New Zealand's Taxation Treaties
1. New Zealand's Taxation treaties
Because of its geographical location, New Zealand is not a party to the numerous treaties and conventions of the European states.
The trust can access New Zealand's Double Taxation Agreements (DTA's) minimising and sometimes eliminating the deduction of taxes on profits and pensions in other countries.
The purpose of a DTA is to provide relief from double Taxation and to facilitate the exchange of information between two countries. DTAs override the domestic tax laws of both countries. New Zealand's DTAs override anything in the Income Tax Act 1994 or any other Act.
Section BH1 of that Act provides: "Overriding effect
(3) The Governor-General may declare, by Order in Council, that a convention or agreement negotiated in accordance with subsection (1)(a) and (b) has effect, notwithstanding anything in this Act or in any other enactment, in relation to
(a) income tax:
(b) unpaid tax:
(c) the exchange of information that relates to a tax." Tax is defined in paragraphs (a)(i) - (v) in the Tax Administration Act 1994.
New Zealand has 28 DTAs with:
Russian Federation (2001)
South Africa (2002)
United Kingdom (1984)
United States of America (1983)
2. DTA's concerning Trusts
A New Zealand offshore trust with a trustee resident in New Zealand should qualify as a resident of New Zealand for the purposes of a double taxation treaty. Tax treaties vary in the treatment of trusts and of "persons" not subject to tax in their country of residence. The New Zealand offshore trust is however considered to be "subject to tax" in New Zealand in terms of its double tax treaties.
An entity can obtain the benefits under New Zealand tax treaties if it is resident in New Zealand in the sense that the word �residence� is used in tax treaties. For most treaties an entity is resident in New Zealand if it is "liable to tax" in New Zealand by reason of residence, domicile or other grounds. The is the residency test under the 1977 OECD Model, Article 4(1), and most New Zealand treaties follow that pattern. For New Zealand purposes, it is normally the trustee who must be liable to tax, rather than the trust.
While the trustee is not liable for taxation on foreign-sourced income, it remains liable to tax in New Zealand on, for example, New Zealand-sourced income. Thus, there is a strong argument that the trustee is resident in New Zealand and is thus entitled to the benefits under most New Zealand taxation treaties.
Consequently the New Zealand offshore trust is entitled to the benefits of double taxation treaties but not taxed in New Zealand. As all treaties are not identical professional advice must be obtained.
New Zealand Offshore Trusts Limited can assist in ensuring that the New Zealand trust can avail itself of the advantages of a particular tax treaty (for example reduced withholding tax, and no source country taxation on business income without a permanent establishment).
Most New Zealand tax treaties provide for a limitation or elimination of foreign withholding taxes on dividends, interest or royalties. However, to obtain these benefits it must be established that the New Zealand resident trustee is the beneficial owner of the dividends, interest or royalties.
There are strong arguments for a number of New Zealand's tax treaties that a trustee of a discretionary Foreign Trust can be treated as the beneficial owner of the dividends, interest or royalties, and as such can obtain the benefit of reduced withholding rates under tax treaties.
A number of New Zealand tax treaties prevent the proceeds of alienation of property being taxed in both jurisdictions. For example, where a New Zealand Foreign Trust disposes of eligible property in the United Kingdom, the capital gain on the sale may not be subject to tax in the United Kingdom.
The capital gain will also not be subject to New Zealand tax as New Zealand generally does not tax capital gains. New Zealand would not tax the trustee if the gains are foreign sourced income of a Foreign Trust.
No New Zealand taxes are paid on offshore income of a Foreign Trust which is trustee income or allocated to overseas beneficiaries.
3. DTA's concerning Companies
Double taxation agreements between foreign countries may be relevant in determining whether a company is liable to income tax by virtue of domicile, residence, place of incorporation or place of management.
For example, a company may be resident in two countries in terms of the tax legislation of those countries, and it may be liable to tax in each country by virtue of that residence. However, by virtue of a double taxation agreement between those countries the company may be treated as being resident in only one country for the purposes of the agreement and, consequently, it may be liable to tax on a residence basis only in that country. In these circumstances, the company will be treated as being resident in the country in which it is resident for the purposes of the double taxation agreement.
Where the residence of a company that is resident in New Zealand and in another country with which New Zealand has a double taxation agreement is allocated to the other country for the purposes of the agreement, the effect may be that New Zealand may not be able to tax the company on its entire income. If this is the case, a tax planning opportunity could arise whereby companies resident in New Zealand and in a country with which New Zealand has a double taxation agreement were used to accumulate income free of New Zealand tax.
To limit opportunities for this strategy to be used to defeat the CFC and foreign investment fund regimes, companies that are resident in both New Zealand and a country with which New Zealand has a double taxation agreement are treated as foreign companies where the company is treated as being resident in the other country for the purposes of the agreement and where pursuant to the agreement New Zealand's ability to tax all or part of the company's income is limited.
This would be the case, for example, if a company incorporated in New Zealand had its place of effective management in Switzerland. The company would be resident in New Zealand by virtue of the Income Tax Act. The company would also be resident in Switzerland as Swiss taxation law treats a company as being resident in Switzerland if it has its place of effective management there. For the purposes of the double taxation agreement between New Zealand and Switzerland the company would be resident in Switzerland because it has its place of effective management there: Article 4(3). The double taxation agreement would therefore operate to limit New Zealand's right to tax the income derived by the company, and the company would therefore be a foreign company for the purposes of the Income Tax Act.
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