Hart, John: New Zealand Look-Through Companies

We have a new wealth planning vehicle available in New Zealand: the LTC (Look-Through Company). This is a body corporate with separate legal existence, which is fiscally transparent. It is very comparable to a US LLC, certainly in terms of its transparency and body corporate status.
The LTC must have a minimum of one director and one shareholder: corporate directors are not permitted. There is no requirement for the director to be New Zealand resident; however there is a requirement for the LTC to meet the New Zealand test for corporate tax residency. This requirement will be satisfied if the company is incorporated in New Zealand, unless its “mind and management” (usually directors) is situated in another jurisdiction which has a tax treaty with New Zealand. If this results in the company then being regarded as a tax resident of that other jurisdiction under its domestic laws, in most cases the tax treaty “tiebreaker” test will result in the company ceasing to be categorised as a New Zealand tax resident.

The shareholders must be either trusts, individuals or other LTCs: ‘ordinary’ companies cannot hold shares. To be eligible, all shareholders must have elected LTC tax treatment for the company. Once election is made, and assuming the other criteria are satisfied, the company falls out of the New Zealand tax definition of a “company” and is taxed as a partnership.

The LTC files an annual tax return (a partnership tax return) showing total worldwide income and the allocation to its owners (i.e. shareholders). If the shareholders are non-New Zealand residents and the LTC earns exclusively non-New Zealand sourced income, there will be no need for a tax return to be filed. A shareholder which is a New Zealand resident foreign trust (i.e. a trust settled exclusively by non-New Zealand resident persons) is treated in the same way as a non-resident for these purposes.

Consequently, an LTC will be a very useful asset holding vehicle both for New Zealand foreign trusts and non-New Zealand resident individuals, in either case earning foreign sourced income.

The LTC must prepare financial statements, but there is no requirement to file them with the Registrar of Companies.

The tax filing obligation is rudimentary and would not disclose the names of any underlying client connected with a New Zealand foreign trust; however, a foreign individual directly owning an interest in an LTC would have his or her name disclosed in the LTC tax return – but this is a confidential document accessible only by the IRD.

From a confidentiality perspective the LTC seems to offer a considerable benefit compared to the US LLC under the new FBAR filing rules. The shareholder details are publicly searchable at the Companies’ Registry; however, it is permissible to use nominee shareholders if privacy is a concern.

An LTC must have five or fewer shareholders. If a trust is the shareholder, the trust is counted as one person. If current year income is distributed to beneficiaries of the trust, then each beneficiary is also counted as one shareholder, however if family members within two degrees of relationship are recipients of income from the trust, then they are collectively treated as one person for the purpose of the “five count” test. If there is any doubt concerning compliance with this test, it would be highly desirable for trust income to be retained for 12 months or so and then distributed as a capital distribution, as the counting of beneficiaries receiving distributions only applies to those receiving, essentially, current year income.

The opportunity for LTCs to obtain the benefit of New Zealand’s network of double tax treaties is a question which needs to be considered on a case-by-case basis. Broadly speaking, in most cases it is unlikely that an LTC would be able to claim any tax treaty relief, but it really comes down to an individual assessment depending on the type of income and the applicable treaty.