New Zealand Offshore Trust Options

By Peter Macfarlane

Tax Treaty Benefits of New Zealand Trusts

As an example of this third benefit, property in France is normally taxable. The Double Tax Treaty between New Zealand and France may however be used to eliminate tax on French properties. Similarly, it is often possible to avoid withholding taxes in other countries using a New Zealand trust, even if that income derives from an active business (for example royalties obtained from franchising brands or know-how).

Foreign income can be paid out under a tax treaty to the Trust's bank account free from withholding tax in the place where the income is generated, because the trust is a New Zealand resident and so is able to claim this benefit. But, because the Trust is not itself taxable in New Zealand, there will be no withholding tax when the same income is distributed to the offshore beneficiary.

Income such as interest, dividends or royalties paid to a New Zealand resident is typically taxed at a rate of 10% or 15% in the source country, according to New Zealand's tax treaties. By way of comparison, for example, such income paid from the USA to an offshore beneficiary would normally be subject to 30% withholding tax - this is reduced to 10% by using a New Zealand resident entity.

Trustees and Private Trust Companies

There is a legal requirement to have at least one New Zealand resident trustee in order to qualify as a New Zealand offshore trust. The reason for this is simple and logical - to create the necessary legal connection with New Zealand. After all, imagine if the settlor, trustee and beneficiary were all abroad and there was no connection with New Zealand, it be hard to claim that the trust had anything to do with New Zealand.

Fortunately, it is easy to incorporate companies in New Zealand, and all companies incorporated there are automatically considered resident. The cleanest way to comply with this residency requirement, therefore, is to incorporate your own New Zealand Company that will act as trustee - in other words, a Private Trust Company or PTC.

Provided the sole purpose of the company is to act as a trustee, then the company will not have any transactions of its own and will have no income. It can therefore legally file a dormant or 'nil' tax return and will not be subject to taxes, even though it may easily be holding assets worth millions. AS we said, this is not an accidental loophole but is a clearly designed strategy that the New Zealand government implemented in order to stimulate foreign investment.

Since the PTC will also own no assets of its own (remember that the trust assets are legally separated from the PTC's assets) it will also have very little to no value - a fact which legally avoids the need to report ownership of it in many countries.

Ownership and Control of the Private Trust Company

There is nothing legally speaking to stop the client (or a foreign company or foundation controlled by the client) from owning the shares and being the director of the PTC - thus controlling the company and ultimately the Trust assets.

However, it's often not desirable for the client to be listed as the owner of the PTC. Once again, we are back to separating the Ownership of the Company from the control of it - and once again, we find the solution in the form of a trust arrangement. This is what we talked about back in Part One, where we said that an effective privacy and asset protection structure might well involve several layers of trusts and companies.

In this optimal solution, a New Zealand resident person will act as trustee owning the shares of the PTC. Let's call this a 'mini trust.' This 'mini' trust is set up solely to function as owner of the PTC. A third party such as any well-known public charity may be named as the beneficiary of this 'mini' trust - which will have effectively no assets except for the shares in the PTC, which itself has no assets of its own. Are you with us so far? This simple 'mini trust' arrangement adds a level of privacy and actually reduces the costs of maintaining the structure, since the annual filing requirements are simplified too if the owner is resident.

But how, then, does the client manage to legally retain control of the trust assets? In this latter option, a limited Power of Attorney is drawn up to allow either the client, or a family member or trusted third party, to manage certain financial affairs of the trust - including being sole signatory on the trust's bank account. The client therefore ultimately retains 'effective control' of the trust without drawing unwanted attention to him or herself.

Banking Options for New Zealand Trusts

Another advantage of trusts is that there are several ways the account may be named. This in turn allows additional flexibility when making deposits, transfers etc. The account may be held:

o Only in the name of the trust

o Designated with the name of the PTC then "as trustee for" and the name of the trust

o Only in the name of the PTC

Options 1 and 2 are generally only available in banks based in jurisdictions that are familiar with trusts. Option 3 would be available worldwide, since even if a bank does not technically recognize the existence of a trust, they will recognize the Private Trust Company as a legal entity. The signatory or signatories on the bank accounts may be either directors of the PTC, or any individual duly authorized by a power of attorney.

The same theory, of course, applies to all trusts - not just New Zealand trusts. When clients set up a New Zealand trust through our firm, we typically recommend working with one of several European banks that are familiar with this structure.