New Zealand is not a tax haven, yet trusts established in New Zealand are increasingly important international tax planning vehicles.
Some of the most successful offshore tax planning vehicles have been in fact "on-shore" in tax paying jurisdictions - the UK non-resident company, the Delaware corporation, the UK limited partnership, the Irish non-resident company, the Singapore company, and the US LLC to name a few.
Add to this worthy collection the New Zealand offshore trust.
What is it about on-shore zero tax entities that makes them so useful? The appeal is obvious - all the cosmetic advantages of appearing to be a tax paying entity, with no "tax haven" taint, with the additional bonus of paying little or no tax. Recent OECD moves against tax havens have not affected most on-shore tax effective structures.
The New Zealand offshore trust allows assets to be owned and managed by a company in a reputable, relatively high tax-paying jurisdiction, with a significant network of tax treaties, but without tax.
New Zealand is a sovereign state in the South Pacific. In addition to political stability, it enjoys economic prosperity. New Zealand has a developed legal system, with respect for the rule of law, an independent judiciary, and a substantially statutory system of law.
The New Zealand "offshore" trust is a misnomer. The "New Zealand foreign trust" is in fact a New Zealand trust, which usually has (although need not have) a New Zealand trustee, and may have (but need not have) New Zealand resident beneficiaries.
The trust is an integral part of the legal system of New Zealand, as it is with most jurisdictions deriving their legal system from the common law and equity. However New Zealand has developed its own approach to the taxation of trusts, based not on the residence of the trustee or of the beneficiary, but on the source of the trust funds - that is, taxation based on the residence of the settlor. This provides tax planning opportunities.
Since 1988 the New Zealand tax legislation has specifically codified the New Zealand "offshore" trust - a New Zealand trust (often with New Zealand resident trustees), settled by a settlor or settlors none of who is resident in New Zealand.
The New Zealand offshore trust is not subject to New Zealand tax, except on income with a New Zealand source - even though the trustees are tax residents of New Zealand, and even if some or all of the beneficiaries are New Zealand resident.
For beneficiaries of a New Zealand offshore trust the New Zealand tax rules are also interesting. A trust beneficiary who is not resident in New Zealand will only be taxed on income with a New Zealand source, and will not be taxed on capital profits or gains (even those with a New Zealand source). Foreign income and all capital gains can be distributed free of New Zealand tax - free of tax on the trustee, free of tax on the beneficiary.
Income with a New Zealand source will be subject to normal New Zealand income tax rules, including any protection from income tax that double tax treaties may provide. Capital gains, wherever their source, are not subject to New Zealand tax.
The same rules would also apply to a trust established under New Zealand law but which does not have New Zealand resident trustees, or has some resident and some non-resident trustees, provided no settlor was resident in New Zealand. As the taxation status depends on the residence of the settlor or settlors, a New Zealand resident (including a beneficiary) may be a trustee of the trust without prejudicing the tax status.
New Zealand offshore trusts, which are "foreign trusts" in terms of the New Zealand legislation, are not specifically deemed to be non-resident in the legislation. Residence of the trust has no meaning in the Income Tax Act 1994 - the residence of the settlor or settlors is the determining factor as to whether the trust is a foreign trust or not.
New Zealand has a reasonably extensive network of double tax agreements, including treaties not only with the United States of America, but also Australia, Canada, Japan, Singapore, Malaysia, Italy, France and the United Kingdom. It even has a treaty with Finland.
This raises the interesting possibility of a New Zealand offshore trust being a resident of New Zealand for the purposes of a double taxation treaty, with the protection this brings, and yet not being subject to tax in New Zealand.
Provided the trust documentation is drafted with this aspect in mind (and depending on the treaty), it is possible that the New Zealand trust can receive income from a treaty partner country and avail itself of the advantages of the treaty (for example reduced withholding tax, no source country tax on business income without a permanent establishment, etc.)
The advantages of a New Zealand offshore trust are as follows:
- Such trusts are substantially tax free if there is no New Zealand sourced income;
- New Zealand sourced income is not subject to any taxation disadvantage;
- New Zealand tax law does not tax capital gains, even of residents;
- New Zealand is politically and economically very stable;
- New Zealand trust law is firmly based on equity and the common law, with some local modification, but supported by an efficient and open judicial system;
- New Zealand professional and administration services are efficient, and are of a reasonable cost by international standards;
- Such trusts avoid the stigma associated with tax haven trusts;
- Such trusts provide some asset protection advantages;
- There is the possibility of using New Zealand's tax treaties;
- Through the use of custodian trustees or advisory trustees (both concepts codified in the relevant legislation) it is possible for a non-New Zealand co-trustee or protector to control the trust funds.
The New Zealand offshore trust may be of interest in a number of situations:
- As a zero-tax tax planning vehicle, in place of an offshore trust established in a tax haven;
- In particular, in conjunction with the lack of a capital gains tax in New Zealand, such trusts can be used as holding vehicles;
- As an asset-protection trust established in a jurisdiction with a range of treaties and with a fully developed and efficient judicial system;
- As a pre-migration trust, established prior to immigration to New Zealand (or indeed to other countries where such trusts are effective - for example, the United States of America, Australia or Canada).
The concept of the New Zealand offshore trust can be applied to a trading trust.
A New Zealand company can be established to hold an investment or carry out a business or trade. If the company is acting as the trustee of a New Zealand offshore trust, it will not be subject to tax in New Zealand (except on New Zealand source income) and yet it will for all intents and purposes (including tax treaties) be a normal New Zealand company.
A New Zealand company can also be formed to be a private trust company (dedicated trust company), owned by or on behalf of the clients. The company can then be the trustee of one or more trusts (whether under New Zealand law or the law of another jurisdiction such as Ireland), and whether offshore or on-shore trusts.
Each jurisdiction has its disadvantages. What are those of New Zealand, in the context of offshore trust? In particular, could the legislation be changed to close this "loophole"?
It should also be noted that the New Zealand offshore trust does not depend on a loophole. The taxation of such trusts is a specific and apparently deliberate codification of the legal position prior to the amendment of the trust taxation regime, and is entirely consistent with New Zealand general taxation principles and law.
It is also necessary to note that New Zealand’s bankruptcy laws, in common with those of most of the OECD countries, favor the creditor rather than the debtor. However by the use of co-trustees based in such countries as the Cook Island, and of course by careful structuring of the holding of assets (for example using the trust to hold share in a Western Samoan international business company) it is possible to retain creditor protection advantages of New Zealand offshore trusts.
NZ Source Rules
Although New Zealand resident trustees may be subject to some disclosure requirements, for example under exchange of information provisions of New Zealand's double tax treaties, these requirements are limited. The judicious use of an underlying company to hold assets, or at least sensitive assets, would preserve absolute confidentiality.
The New Zealand offshore trust is a useful tool for international tax planning, providing a tax free vehicle in a stable, reputable jurisdiction. It also has asset protection and pre- and post-immigration advantages for intending immigrants into New Zealand.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.