New Zealand Limited Partnerships
The Limited Partnerships Act 2008 ("LPA") came into force on 2 May 2008 enabling registration of Limited Partnerships ("LP") and Overseas Limited Partnerships ("OLP").
LPs are a form of partnership involving General Partners (who are liable for the debts and liabilities of the partnership) and Limited Partners (who are liable only to the extent of their capital contribution to the partnership). Although LPs are created by statute, they are relatively unregulated when compared to companies. They are therefore an attractive vehicle for a wide range of businesses.
The registers of LPs and OLPs are administered by the New Zealand Companies Office. Registration, maintenance and annual return filing for LPs and OLPs is currently conducted through manual forms. The registers are able to be searched online at http://www.business.govt.nz/companies/learn-about/other-entities/limited-partnerships/.
The stated purpose of the LPA was to:
"establish a modern regulatory regime of limited partnerships that gives the business community in New Zealand the option of a flexible and internationally recognised business structure similar to limited partnerships in use in overseas jurisdictions; and facilitates the development of the venture capital industry in New Zealand."
The key features of New Zealand LPs:
The key features of New Zealand LPs include:
Legal status of an LP:
An LP registered under the LPA is a separate legal entity, and therefore shares the same major legal features as a limited liability company.
Wide business activities:
An LP can carry on any business and enter into any transaction in any country (subject to limited restrictions in the LPA). It does not need to carry on business in New Zealand (unlike the United Kingdom LPs).
There must be at least one General Partner, who must be aged over 20, (who cannot be a Limited Partner), and who is responsible for the management of the LP. The General Partner does not need to be resident in New Zealand.
The Limited Partners:
There must be al least one Limited Partner, who must be aged over 20, who does not need to be resident in New Zealand.
Liability of Limited Partners:
They have limited liability for LP debts.
Privacy of the limited partners is protected:
The Registrar of Companies must treat Limited Partner information as confidential, and details of the Limited Partners and the Limited Partnership agreement are not available for viewing by the public (unlike the United Kingdom).
An unlimited legal life if desired.
A partnership agreement:
Each LP must have a partnership agreement, which must comply with the minimum content requirements in the LPA. On registration the General Partner, or their agent, must certify that the proposed partners of the LP have entered into a partnership agreement which complies with the LPA before it can be registered. The partnership agreement is not publicly searchable.
The New Zealand tax treatment of LP:
Like LP regimes in many other countries, in New Zealand an LP is transparent for tax purposes, so losses and gains are attributed to the Limited Partners directly, in the manner agreed in the partnership agreement (although the maximum loss claimable in New Zealand for taxation purposes is the total capital contributed plus any guarantees given in favour of the LP).
If a New Zealand LP carries on business solely outside of New Zealand, and has no New Zealand sourced income, non resident Partners of the LP have no New Zealand income tax liability, and do not have to file New Zealand income tax returns.
The types of partners:
The LP must have at least one General Partner and one Limited Partner. There is no limit on the maximum number of General Partners or Limited Partners. If there is not a General Partner or a Limited Partner for a period of 10 or more working days the LP will terminate.
Any person (including a corporation sole, body corporate or unincorporated body such as a partnership) may be a General Partner or a Limited Partner of a LP, but the same person cannot be both a General Partner and Limited Partner. However, a General Partner and a Limited Partner can be related parties.
It is usual for a new company to act as the General Partner, the shares in which are owned by the Limited Partners in proportion to their interest in the LP. The Directors of the General Partner company can be the Limited Partners.
Both General Partners and Limited Partners may contribute capital to the LP and therefore have a "partnership interest", although a General Partner does not normally contribute capital to the LP.
The General Partner:
The General Partner is responsible for the management of the LP. The General Partner has authority to bind the LP, and is an agent of the LP. General Partners are jointly and severally liable with each other General Partner and the LP, for the debts and obligations, and "wrongs and omissions" of the LP. The liability of a General Partner extends only to debts, obligations, wrongs or omissions that arise while that person or entity was a General Partner of the LP. However the General Partner is only be liable for LP debts to the extent that the assets of the LP are insufficient to satisfy those debts unless the LP agreement provides otherwise.
The key features of the LPA in relation to the role of General Partner are:
The Limited Partners:
Limited Partners are passive "investors" in the LP who are responsible for providing the assets or capital to the LP.
The key features of the LPA in relation to the role of Limited Partner are:
Limited Partners are only liable for LP debts to the extent of their capital contribution, much like a shareholder in a limited liability company. However, the benefit of limited liability is lost if the Limited Partner engages in non-safe harbour management activities.
The names and addresses of limited partners are not publicly available (those details are included on a register but that register is not publicly searchable).
Limited Partners are not permitted to participate in the management of the LP, except for certain "safe harbour" management activities listed in the Schedule to the LPA. A Limited Partner is not an "agent" of the LP or any of the partners and has no authority to bind the LP.
A limited partner owes no fiduciary duties to the LP or to any other Limited Partners.
Although management is not defined, the LPA sets out certain specified 'safe harbour' activities, being activities Limited Partners can undertake without being deemed to be taking part in the management of the LP. Safe harbour activities include but are not limited to:
Registration and LP Agreement:
A LP is formed on registration with the Registrar of Companies. On registration, the General Partner must certify that the LP has a written LP agreement, detailing as a minimum the matters set out in the Act (which broadly cover assignment of interests, entry and exit from the LP, meetings, and entitlement to distributions).
Subject to the LP agreement, both General Partners and Limited Partners may make capital contributions to the LP, entitling them to the share in the partnership interest in that LP as defined in the LP Agreement.
A Partner who makes a capital contribution to a LP has the right to receive distributions from the LP in the percentages detailed in the LP Agreement. Distributions are subject to a solvency test requirement (similar to distributions by companies).
While a LP is required to prepare accounts, there is no requirement to file accounts with the Registrar (unless the LP is an "issuer"). However the accounts need to be held at the registered office.
Provisions relating to taxation of LPs are set out in the Taxation (Limited Partnerships) Act 2008 which came into force on 1 April 2008.
One of the key attractions of the LP regime is its compatibility with international tax treatment of LPs. Like LP regimes in many other countries, the New Zealand Income Tax Act 2007 allows for the "flow through" of income and expenses based on the LP Agreement. This flow through allows partners to receive gains and losses personally, based on the proportion their share in the LP bears to the total income or loss (or other amount claimed) of the LP. For New Zealand income tax purposes the maximum loss claimable in New Zealand is the total capital contributed plus any guarantees given in favour of the LP.
This principle is confirmed by s HG 2(1) Income Tax Act 2007:
For the purposes of a partner's liabilities and obligations under this Act in their capacity of a partners of a partnership, unless the context requires otherwise,-
a. The partner is treated as carrying on an activity carried on by the partnership, and having a status, intention, and purpose of the partnership and the partnership is treated as not carrying on the activity or having the status, intention, or purpose:
b. The partner is treated as holding property that a partnership holds, in proportion to the partner's partnership share, and the partnership is treated as not holding the property:
By contrast, in New Zealand, capital gains realised by a company cannot be distributed to shareholders in a tax-free manner until the company is liquidated and, cannot be distributed tax free at any time to non-resident corporate shareholders that are associated with the company.
As detailed on the New Zealand Inland Revenue Departments web site at
http://www.ird.govt.nz/technical-tax/legislation/2008/2008-2/ , under section YD4(17B) of the ITA 2007:
Income from New Zealand partnerships Income has a source in New Zealand if, treating all of the partners of a New Zealand partnership as resident in New Zealand, the income is treated as having a source in New Zealand under another provision of this section. The application of the other provisions of this section is unaffected if this subsection does not apply.
Under section YD4(2):
YD 4 Classes of income treated as having New Zealand source
(1) What this section does This section lists the types of income that are treated as having a source in New Zealand for the purposes of this Act.
(2) Business in New Zealand Income derived from a business has a source in New Zealand if
(a) the business is wholly carried on in New Zealand:
(b) the business is partly carried on in New Zealand, to the extent to which the income is apportioned to a New Zealand source under section YD 5.
Accordingly if a New Zealand LP carries on business solely outside of New Zealand, and has no New Zealand sourced income, non resident Partners of the LP have no New Zealand income tax liability, and do not have to file New Zealand income tax returns.
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