New Zealand continues to thrive as a popular jurisdiction for the establishment of wealth planning structures – including trusts, limited partnerships and look-through companies.
With the ongoing pressure on the offshore centres, New Zealand, as an onshore jurisdiction, is proving attractive to a wide range of clients, not least of which being those that are subject to blacklisting regimes in their home countries, which prevent or penalise the use of wealth planning structures domiciled in traditional offshore centres.
New Zealand is perhaps unique in that the foreign trust regime was not created by the Government with the intention of fostering or supporting a business sector. The tax exemption available for New Zealand foreign trusts settled by non-residents is simply the ‘flip side’ of a tax regime introduced to prevent New Zealanders from sheltering income offshore via trusts and associated vehicles. This resulted, in 1988, in the introduction of legislation which, for the most part, abandoned the concept of trust tax residency and instead taxes trusts based on the place of residency of the trust settlor.
It needs to be remembered, however, that a New Zealand foreign trust may still be liable to tax in New Zealand if it earns New Zealand sourced income. Therefore care needs to be taken with respect to such matters as: day to day investment management, the execution of contracts in New Zealand and the like, to avoid any assertion that part of a trust’s income has a New Zealand source.
Where (as is often the case) New Zealand foreign trusts hold non-New Zealand assets such as ‘bankable’ portfolio investments, real estate and art, the income generated will normally be foreign-sourced. However, a number of our source rules are cast quite broadly and therefore there are definite advantages in having investment management handled by parties outside New Zealand. This is to prevent the risk of some of the broader source rules tainting a portion of what would otherwise be regarded as foreign source income.
For example, if a portfolio was actively traded by managers in New Zealand, even though the securities themselves are all offshore, there is a risk that a portion of the income generated could be attributed to a New Zealand source because of the highly active investment management occurring in New Zealand.
Similar source issues arise for both look-through companies and limited partnerships and need to be dealt with equally carefully.
With regard to companies, New Zealand has unfortunately had a few cases where unscrupulous individuals have misused New Zealand companies for illegal or inappropriate purposes. There is a valid perception that one of the reasons this has occurred on occasions is that a New Zealand company does not require a New Zealand resident director, and therefore there is scope for foreign individuals who have no standing in the New Zealand jurisdiction to participate in these inappropriate activities. Whilst not always the case, behaviour tends to be better when local officers are accountable.
As a result of this there is presently new legislation before Parliament (the Companies & Limited Partnerships Amendment Bill), which will require companies and limited partnerships to have a director or general partner resident or incorporated in New Zealand. The Bill originally had an alternative of having a New Zealand resident agent, but that was dropped as the perception (correctly) was that this did not have enough substance to encourage better standards of conduct by directors or general partners.
If a general partner is a foreign company, it would comply with the new Bill by registering as a branch of a foreign company, under the Companies Act 1993.
If a limited partnership has more than one general partner, then at least one must be incorporated or resident in New Zealand. Of course, it is virtually unheard of to have an individual as a general partner because of liability issues.
There is one very significant exception to the requirement for a New Zealand resident director: this is if there is a director who lives in and is a director of a company in an ‘enforcement country’. Enforcement countries will have reciprocal arrangements for enforcement of low level criminal fines. At this stage we have no idea what countries will qualify: they will in due course be named in statutory regulations.
These proposed changes are for the most part seen as positive given that New Zealand has an excellent reputation internationally and any measures designed to minimise or prevent the misuse of New Zealand structures are in our interest. That said, it does of course penalise reputable service providers by limiting their structural choices.
The same legislation will also require disclosure on the company register of the ‘ultimate holding company’ where there is foreign corporate ownership of a New Zealand company. This will be the ‘top’ company in a corporate structure, which is not itself owned by other corporates. The details to be provided on the register will include: the name of the company; its country of registration, and registration number (if any); the address for service and possibly other prescribed information.
This will not apply to limited partnerships: limited partners’ details are not publicly searchable.
One major development in New Zealand at the present time is the impending introduction of the new anti-money laundering (AML) regime with effect from 1 July 2013. Whilst New Zealand has AML legislation at the present time, it is relatively light-handed. The new regime is much more prescriptive in terms of requiring: the appointment of a compliance officer; development of an AML/CFT programme; the completion of risk assessments, account monitoring and ongoing due diligence, amongst other things.
In New Zealand a great many trust service providers operate through managed trust companies (ie, with a – usually – substantial foreign parent) using local service providers rather than their own in-house, dedicated staff. There was a concern that the extensive bureaucratic requirements of the new AML regime would impose an undue burden upon managed trust companies, but the good news is that such companies can form ‘designated business groups’ with their parent companies or fellow group members, and may rely upon risk assessments and AML/CFT programmes created and maintained by the group, offshore.
This facility is only available if the offshore group member is based in a jurisdiction which has a comparable AML regime to New Zealand to ensure that, within the designated business group, AML processes are completed to the same standard as required in New Zealand.
Responsibility for AML compliance still rests with the New Zealand reporting entity, however this at least avoids the need for managed trust companies (and others within a designated business group) to design an AML programme from scratch.
The second major development at the moment is an extensive trust law reform process being undertaken by the Law Commission. The Law Commission has recently issued its ‘preferred approach’ paper. After submissions are considered by the Commission, it will eventually produce a final report plus draft legislation. Most of the reform proposals at the present time are sensible and balanced, including such things as the abolition of the 80 year perpetuity period and the introduction of a simple 150 year maximum duration for trusts. The writer has submitted to the Commission that perpetual trusts should be permitted, but we will have to wait and see whether submissions to that effect are taken account of. However, it seems almost certain that we will end up with at least a 150 year trust duration.
There are some other proposals which are unattractive (and in the writer’s view very poorly conceived), including – in some limited circumstances – holding directors of corporate trustees liable for trust debts; and imposing a direct fiduciary liability on directors of corporate trustees, as if they were acting as individual trustees. There have been vigorous submissions against both these proposals and it is hoped that they will either be dropped entirely or modified very substantially.
The Law Commission’s attitude is very constructive: they want to get the law right and are giving public submissions very careful consideration.
The Companies Office has recently introduced due diligence requirements for non-resident directors and shareholders of New Zealand companies. They have purported to do this under their inherent discretion granted by the Companies Act 1993 which, whilst a debatable proposition, is something that we simply have to live with as it is not possible to incorporate companies now without furnishing basic KYC information to the Registrar when foreign parties are involved. The good news is once KYC is furnished for one individual or entity as director or shareholder there is no need to furnish the information repeatedly in the event of the creation of other entities with those parties involved.
Whilst this has slowed down the incorporation process slightly, the writer is sympathetic to the desire of the Registrar of Companies to minimise the misuse of New Zealand entities. In a sense these measures appear to be a stop gap prior to the introduction of the new AML regime and the enactment of the Companies and Limited Partnerships Amendment Bill.
Finally, from a domestic perspective, the Inland Revenue Department (IRD) has recently issued a draft interpretation statement on tax residency, which is a not so subtle attempt by IRD to expand the concept of tax residency particularly in relation to the ‘permanent place of abode’ basis for individual residency. This interpretation statement arguably lacks merit given that the statutory provisions remain unchanged and there have been no recent case law developments which support the more extensive interpretation adopted by IRD.
John has specialised in tax and trust law since 1984. John provides tax and trust advice to a wide range of New Zealand and offshore corporate and private clients, and not-for-profit organisations. The majority of his work is cross-border/international in nature. John is a frequent presenter at conferences in New Zealand and internationally and has authored numerous publications on tax and trust law issues. He was a part-time Teaching Fellow at the University of Auckland for the Master of Taxation Studies degree. John was Founding Chairman of the New Zealand branch of STEP and has served as a STEP Worldwide Council member.