Unlike many jurisdictions where the tax treatment of a Trust is determined by the residency of the trustee(s), the tax treatment of a Trust under New Zealand tax law is determined by the residency of the settlor(s). (The settlor is usually the person or persons who will be transferring assets to the Trust) As a consequence, more and more foreign (i.e. non New Zealand) tax residents are considering the establishment of a "Foreign Trust" in New Zealand, being one that has never had any New Zealand resident settlor. A Foreign Trust that has New Zealand tax resident trustee(s) but no New Zealand tax resident settlor(s) only pays tax on its New Zealand sourced income and does not pay tax on any income derived from outside New Zealand.
An essential element of the establishment of a Foreign, or any, Trust in New Zealand is that the Trust must be under the control of the trustee(s). Foreign settlors may have difficulty with this aspect of Trust law. However, while the settlor cannot govern the decisions of trustees, the settlor can hold the power of appointment of trustees. The settlor could establish a New Zealand registered company to act as trustee of the Foreign Trust and the settlor could be the director/shareholder of that company. However, the tax law of the settlor’s home country may mean that it is undesirable for the settlor to hold those positions. Further, it is preferable for the shareholder of the company to be New Zealand resident to avoid certain disclosures under New Zealand law (see Foreign Trusts In New Zealand - Reporting And Record Keeping Requirements).
The laws of the settlor’s home country, and the laws of the country from where the Trust’s income will be sourced, need to be considered also. Further, there are double tax agreements ("DTA's") in force between New Zealand and some other countries that can impact on the way the Trust should be established. For example, where a New Zealand company under the control of the settlor is formed to act as trustee, the provisions of any applicable DTA must be considered to ensure that it does not result in the company being treated as a resident of the settlor’s home country.
Under New Zealand tax law, trustees may be paid for their trustee services if the Trust instrument expressly authorizes. If a trustee has been so authorized, the trustee must be paid at a market rate. Otherwise, the trustee could be deemed to be a settlor of the Trust. The Trust could then be treated as a "Non-Complying Trust" rather than a "Foreign Trust" for tax purposes, with different tax consequences applying from those described above (see Tax Treatment Of Your Trust On Migration To New Zealand).
The establishment of Foreign Trusts has caught the eye of some Interlaw members who have referred their clients to us. Unlike some small jurisdictional havens, New Zealand has a stable system of Government, developed Trust laws and an established common law court system.
For further information on Foreign Trusts, please contact Tony Fortune or Lauren Corbett. Alternatively, you can contact our Trust Administrator, Katherine McCarthy.
June 2011
