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Foreign Trusts

New Zealand is a popular jurisdiction for settlement or re-domiciliation of a Trust . This is because, a trust that is a foreign trust for New Zealand as defined in the Income Tax Act 2007 will not be subject to taxation in New Zealand.

The trustee of a foreign trust must be a New Zealand resident trustee (resident foreign trustee). The resident foreign trustee is typically, but not necessarily, a corporate trustee that is incorporated in New Zealand. Prudence dictates that the company should be demonstrably controlled and managed in New Zealand and for this reason non-resident directors are not generally recommended.

All New Zealand incorporated companies must have a director who:

  • lives in New Zealand or
  • lives in Australia and who is also a director of an Australian incorporated company.

Foreign-sourced income derived by the trustee of a foreign trust is exempt from income tax in New Zealand, provided the settlor is not resident in New Zealand.  Note that the classification as a foreign trust can change and so must be managed.

Income derived in New Zealand by the trustee of a foreign trust will be taxable.

Qualifying Resident Foreign Trustee

When a New Zealand corporate trustee has a director who is both resident in New Zealand and is a member of an approved organisation (New Zealand Law Society, Chartered Accountants New Zealand Australia and the New Zealand Branch of the Society of Trust and Estate Practitioners (STEP)), the New Zealand corporate trustee is a “qualifying resident foreign trustee”.

It is not mandatory for a foreign trust to have a qualifying resident foreign trustee.  However, again this is prudent to ensure that a foreign trust does not lose its foreign trust status if there is a failure to comply with any disclosure or record keeping obligations.

Why New Zealand?

New Zealand is a sovereign state in the South Pacific. The country is politically stable and has a developed legal system, with respect for the rule of law.  There is an independent judiciary, and a substantially statutory system of law providing certainty as to outcomes, particularly in regard to the taxation of trusts

New Zealand has a sophisticated banking system and is an international financial services centre with a significant history of administering trusts.  New Zealand has no public register of trusts and the Law Commission recently confirmed that it was not recommending any such register; accordingly it can offer a significant level of privacy.

New Zealand currently sits at fourth place in the Transparency International Corruption Perceptions Index, which is produced each year to highlight the global importance of transparency.

Proposed new registration obligations

During 2016, the release of a large number of documents obtained from Panamanian law firm, Mossack Fonseca, which came to be known as the “Panama papers”, led to New Zealand’s foreign trust regime coming under close political scrutiny. The Government subsequently initiated an Inquiry into Foreign Trust Disclosure Rules. This Inquiry resulted in a number of recommendations for tightening the foreign trust regime.

As a consequence, on 8 August 2016, the Government introduced the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill (149—1) to Parliament. This Bill implements many of the changes to disclosure requirements for foreign trusts recommended by the Inquiry into Foreign Trust Disclosure Rules. It requires resident trustees of a foreign trust to apply for registration of the trust (existing foreign trusts by 30 June 2017 and new foreign trusts within 30 days of existence).

Specific changes introduced in the Bill include:

  • The requirement for foreign trusts to formally register with Inland Revenue. As part of this registration process, each trust will be required to declare that:
    • the settlor(s); and
    • the person establishing the foreign trust; and
    • the trustees

have all been advised of, and have agreed to comply with the applicable requirements in the Tax Administration Act 1994, the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (and regulations), and Automatic Exchange of Information (AEOI) requirements provided for in the Bill in accordance with the G20/OECD standard)

  • On registration, the name, e-mail address, foreign residential address, country of tax residence, and taxpayer identification number of all of the following be provided to Inland Revenue:
    • the settlor(s)
    • the protector (if there is any)
    • non-resident trustees
    • any other natural person who has effective control of the trust:
    • beneficiaries of fixed trusts, including the underlying beneficiary where a named beneficiary is a nominee.

The proposed amendments also require the trust deed of the trust to be filed with the registration form, and that discretionary trusts are required to describe in the registration any class of beneficiary not listed in the trust deed. This will enable the identity of a beneficiary to be established at the time of a distribution or when vested rights are exercised.

  • The registration requirement will apply to all trusts formed after enactment of the enabling legislation. Existing foreign trusts will be required to meet the new information requirements by 30 June 2017.
  • The proposed amendments require foreign trusts to file annual returns with Inland Revenue. The proposed amendments require the return to include:• the trust’s annual financial statement:
    • the amount of any distributions paid or credited and the names, foreign address, taxpayer identification number, and the country of tax residence of the recipient beneficiaries.
    • any changes to the information provided at registration:
  • When a foreign trust qualifies to be exempt from New Zealand tax. Foreign trusts are not taxable under current law. The Bill proposes that a foreign trust will lose its exemption from New Zealand tax if it has not registered with Inland Revenue and fulfilled its associated disclosure obligations. This means that a foreign trust that fails to meet these requirements will be taxable in New Zealand on its worldwide income. The proposed amendment is intended to provide a sanction for non-registration.
  • Qualifying resident foreign trustee safe harbour. Currently, if a trustee of a foreign trust is convicted of an offence of not providing information requested by Inland Revenue then the foreign trust loses its exemption from New Zealand tax and is subject to New Zealand tax on its worldwide income. However, legislation currently provides that the tax exemption will still apply, in the case where a trustee is convicted of a knowledge offence if the trustee of the foreign trust is a “qualifying resident foreign trustee”. To be a “qualifying resident foreign trustee”, the trustee must be a member of a specified professional body. The Bill proposes an amendment to remove this “qualifying resident foreign trustee” exemption.
  • Register of foreign trusts shared with law enforcement agencies. The proposed amendments require Inland Revenue to share information contained in the foreign trusts register for law enforcement purposes with the Department of Internal Affairs and the New Zealand Police. This will apply from the date of enactment.
  • The Bill proposes that foreign trusts will be required to pay a registration fee of $270 and annual filing fee of $50 to Inland Revenue. The amount of the fees may be adjusted through an Order in Council.). 

See Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill 2016 (149—1).

In the Bill as introduced to Parliament the changes come into effect from [1 July 2017].

 

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