Late last year there was a media storm as a result of information uncovered in the release of the ‘Panama Papers’ from a Panamanian law firm. The release of this information brought into the spotlight the ability to use New Zealand’s trust regime as a tax haven. NZ foreign trusts have been favoured due to the level of privacy and secrecy.
New Zealand – a tax haven?
In most tax jurisdictions the tax residency of a Trust is based on the residency of the Trustees (those that control the trust). In New Zealand the residency of the Trust is based on the settlors (the person/people who have conferred wealth on the Trust). For a trust formed in NZ by a non-resident settlor, as long as the income generated by the Trust was not sourced in NZ, the NZ Inland Revenue were not interested and there are no NZ income tax obligations. In short, a foreign Trust generating foreign income is not taxed in NZ.
A foreign Trust generating foreign income in NZ will still have no NZ income tax obligations. However, there are now a significant number of disclosure requirements:
- A foreign trust will now need to register with Inland Revenue when it is formed. In particular the details of the settlor, trustees, protectors and beneficiaries will need to be disclosed.
- An annual return will need to be filed with Inland Revenue. This annual return will contain financial statements and disclosures regarding any distributions made from the Trust
The net effect of these changes is that information relating to the activities of the foreign trusts will be held by Inland Revenue and as a result, the information will be made available to the tax departments of overseas tax.