New Zealand Limited Partnerships

The NZLP combines the benefits of the limited liability protection of a company with the fiscal transparency of a partnership. Due to the NZLP’s fiscal transparency, foreign and income-tax exempt partners are not taxable in New Zealand on the NZLP’s foreign income.

As a further benefit, New Zealand is a reputable Commonwealth jurisdiction with good laws, good commercial infrastructure, and OECD and FATF membership. The 2021 Anti-Money Laundering and Countering Financing of Terrorism Evaluation of New Zealand by the FATF has been favourable.

An NZLP is a body corporate with separate legal existence from its partners. NZLPs must have at least one general partner and one limited partner. A partner cannot be both a general partner and a limited partner at the same time. Any person or body corporate can be a limited partner.

An NZLP requires a resident general partner. The simplest way to comply with this is to have a New Zealand company (with a New Zealand director) as a general partner.

If a limited partnership has more than one general partner, then at least one must be incorporated or resident in New Zealand. 

New Zealand (like every jurisdiction) 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 is that (until 2015) a New Zealand company did not require a New Zealand resident director, and therefore there was 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. Consequently, the law was amended by the Companies Amendment Act 2014.

It is now a requirement for every New Zealand registered company to have:

• a director who lives in New Zealand; or
• a director who is also a director of a company formed in, and who also lives in, a country with which New Zealand has reciprocal enforcement arrangements (an ‘enforcement country’).

At the present time, Australia is the only country to be approved as an enforcement country and it would appear that is unlikely to change. Corporate directors are not permitted.

As part of the legislative changes in 2014 designed to protect the integrity of the Registries, it became a requirement for directors to supply their date and place of birth information (and their residential address) at the time of registration of a company and on any change of directorship. Typically, the Registrar will require copies of a passport and utility bill (or equivalent), relying on his general powers under the Companies Act 1993.

Only the full name and residential address of a director (and a shareholder) become a matter of public record.

This customer due diligence (“CDD”) information is also requested for non-New Zealand limited partners and shareholders. In the case of foreign corporate partners and shareholders, one can expect to be asked for certified constitutional documents, with a corporate extract or certificate of incumbency.

Information about limited partners is confidential and cannot be accessed by the public – only details of the general partner may be searched.

It is also a requirement that details of a company’s ultimate holding company (if it has one) is disclosed at the time of registration and kept up to date. These details will be publicly available.

As is typically the case, the general partner is responsible for the management of an NZLP. The general partner is jointly and severally liable with the NZLP for all of the debts and liabilities of the NZLP but has a statutory right of indemnity against the NZLP’s assets.

The general partner has authority to bind, and is an agent of, the limited partnership.  Similar to companies, limited partnerships have an ‘indoor management’ rule, so that third parties contracting with the general partner need not enquire as to the limits of the general partner’s authority. Limited partners cannot bind the limited partnership.

Limited partners are passive investors in an NZLP, akin to shareholders in a company.  Their liability is limited to their capital contribution to the NZLP, as long as they do not participate in management.

The Act contains certain partnership management activities (’safe harbours’) that a limited partner may participate in without losing its limited liability status – for example (this is not an exhaustive list):

• Acting as a member of an advisory committee of the limited partnership.
• Approving a change in the senior employees of a general partner or of the limited partnership.
• Taking part in a decision about whether to dispose of the business of the limited partnership or to acquire another business.
• Reviewing and approving the accounts of the limited partnership.
• Being engaged under a contract by the limited partnership or by a general partner of the limited partnership (unless the contract is to carry out management functions).
• Acting in the capacity as a director or employee of, or consultant or contractor to, or a shareholder in, a general partner that is a body corporate.
• Acting as a director or employee of, or contractor to, any person in which the limited partnership has an interest.

NZLPs must have a written partnership agreement. The agreement must contain certain provisions (e.g., assignment of interests, entry and exit of partners, entitlement to distributions).

An NZLP is formed on registration (and not on the earlier signing of the partnership agreement). Business activities should not be undertaken until the NZLP is registered.

NZLPs can be formed for any business or investment activity, however the partnership agreement can restrict the business activities that an NZLP can undertake.

The Act allows both general partners and limited partners to make capital contributions, but there is no requirement for any partner to do so. In most cases, it is simplest if the general partner has no capital contribution or entitlement to profit as this simplifies tax compliance, especially where the NZLP is used for international planning.

Usually, the partnership agreement will detail the capital contributions that the partners will make.

Partners who have made capital contributions are entitled to receive distributions.  Payment of distributions is subject to the NZLP satisfying a two-stage solvency test (i.e., that it can pay all debts as they fall due and that assets after distribution will be greater than liabilities).

The NZLP must prepare accounts but is not required to file them with the Registrar.  Auditing of the accounts is optional.

NZLPs have an indefinite lifespan and continue in existence until deregistered under the Act. The Act provides various methods to wind up an NZLP.

TAX TREATMENT OF NZLPS

The tax treatment of NZLPs is contained in the Income Act 2007. The following summary assumes that an NZLP will be used to hold only non-New Zealand assets and investments.

NZLPs are fiscally transparent for New Zealand tax purposes; an NZLP is not taxed at the partnership level, the individual partners are each taxed on their share of the NZLP’s net income. However, where the limited partner is a non-resident or a New Zealand foreign trust, it will not be taxable in New Zealand on the NZLP’s overseas income.

Assuming that the NZLP will hold exclusively non-New Zealand situated assets and securities, it is extremely unlikely that New Zealand-sourced income could ever arise.  However, the Tax Act does contain a number of broad source rules and apportionment provisions which need to be dealt with carefully.

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 were 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.

The NZLP must file tax returns in New Zealand, detailing all worldwide income earned by the NZLP and the allocation of that income to the limited partners. Where the limited partner is a non-resident or a New Zealand foreign trust, it should not be required to file a New Zealand tax return.

Broadly speaking, it is unlikely that an NZLP could claim the benefit of New Zealand’s network of double tax treaties. Definitive guidance will require an individual assessment based on the type of income and the applicable treaty.

An NZLP may be used as a tax-exempt vehicle by a New Zealand foreign trust. With the trustee as the sole limited partner, the NZLP can be used in the same way as a tax-exempt company that is wholly owned by the trust.

The NZLP should not be black‑listed in jurisdictions that adopt a black-list approach to foreign entities. Accordingly, the NZLP offers a good alternative to an investment-holding company in a traditional ‘offshore’ jurisdiction.

The NZLP may be a more attractive standalone vehicle for clients who are less comfortable with trusts. It could be a closely held investment vehicle. Conversely, it could also be used as a more widely held investment vehicle for private equity or real estate – it is a versatile entity.

For investors resident in higher tax jurisdictions, the NZLP will be a more efficient investment vehicle if the home jurisdiction treats the NZLP as fiscally transparent (as we do in New Zealand), as this can overcome double tax outcomes that can occur with cross-border investment in ordinary companies.

For a partnership investing in US securities, the NZLP can elect to be treated as either a flow through or a corporate by using the ’check the box mechanism’.

John Hart
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.