The taxing of Foreign Trusts

Haven Accounting | 3 MIN READ April 6, 2016


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by Melanie Bennett

In light of the recent release of the “Panama Papers”, people are asking how foreign Trust rules work.

The New Zealand tax regime works by taxing individuals, companies, and Trusts based on tax residency. If they are a tax resident in New Zealand they are taxable on their worldwide income. If they are not a tax resident then they are taxable on their New Zealand sourced income only.

An individual is a tax resident in New Zealand if they are in New Zealand for 183 days in a 12-month period or have a permanent place of abode; housing, employment, financial, personal and social ties are assessed.

For companies, a company is a tax resident if it is an incorporated company or a foreign company that has a permanent establishment in New Zealand, the day to day management of the company is in New Zealand, or director’s control and decisions are made in New Zealand.

For Trusts, the Trust’s tax treatment depends on whether the settlor of the Trust is a tax resident in New Zealand when the Trust is settled.

Where a settlor is a New Zealand tax resident then the Trust is taxable on its worldwide income. A standard Mum and Dad family Trust with a family home and some investments is taxed on its worldwide earnings. This means investments in foreign companies, foreign bank accounts, etc, are all taxable in NZ.

Where a settlor of a Trust is not a New Zealand tax resident then the Trust is a foreign Trust for New Zealand tax purposes, and only income sourced in New Zealand is taxable in New Zealand. For example New Zealand rental property and bank account is taxable in New Zealand, but offshore property, bank accounts and shares are not.

In a media release on April 4 2016, the Minister, Hon Michael Woodhouse, said that New Zealand has a very sound tax system with world-class tax rules.

“We tax people who live, work and do business here. We don’t tax foreign income earned by foreigners. The same principles apply to trusts, and have done since 1988,” he said.

“It is ridiculous to suggest that New Zealand is a tax haven, as tax havens thrive on secrecy.

“Our tax rules require foreign trusts to be registered. We also have a strong tax treaty network, with the express purpose of discovering and preventing tax avoidance by exchanging information between tax jurisdictions.

“We have an ongoing responsibility to ensure these rules are robust so we can comply with our international obligations.

“The OECD has looked at our foreign trust rules in the past and had no concerns with them. The tax treatment of foreign trusts may come up in the OECD’s Base Erosion and Profit Shifting work programme in which case we would look at our own rules in the context of everyone else’s.

“New Zealand has also been a very active participant in the OECD and G20 work to combat tax avoidance. We continue to be a strong voice in this area.”

This is an area to watch over the next few weeks. The tax authorities around the world are looking into the information provided. Who has set up what structures and where?

There will be many people who will have a view on how the New Zealand Trust tax rules should work. What are your thoughts?

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