NZ Foreign Trusts
Foreign sourced income derived by the trust through the trustee company (acting as trustee on behalf of the trust) is not taxable in New Zealand.
Non-New Zealand resident beneficiaries are not subject to New Zealand tax on foreign sourced income distributed from the Trust.
In addition, there are no capital gains taxes, inheritance taxes or forced heirship rules in New Zealand legislation. Only income earned by the Foreign Trust within New Zealand is subject to New Zealand taxation.
The New Zealand Foreign Trust may be used on its own or in conjunction with one of New Zealand’s International Double Tax Agreements. In this case, if the withholding tax has been paid in the country of origin on dividends, interest and royalties received, potentially no further taxes are due. The net investment income can typically then be repatriated to another country from New Zealand without taxes.
Because settling a New Zealand Foreign Trust is a genuine disposition of assets, foreign jurisdictions generally have no tax regimes in place to continue to tax income from those assets.
New Zealand Foreign Trust Structure
The person or corporate entity, who establishes the trust by the initial settlement onto the trust. The settlor for a New Zealand Foreign Trust must be a non-New Zealand resident.
The New Zealand resident trustee may be a company or New Zealand resident person. The trustee company acts for the trust and derives its income by managing trust’s assets and investments, or by conducting business on behalf of the trust. The trust must have at least one “Qualifying Resident Trustee”. This is a person who is member of a professional body in NZ, such as the Institute of Chartered Accountants or the Society of Trust and Estate Practitioners.
The Appointor or Protector
This is a nominated person and can be a non-New Zealand resident who has the power under the trust deed to remove and replace the trustees .The powers vested in the protector can vary both according to the proper law of the trust and the terms of the trust instrument. .
This can be an individual or corporate entity who is a non-resident of New Zealand.
A New Zealand Foreign Trust is a legal arrangement governed by New Zealand legislation, entered into by a non-resident settlor and a New Zealand resident trustee for the benefit of a non-resident beneficiary as specified by the settlor.
There can be any number of settlors and beneficiaries, all who must be non-residents of New Zealand. There can be any number of trustees and at least one of them must be a resident of New Zealand.
All assets and investments settled into the trust are usually held through the trustee company. The income derived by the trust could be accumulated within the trust or distributed to its beneficiaries