New Zealand is becoming more and more popular as a migration destination. Migrants to New Zealand are often concerned with providing a great lifestyle for their families and the security of their wealth. It is no surprise that we are often asked whether New Zealand has nuclear power plants and whether our banks are safe.
New Zealand has been ranked as a third best country to live in by the Human Development Report 2010. New Zealand is not only finding its place in the world as “a great place to live”, but also as a “tax planning destination”. New Zealand offers great tax planning opportunities for those wanting to migrate to NZ or those who simply wish to take advantage of New Zealand favourable tax regimes.
If you want to find out more about tax planning opportunities or setting up pre-migration tax efficient structures, please click here.
Tax Planning & Pre-Migration Structures
New Zealand is generally perceived as a country with a robust tax system levying high taxes on its residents. However this analogy does not apply to taxation of New Zealand Foreign Trusts (NZFT’s), and New Zealand Look Through Companies (NZLTC’s), provided that certain criteria are satisfied and individuals who qualify as Transitional Residents.
New Zealand Foreign Trusts (NZFT’s)
New Zealand is a common law country that has a long-standing and mature trust and foreign trust industry. Trusts are extensively used for asset protection, tax planning and trading purposes. New Zealand Trust legislation, the Trustees Act 1956, is modelled on the United Kingdom Trust Legislation. It is possible to use a corporate trustee as the trustee of the Trust which offers greater flexibility and separates control further from the settlor.
Taxation of New Zealand Foreign Trusts (NZFT’s)
A Trust with a foreign resident settlor is not subject to New Zealand tax, except on the income derived from a New Zealand source. This would be the case even if the Trustees were resident in New Zealand. Correspondingly beneficiary income or capital distributions from NZFT to non-New Zealand resident beneficiaries, from income or gains that do not have a New Zealand source, will not be subject to New Zealand income and capital gains tax. No gift, estate or transfer duties are imposed in New Zealand.
NZFT’s are also often set up by persons wanting to migrate to New Zealand at some stage, as they, if used correctly can facilitate asset transfer to New Zealand without a New Zealand tax impost, thus mitigating migrant tax exposure.
There is no central registry of Trusts in New Zealand, therefore these vehicles offer a degree of privacy/ secrecy. The residence of a Trust for tax purposes is determined by the residence of the Trustees, regardless of whether the income of the Trust is or is not liable to New Zealand tax due to the residence of the Settlor. This is the very reason why NZFT’s are very popular vehicles for tax planning and asset protection.
As a result a NZFT can operate as an offshore trust without the negative stigma that is often associated with Offshore Entities. A NZFT offers the advantages of an offshore entity with the convenient residency in a high tax country. The advantage is that New Zealand is not classified as an offshore jurisdiction that is blacklisted for tax purposes. It is an OECD member country with sound legal, regulatory, political and economic system, thus becoming a viable alternative to offshore jurisdictions.
Visual Representation of a NZFT
New Zealand’s Foreign Trust regime is a robust industry and is becoming more popular with foreign settlors. NZFT’s offer a flow of income through the New Zealand vehicle that is not liable to New Zealand income or withholding tax on foreign sourced income. The residency of NZFT, which is determined by reference to the Trustees, provides a residency in a high tax country and possibility of the application of double tax treaties.
New Zealand Look Through Companies (NZLTC’s)
A New Zealand Look Through Company (NZLTC) is a company incorporated in New Zealand. Upon incorporation it is entered into the register of companies. It is a separate legal entity providing limited liability to its owners. Its capital is divided into shares. A NZLTC is a transparent vehicle for New Zealand tax purposes akin to the US LLC. This is another useful vehicle that is finding traction with foreign owners. As opposed to Limited Partnership an owner can be the shareholder and the director of a NZLTC.
There are a few criteria that have to be met with NZLTC’s; such as that there can be only class of shares with the same rights, shareholders can be natural persons, another NZLTC, a Trust, or can be a NZFT. NZLTC’s must be resident in New Zealand and cannot be non-resident by virtue of application of a double tax treaty. This means that the company must be managed and controlled from New Zealand if there is a double tax treaty in place between New Zealand and the country of residence of the persons’ behind the NZLTC. In case where there is no double tax treaty in place, the NZLTC will remain tax resident in New Zealand under the domestic law by the virtue of incorporation in New Zealand. Directors of NZLTC must be natural persons and cannot be corporate directors.
Taxation of the NZLTC
NZLTCs are treated as transparent for tax purposes and follows partnership taxation. Where the shareholders of NZLTC are individuals, tax resident outside New Zealand or New Zealand resident Trustees of a NZFT, then the shareholders will not be liable to New Zealand income tax on their foreign sourced income or any withholding tax at the time the dividend is distributed to its shareholders.
NZLTCs work well in combination with the NZFT’s. At times it may be beneficial for the owners to have a company interposed between the underlying investments in the source country and the NZFT. A good reason for this could be a requirement of the settlor in a NZFT to further distance himself from the underlying assets of the NZFT. NZLTC’s, just like NZFT’s, provide a flow through tax treatment with addition of limited liability.
Visual Representation of a Typical NZLTC Structure
New Zealand Look Through Companies are a good alternative to US LLC’s which can complement the NZFT structures quite well. Both of these entities therefore become good alternatives, whether alone or in combination, to vehicles established in classical tax haven countries.
New Zealand Limited Partnerships (NZLP’s)
A New Zealand Limited Partnership (NZLP) is a partnership registered in New Zealand under the Limited Partnerships Act 2008. Details of the NZLP is entered in the register of Partnerships, which is maintained by the Companies Office.
NZLP must have at least one general and one limited partner who cannot be the same person. The general partner has an active management role and is responsible for day to day management of the partnership business. Limited partner is generally a passive investor and cannot take part in an active management of the partnership’s business. A partner does not need to be a resident in New Zealand. It is fairly common that one or all of the partners reside outside New Zealand.
As opposed to the ordinary partnership, the liability of a limited partner is limited to the value of the limited partner’s capital contributions. Liability of the general partners is much wider however this is often limited by the corporate personality of the general partner with limited assets and share capital. Furthermore, the limited partnership enjoys a separate legal. Any company or an individual can be a partner. The legislation does not impose restrictions on what activities a NZLP can do.
Taxation of the NZLP
NZLPs are transparent for tax purposes and follows general partnership taxation. Any profits or losses of the partnership flow through to its partners on the basis of their share of the economic interest in the partnership. This is compatible with the treatment of Limited Partnerships in other jurisdictions.
Where the partners of NZLP are, tax resident outside New Zealand, and NZLP derives non-NZ sourced income, then the Partners will not be liable to New Zealand income tax on their portion of foreign sourced partnership income. Any New Zealand sourced income derived by foreign resident partners of NZLP, or any foreign sourced income derived by New Zealand resident partners of the partnership will be subject to New Zealand Tax.
Typical NZLP Structure
NZLP provides a flexible business structure that offers limited liability protection to its partners and a flow through tax treatment. NZLP’s have become popular amongst foreign investors due to their flexibility and discretionary tax treatment of foreign sourced income in the hands of the non-resident investors.
An individual is resident in New Zealand if:
• He/she has a permanent place of abode in New Zealand, or
• He/she is present in New Zealand for more than 183 days in any 12 month period.
The residence begins with the first day of the period of presence. Whilst there is no statutory definition of ‘permanent place of abode’, it makes a reference to a place with which a person has an enduring relationship and where the person habitually or normally lives.
Resident of New Zealand (including individual and company) is liable to tax in New Zealand on their worldwide income. A New Zealand resident individual may qualify for a Transitional Resident Status.
Transitional Resident Individuals
A resident of New Zealand that qualifies as a Transitional Resident is exempt from tax on foreign sourced income, but is liable for tax in New Zealand on New Zealand sourced income and worldwide employment income. Some exceptions to this rule apply.
An individual is regarded as non-resident if :
• He/she is absent from New Zealand for more than 325 days in any 12 month period.
Non-residence begins with the first day of the period of absence. A 325 days absence does not automatically impute a non-resident status.
A non-resident of New Zealand is liable for tax in New Zealand only on income from a New Zealand source.
A company is regarded as resident in New Zealand if:
• It is incorporated in New Zealand,
• It has its Head Office in New Zealand,
• It has its centre of management in New Zealand,
• It is controlled from New Zealand.
A company that is incorporated outside New Zealand will be resident in New Zealand if it satisfies any of these criteria.
Companies resident in New Zealand are subject to tax in New Zealand on their world-wide income. Non-resident companies are subject to tax in New Zealand on their New Zealand sourced income only
Income derived by a non-resident from personal services performed for a non-resident employer during a visit to New Zealand is not subject to income tax in New Zealand, if that visit does not exceed a period of 92 days in the income year and that income is subject to tax in the home country of the individual.
The marginal tax rate for individuals varies between 10.5% and 33%. The tax rate for companies is a flat 28%. The tax rate for trusts is dependent on the status of the Trust, the type of income it receives and whether or not that income has been distributed to the Beneficiaries or has been retained by the Trust. In general, income distributed to beneficiaries is subject to tax in the hands of Beneficiaries at their marginal tax rate. Income retained by the Trust is subject to tax at a Trustee rate of 33%. Special Rules apply to certain types of Trusts.
Capital Gains Tax
New Zealand does not have a comprehensive capital gains tax. However certain profits from the sale of personal property or immovable property and some unrealized capital accretions may be included in income in certain circumstances.
Net Wealth Tax
New Zealand does not impose Newt Wealth Tax.
There is no gift duty in New Zealand.
There is no inheritance tax in New Zealand.
Real Estate Tax
There is no real estate tax in New Zealand.
Goods and Service Tax (GST)
GST is a value added tax imposed on the supply of goods and services in New Zealand by a GST registered person. The GST rate is imposed at 15% on the value of the supply. Certain supplies made to overseas persons, may be subject to GST at 0% or may be exempt.
Double Tax Treaties
New Zealand has concluded double tax agreements (DTA’s) with a number of foreign jurisdictions. The DTAs generally allocate the primary taxing rights to the country of source and require the country of residence to provide its residents with a relief for foreign tax paid in the country of source by way of a tax credit (and sometimes by exemption).
The rate of New Zealand withholding tax on dividends, interest and royalties paid to residents of treaty countries is levied in accordance with the respective DTA.
Payments of dividends, interest, and royalties to individuals or companies who are not resident in New Zealand are subject to withholding tax. The rate of non-resident withholding tax is levied in accordance with the respective DTA.
Double Tax Relief
Credit is levied either in accordance with applicable DTA or in accordance with the domestic law, in cases where no DTA is in force. The credit is limited to the lesser of the New Zealand income tax payable on the foreign income or the foreign income tax actually paid.
Foreign income tax must have been paid, and not merely be payable, before a credit is granted. Consequently the rate of exchange that must be used for converting the foreign tax into New Zealand dollars is generally the rate applying at the time the tax was paid.
All of New Zealand’s DTAs allow New Zealand residents a credit against New Zealand tax for tax paid in the treaty partner country, but not, in the case of dividends to which imputation credits in foreign country are attached.