What is a foreign trust?
A foreign trust is a trust set up in New Zealand with New Zealand resident Trustees, however the beneficiaries and settlor(s) of the trust reside overseas (i.e: outside New Zealand's tax jurisdiction). Foreign trusts are also known as "offshore trusts" or "New Zealand exempt trusts".
Commonly, NZ foreign trusts derive all of their income and hold all their assets offshore.
NZ foreign trusts have become very popular with overseas investors and business people. At the present time there is believed to be circa 10,000 registered foreign trusts in NZ and the number seems likely to continue to increase. This is for a number of reasons, as outlined below.
Why are NZ foreign trusts so popular?
New Zealand trusts are useful structures, providing both asset protection and estate planning benefits. These benefits for New Zealand resident persons are canvassed elsewhere in blogs and articles on this site, so we will not repeat the benefits of trusts for kiwis in this discussion.
For overseas residents (non New Zealanders), however, having a trust in NZ offers additional advantages and particularly good tax advantages.
Tax advantages of Foreign Trusts
With the way New Zealand tax law works at time or writing, it is possible to set up a trust in New Zealand and have no tax obligations here.
Our tax laws are such that no tax is payable in NZ on trust income or beneficiary distributions as long as:
- none of the trust's income is derived in NZ;
- beneficiaries are not NZ residents; and
- the trust settlor(s) is not a New Zealand resident.
It is the last point that is the most significant ("the trust settlor(s) is not a New Zealand resident"). Most other countries focus on the residency of the trustees i.e. trusts must file tax returns and pay tax in the country where the trustees reside. NZ is unusual in that its focus is on the residency of the settlor(s).
Additionally, because New Zealand doesn't have capital gains tax, any increase in the value of trust assets is normally not taxed here either.
Note, this does not mean that the trust never has to pay tax at all. Generally trust income and distributions made to beneficiaries will be taxed in the country of income origin/source. It does, however, prevent the trust or beneficiaries from being taxed twice which can occur if you have the wrong tax structures set up.
New Zealand's business environment reputation is excellent
NZ has an excellent reputation from political, legal, business and economic perspectives, and is a well-respected member of the OECD. As such, it is seen as a stable, safe environment to conduct business.
Furthermore, the way trusts are administered and managed in NZ is considered to be superior, and NZ foreign trusts are perceived to be among the best in the world. It's worth noting that many countries do not have trusts at all or have different rules surrounding how trusts are handled from a tax, insolvency and matrimonial perspective. In many countries trust assets are treated as individual property for the purposes of dealing with creditors, insolvency and matrimonial concerns, In New Zealand trusts are treated as reserved assets for all of the beneficiaries of the trust and protected as such. This is not the case in many OECD and other countries.
Because of its good standing, NZ is not black listed as a "tax haven" country, even though it offers excellent tax advantages like no capital gains taxes. This makes establishing a foreign trust a very attractive and low risk option for overseas investors.
Privacy and confidentiality of a Foreign Trust
New Zealand does not have a central trust registry, and therefore it offers more privacy to those wanting to establish trusts here than is possible in many other countries.
Flexibility and protection
The trustees of NZ foreign trusts have wide discretionary powers, giving them flexibility, but without compromising the interests of the beneficiaries.
What are the costs for setting up a Foreign Trust
The costs involved with establishing and running a New Zealand foreign trust are at the low end of the scale compared with many other types of investment structures in New Zealand and around the world. One of the reasons for this is that audits of trust financial statements are not required.
Advantages for new immigrants
For four years after the settlor becomes a tax resident in NZ, a foreign trust migrating to New Zealand does not have to pay tax on offshore-sourced income. However, before the four-year exemption time limit is up, the settlor must elect for the trust to become a complying trust or serious adverse tax consequences occur. For example your capital in a trust can become taxable on distribution if the migration process is not completed in a complying fashion. Migrants seeking to utilise foreign trust structures must take specific individual advice from a qualified professional in this regard and follow it carefully.
What are the rules of a Foreign Trust?
There are rules and regulations around establishing and running a foreign trust in NZ which must be adhered to.
As well as beneficiaries and settlors being resident overseas, a foreign trust must:
- Have at least one New Zealand resident trustee
- Meet NZ disclosure requirements, including details of trustees, and whether the settlor is an Australian resident
- Meet record-keeping requirements.
This is not intended to be an exhaustive examination of the structure and rules, we leave that to you to do with your advisors. GRA can help you in this regard if required.
Ensuring that the settlor/s establishing the New Zealand Foreign trust are not deemed to be New Zealand tax resident is essential to avoid the trust failing to quality for foreign status and a matter for your professional establishing the trust to provide specific advice on for obvious reasons.
Establishing a foreign trust in NZ
It is important to get professional advice regarding the establishment of a foreign trust. It must be set up correctly if it is to provide the asset protection you desire, and this is something we specialise in at GRA.
It is also highly advisable to use a New Zealand professional trustee to oversee the administration of such a trust to ensure it is run correctly and meets all its legal obligations. GRA provides a professional trustee service, and was awarded the inaugural Corporate Trustee of the Year award by the New Zealand Corporate Trustees Association in 2009.
If you would like to know more about NZ foreign trusts, then please contact GRA, or email Matthew Gilligan firstname.lastname@example.org.
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Disclaimer: Nothing in this article is intended to be specific advice suitable to be relied upon by the public or any individual reader. Instead anyone seeking to rely on matters in this article should take specific individual advice from a suitably qualified professional and further should ensure that tax law has not changed since time of writing to ensure that the comments in this article are still valid and consistent with New Zealand tax law which does change over time.
Thanks David for ALL your help today :)
You have such a great way of making your clients feel comfortable with the whole process...even though it sounds so confusing at times to me :(
I would have to say that I definitely feel a WHOLE lot better now...and I have a better understanding of what is still needed to be done and what we will have to continue to do...
THANK YOU :) THANK YOU :) THANK YOU :) THANK YOU