Reason, Michael:New Zealand’s Tax Strategy for Establishing Itself as a Finance Centre (January 2012)

  • New Zealand’s Tax Strategy for Establishing Itself as a Finance Centre
    • New Zealand has in recent years reformed its tax system to make it friendlier to business migrants. For example, the transitional residence rules now permit a “genuine migrant” to receive foreign passive personal income tax free in New Zealand for the first four years of residency.

      A first-time migrant also may settle a non-resident trust before becoming a New Zealand resident, and that income will remain tax free even though distributions to New Zealand residents are taxed. Also, the 2010 active company exemption to New Zealand’s controlled foreign corporation rules allows a New Zealand resident person to own non-portfolio investments (of over 10 percent) in a non-resident company without the non-resident company being deemed to be taxable in New Zealand. This effectively permits New Zealand residents to operate their foreign investments from New Zealand and to be taxed on a remittance basis.

      The abolition of the New Zealand gift duty enables a New Zealand resident or domicile to gift assets or transfer them to a trust free from restrictions, other than rules concerning insolvency and foreign tax, such as the UK lifetime transfer charge that affects UK domiciles wherever they are resident. And a look-through company regime was established in April 2011 that permits regular New Zealand resident companies (that are not deemed to be non-resident as a result of an income tax treaty) to have the status of a tax-transparent corporate body in New Zealand.

      Even before the most recent tax reforms, New Zealand held many advantages for migrants including:

      no inheritance tax;
      no capital gains tax (although income tax can apply to capital profits on the trade of assets such as land); and
      the ability to migrate UK pensions to New Zealand Qualifying Recognized Overseas Pension Schemes (QROPS), permitting member distributions of the former UK pension fund to be made tax free under the New Zealand complying trust rules, and with greater flexibility for distributions as a superannuation scheme.
      To benefit non-residents and members of the New Zealand finance and investment industry, the current government now has transformed the (tax and finance) legislative landscape to encourage New Zealand’s development as a financial centre.

      It has adopted the zero-rate Portfolio Investment Entity, a “collective investment entity” tax vehicle that allows for a zero-rate income tax on foreign income, looking through to non-resident members. Transitional residents may enjoy zero tax on foreign investment zero-rate portfolio investment entity (PIE) investments.

      The recently adopted limited partnership is a registered partnership useful for private equity investment structuring with legal person status as opposed to body corporate status (like the Scottish limited partnership).

      The foreign trust regime has not been modified because of amendments made under the previous government that require qualifying trustee and trust registration. A foreign trust is subject to tax depending on the place of residence of the settlor, which permits a New Zealand trust settled by a non-resident with foreign income to retain tax-free status in New Zealand.

      A foreign trust is also able to act in conjunction with a look-through company or a limited partnership, operating as a holding vehicle and enabling the income of the look-through company to pass through the trust or partnership to the beneficiaries of the trust or to the partnership shareholder, provided that the trust or partnership is not conducting trading business to the extent that it has New Zealand-source income.

      The current government, which this month is about to complete its first term, has also come up with a number of nontax proposals, including:

      a system for the licensing of financial service providers such as trustees of funds;
      a system for the training and licensing of financial advisers who are required to join a complaint resolution and adjudication scheme;
      anti-money-laundering legislation; and
      the forthcoming obligation for New Zealand companies to appoint either a New Zealand resident director or a registered agent.
      Other legislation that is in the process of becoming law includes:

      a wholesale reform of the law regulating non-bank account providers following the collapse of New Zealand’s unregulated finance industry;
      the establishment of a Financial Markets Authority to regulate market participants; and
      a repeal of the Securities Act and Superannuation Schemes Act and associated legislation and their replacement with the Financial Markets Conduct Bill (FMC). This bill is dubbed the “abolition of the prospectus bill” because, as the nickname suggests, the publication of a prospectus by an issuer will be replaced by the obligation to make regulated information available online. The requirement of an independent and licensed manager/trustee and an independent and licensed supervisor/administrator will be introduced in line with the best industry standards.
      The FMC bill has had its first reading in parliament and will not undergo further consultation until after the general elections on November 26. Although the foreign investment zero-rate PIE came into effect on August 29, the foreign investment variable-rate PIE will take effect on April 1, 2012, allowing for a PIE with both New Zealand and non-New Zealand investors and investments.

      If the current government wins the elections, users of the new tax-free vehicles and financial systems can be assured that they have the full backing of the New Zealand population.

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