New Zealand: A Midshore Option For International Wealth Structuring

Using an offshore jurisdiction can offer several benefits, including tax optimisation, where businesses and individuals can reduce their tax liabilities through favourable tax regimes. It also provides enhanced privacy and asset protection, safeguarding assets from threats in one's home country. Offshore jurisdictions can facilitate foreign direct investment and international business operations, with simplified reporting requirements and regulatory environments designed to attract, pool, and deploy capital. Additionally, in jurisdictions known for their secure and discreet financial services they can offer political and economic stability to capital from more volatile regions.

Some risks and disadvantages of using an offshore jurisdiction include potential legal and reputational risks associated with perceptions of tax evasion or unethical financial practices. There can be increased scrutiny from tax authorities and international regulatory bodies, leading to complex compliance requirements. Offshore jurisdictions might also face political or economic instability, affecting the safety of assets. Additionally, less transparency and regulatory oversight can increase the risk of fraud and financial crime.

An onshore jurisdiction typically refers to countries that impose conventional tax rates on business profits, income, and capital gains, and have stringent regulatory and compliance frameworks. These jurisdictions are known for their transparency, adherence to international financial regulations, and robust legal systems. Onshore jurisdictions offer less privacy in financial matters but provide greater stability and recognition in the global financial system, making them suitable for operating and/or regulated businesses, and individuals seeking to maintain a transparent and reputable financial presence. Examples of onshore jurisdictions include the United States, the United Kingdom, Germany, France, Australia, Canada, Japan, and South Korea.

Global Efforts To Level The Regulatory Playing Field

Arguably, the distinction between onshore and offshore jurisdictions has always been blurred and is becoming less relevant. For decades many onshore jurisdictions (like the City of London) have offered offshore type features and services to attract capital and stimulate economic activity. More recently global efforts towards financial transparency and anti-money laundering (AML) regulations have levelled the playing field.

The OECD's Base Erosion and Profit Shifting (BEPS) project and the Common Reporting Standard (CRS) have pushed jurisdictions traditionally considered ‘offshore’ to adopt standards similar to those of ‘onshore’ jurisdictions. Consequently, the global financial landscape is evolving towards a more uniform regulatory and compliance framework, diminishing the obvious contrasts previously seen between finance centres.

Despite global efforts to level the regulatory playing field, there remains an illogical and often unwarranted stigma associated with some offshore jurisdictions. This prejudice often translates into practical challenges, particularly when entities established in these jurisdictions engage with regulated counterparties like banks. Financial institutions, under pressure to comply with international AML and counter-financing of terrorism (CFT) standards, may exercise heightened scrutiny or even reluctance in dealing with trusts and companies from offshore jurisdictions perceived as less transparent. This cautious approach can complicate banking relationships and financial transactions, impacting the operational efficiency of entities based in offshore jurisdictions.

The Emergence Of The Midshore Jurisdiction

A midshore jurisdiction is a less commonly used descriptor, but it has evolved as a term to describe a jurisdiction that combines the legal and financial advantages of offshore financial centres with the stability and regulatory framework of onshore jurisdictions. A midshore jurisdiction offers a balanced approach, providing tax efficiency and privacy for international business and investment, while adhering to international standards and transparency requirements. These features are attractive for families, businesses, and investors seeking to hold their wealth or optimise their operations within a legal and regulatory environment that is recognised and respected globally, bridging the gap between the traditional offshore and onshore models. Examples of midshore jurisdictions include Hong Kong, Singapore, Ireland, Malta, the Netherlands, Luxembourg, the United Arab Emirates (particularly Dubai), and New Zealand.

In the past thirty years, New Zealand has operated as a midshore financial centre by blending common law, an independent judiciary, responsible regulation, and economic substance expected of OECD member jurisdictions, with some of the more innovative features of traditional offshore jurisdictions, including tax neutrality for some types of structures.

New Zealand Foreign Trusts

New Zealand foreign trusts are the central pillar of the New Zealand international wealth structuring industry.

Key features of a New Zealand foreign trust include its tax-neutral treatment of foreign-sourced income for non-resident settlors, ensuring no tax is levied in New Zealand on that income. These trusts are subject to a robust legal framework that emphasises transparency and compliance. They offer privacy for settlors and beneficiaries while maintaining the integrity required by global financial regulations, making them useful for asset protection and estate planning.

Following the Panama Papers, New Zealand introduced stricter disclosure rules for foreign trusts to enhance transparency and combat tax evasion. Trusts are now required to register and report detailed financial and identification information to the Inland Revenue Department. This shift aligned New Zealand with international standards, improving its reputation while maintaining its appeal for legitimate wealth planning. The changes led to a consolidation in the industry, phasing out less compliant structures, and fostering a more transparent, professional environment for international wealth structuring.

New Zealand Limited Partnerships

New Zealand limited partnerships (NZ LP) are more recent and another useful addition to the stable of structural solutions offered by the New Zealand international wealth structuring industry.

The main features of a New Zealand limited partnership include a structure that combines the benefits of incorporation, legal personality, tax transparency, and limited liability for its partners. This is attractive for co-investment activities due to its flexibility in management and operations, and the fact that profits are passed through to the partners who are then taxed individually. This structure is used by private equity funds, venture capital, and international investment arrangements, as an efficient vehicle for collective investment.

A limited partnership can also be created to take on many of the features of a trust and used for structuring family wealth. Such a structure can be designed to operate like a civil law foundation, and providing similar, often enhanced privacy, flexibility, donor control, confidentiality, asset protection, and estate planning benefits to trusts.

Multi-jurisdictional Cross-border Wealth Structuring Strategies

The absence of an International Business Company (IBC) regime in New Zealand, unlike most offshore jurisdictions, could be seen as a limitation. Rather than providing the complete structural, governance, and administrative solution, New Zealand trusts and limited partnerships are typically and often necessarily used as part of a multi-jurisdictional, cross-border wealth structuring strategy utilising IBCs and similar entities set up in other jurisdictions. Structures often include a holding entity in New Zealand (such as a trust or limited partnership), and underlying IBCs registered in other jurisdictions to leverage the specific advantages New Zealand's reputation for regulatory compliance and transparency, alongside the operational, tax, or privacy benefits offered by other regions. This approach allows for a nuanced, tailored strategy for the complexity of contemporary international wealth structuring.

Limitations In The Fiduciary Services Sector

While New Zealand's laws and regulations are robust and aligned with international best practices, the fiduciary services industry is not as mature as those in more established financial centres. This means fewer options for regulated, professional trust and corporate service providers, which may pose challenges for those accustomed to more sophisticated institutional services found in other jurisdictions such as those mentioned in earlier paragraphs.

Navigating this landscape requires careful due diligence and selection of service providers. Engaging with independent and experienced legal advisors is crucial, as they can offer insights into the reputations and capabilities of potential fiduciary partners.

Geographical Considerations And Digital Adaptations

New Zealand's remote location historically presented challenges for global business engagement. However, in recent years, digital advancements have significantly mitigated these issues, enabling efficient international operations and communication. The country's geographic isolation has been mitigated significantly by digitalisation, particularly in facilitating transactions and collaborations across time zones. Notably, New Zealand has carved out a niche in key markets such as Asia and Latin America, where its financial structures and services are recognised and utilised, underscoring the industry’s digital adaptability in overcoming geographical barriers.

An historical lack of government support for New Zealand's international wealth structuring industry has constrained its growth, yet the legislative and policy framework regarding the non-taxation of foreign-sourced income has remained consistent over the past thirty years, and there are no signs of that changing under the current government. This stability, upheld by successive governments across the political spectrum, suggests deliberate policy setting to maintain an attractive environment for international wealth structuring, balancing global compliance standards with the advantages of a tax-neutral environment. This underscores New Zealand's commitment to a transparent and stable international wealth structuring industry, even as it navigates the complexities of OECD and United Nations politics.

Henry Brandts-Giesen
Henry is a leader in the Family Office & High Net Worth Group at Dentons.