New Zealand Qualifying Foreign Trusts

The New Zealand government established the regime, which is fully approved by the OECD, in 2017 to improve its oversight of the New Zealand Trust industry. It happened partly as a result of the Panama Papers debacle back in 2016, partly in respect of international anti money-laundering (AML) rules, but also because of the extensive information sharing agreements entered into by New Zealand Inland Revenue with foreign tax authorities. It has an extensive transparency protocol as to:

• All of the identification particulars of the person creating the foreign trust / whether the actual or economic settlor of the funds establishing the trust;
• The provenance of the money / property settled on the trust, establishing the lawfulness of its source and ownership and;
• Requirements of the New Zealand lawyers / accountants and other service providers to establish the document’s authenticity of the person creating the foreign trust and the details above.

In order to understand the advantages of the New Zealand regime, let’s first consider the problems with other regimes. The use of ‘Grey List’ jurisdictions such as the BVI and the Cayman Islands Jurisdictions with strategic AMUCFT deficiencies) is becoming ineffective for reasons including AMUCFT, trade sanctions and CRS and the issue of ‘Head office’ jurisdictional credibility.

Currently, if a company needs to operate through an off-shore jurisdiction, then using a Grey List’ jurisdiction is becoming increasingly

difficult for effecting fund transfers and can affect business counterparty confidence, whether for ease of transacting or otherwise (FATCA etc.). Offshore banks are sometimes refusing to effect money transfers involving those countries. Further, the OECD has issued a warning that low tax jurisdictions must prove they are meeting the new economic substance requirements.

From 2020, low-tax jurisdictions will have to ‘spontaneously exchange information on the activities of certain resident entities with the jurisdiction(s) in which the immediate parent, the ultimate parent and/or the beneficial owners are resident’, according to the OECD. ‘This information will allow the tax authorities of these jurisdictions to assess the substance and the activities of the entities resident in no or only nominal tax jurisdictions.’ On the other hand, New Zealand provides jurisdictional credibility without compromising existing business arrangements. The OECD has approved New Zealand’s foreign trust regulation and New Zealand as a ‘white-list’ country.

The benefit of New Zealand registration is that when anyone (banks, suppliers, customers etc.) looks at who they will be dealing with they can see that it is an entity registered in an established, stable, First World country with no ‘tainting’ elements from such things as a AMUCFT reputation, political, financial or social instability.

Under the section HC 26 of the Income Tax Act 2007 a foreign-sourced amount that a New Zealand resident trustee derives in an income year is exempt income if no settlor of the trust is a New Zealand resident at any time in the income year.

To enjoy the tax benefits of NZ Qualifying Foreign Trust Regime there are particular administrative / procedural requirements from the New Zealand Inland Revenue, notably:

The trustee of the foreign trust should be a single purpose, private limited liability company formed under New Zealand law.

Such a private trust company operates in exactly the same way as does any other person who is a trustee/co-trustee and is subject to the same rules. it has become normal for the shares in such a company to be held/ owned by its New Zealand-based directors (the foreign business person can be a director if they wish, so long as there is a clear majority of other directors who are New Zealand residents, who exercise their control as directors over the trustee from within New Zealand at all times;

• None of the capital can be invested within New Zealand or in NZ$ assets (to do so compromises the foreign trust NZ tax exemptions in respect of what must be “foreign sourced” income).
• Secondly, it is for the trustee to decide how it should invest the capital pool, in what jurisdiction and in respect of whatever asset base the trustee considers to be prudent/ commercially attractive.
• Given the investment experience and commercial acumen of most readers, it is appropriate that they document with the trustee what would be a Memorandum of Wishes (“MOW”) to deal with this subject matter, but also more broadly in terms of the benefits that should be made available to members of their family and when.

When the above rules are followed and the assets are not NZ based and the income is not sourced in New Zealand, and the beneficiaries are not NZ residents, there is no NZ tax payable. In addition, there is a unique feature in that, being NZ domiciled, dividends flowing into the Trust’s NZ based bank accounts not only do not  attract tax, the distribution to the beneficiaries do not attract Non­ Resident Withholding Tax (NRWT) where the beneficiary resides in one of NZ’s 37 Double Tax Agreement partner countries. This of course assumes that the funds are ditributed within the year and therefore can retain it’s character to benefit from the DTA. Anything after the year would not have any character and would just be an distribution.

If their Trust was in the BVI, Cayman’s etc, distribution automatically attract 30% NRWT.

Separation of ownership – a trust is a legally binding arrangement where a person (the settler) transfers legal ownership of assets to chosen persons (trustees) to be held on trust for the benefit of persons named by the settler (the beneficiaries). The primary purpose of a trust is asset protection.

• Asset protection – a trust may protect assets from legal claims to the extent permitted by law. Trusts can be used as mechanisms to transfer assets to trustees. Where legally permitted, those trust assets would no longer be taken into account in creditors’ claims.

• Asset consolidation and management – a trust may be a preferable way of placing all your assets in one holding structure, with the intended result of simplifying your asset management and financial reporting. This may have tax implications too.

• Privacy – assets are held in the trustees’ names, with the identity and interests of the beneficiaries being kept confidential until the trust terminates.

• Preservation of wealth – a trust may be used to preserve the continuation of certain assets, such as a property or business, within a family.

• Succession planning – a trust is an effective tool to deal with succession planning for your family members, friends and charities in the way that you wish, without fear of legal challenge.

A properly established trust provides virtually 100% protection against interference from third parties including creditors and foreign governments.

This means if the trust is established 2 years before the motives for it’s establishment are questioned, and in the cases of partners or spouses before you marry or begin a relationship, third parties cannot attack it under any circumstances under New Zealand law.

There are thousands of precedents in New Zealand courts that demonstrate that trusts cannot be set aside no matter how unfair or unjust the result and no matter what benefit the beneficiaries are receiving.

Further personal tax issues or other claims against you cannot affect the trust if the trust has been professionally established.