Image by Bernard Spragg. NZ CC 2.0 via Flickr

Since 1988, the New Zealand income tax law allowed foreigners to use trusts established in New Zealand (referred to as “foreign trusts”) to avoid or evade the tax they would otherwise have had to pay in their home country. It would seem to have been possible, too, for foreigners to use such trusts for other illicit purposes, in particular money laundering and perhaps even financing terrorism.

A hypothetical example: from Portugal to Indonesia to New Zealand

We can explain how this worked by way of a hypothetical example. Suppose a resident of Portugal owned a forest in Indonesia, and produced income by arranging for the trees to be chopped down and sold.

The income derived from the forest would have been taxable in Indonesia, at a relatively low rate. It would also have been taxable in Portugal, at a relatively high rate. There would not have been any double tax, because the taxpayer would have been entitled to a tax credit in Portugal for the tax paid in Indonesia. In Portugal, the taxpayer would have paid the difference between the Portuguese rate of tax and the Indonesian rate of tax. The end result would have been that the taxpayer’s overall rate of tax would have been the same as the applicable Portuguese tax rate.

Our Portuguese investor could, however, substantially reduce their liability to tax by using a trust set up in New Zealand. This was typically arranged by a law firm in New Zealand. The firm incorporated a company (let us call it Abracadabra Ltd), owned by itself. The Portuguese resident then transferred the forest in Indonesia to Abracadabra Ltd to hold on trust for himself (or herself) and for members of his family. The law firm provided whatever was required in the way of administering the trust in accordance with the wishes of the Portuguese settlor.

The result was that the profits derived from the forest were still taxable in Indonesia, as before. But no tax was payable in Portugal because the income was no longer the income of anyone resident in Portugal. Rather, it was the income of Abracadabra Ltd; and Abracadabra Ltd was resident in New Zealand, not Portugal.

And no tax was payable in New Zealand because of an exemption enacted in 1988. A person resident in New Zealand is generally taxable on his or her worldwide income. However, amendments made in 1988 (now sections CW 54 and HC 26(1) of the Income Tax Act 2007) provide that a New Zealand resident’s income is exempt from tax where:

  1. he (or she or it) is a trustee (and receives the income in that capacity); and
  2. the settlor of the trust is not resident in New Zealand; and
  3. the income is derived from an asset situated somewhere other than New Zealand; and
  4. the beneficiaries are not resident in New Zealand.

In this hypothetical example, these criteria are satisfied because:

  1. Abracadabra Ltd held the forest as a trustee (and received the income in that capacity); and
  2. the settlor was resident in Portugal, not New Zealand; and
  3. the forest was situated in Indonesia, not New Zealand; and
  4. the beneficiaries were resident in Portugal, not New Zealand.

If Abracadabra Ltd simply distributed the income to the beneficiaries in Portugal, they would have been liable to tax in Portugal. So that is not what happened. Rather, Abracadabra Ltd would get the money to the beneficiaries in some other way. For example, it might have accumulated the income for a few years and then distributed it to the beneficiaries. In that way, it might have counted as a non-taxable capital distribution, rather than as taxable income. Thus, the relatively low amount of tax paid in Indonesia would have constituted the whole of the burden.

From Portugal’s point of view, New Zealand had functioned as a tax haven. Quite apart from avoidance, there was also scope for evasion. That is, Abracadabra Ltd might have distributed the funds to the beneficiary in some way unlikely to be detected by the Portuguese revenue authority (for example, by paying them into a bank account in a country other than Portugal); and the beneficiary might have disregarded his obligation to include the receipt in his Portuguese tax return. Again, from Portugal’s point of view, New Zealand had functioned as a tax haven.

No disclosure obligations for NZ foreign trusts

The NZ tax exemption for foreign trusts was made more attractive because their disclosure obligations were so minimal as to be meaningless. The trustee of a foreign trust was obliged to inform the NZ Inland Revenue Department (the IRD) of the name of the trust – but that was all.

For example, Abracadabra Ltd would have been obliged to disclose that it was the trustee of a trust called the Abracadabra trust – but it was not obliged to disclose who the settlor was, what country he lived in, who the beneficiaries were, what countries they lived in, what assets were owned by the trust, how much income they produced, or to whom it was distributed.

Moreover, the disclosure requirement was generally a one-off obligation: once the trustee had made its initial disclosure to the IRD, there was no requirement for annual reporting or any other subsequent reporting. Foreign trusts seldom if ever derived income from New Zealand; as they are exempt from New Zealand tax on income derived from outside New Zealand, they are seldom, if ever, obliged to file a NZ tax return.

Panama Papers, Mourinho and Jho Low

The fact that New Zealand could be used as a tax haven was well known among the country’s tax professionals, but until recently it attracted little public interest. Since mid-2016, however, information as to a small number of these trusts has come into the public domain.

The Panama Papers revealed that the foreigners setting up trusts in New Zealand included a prominent Maltese politician (Konrad Mizzi, the energy minister) and a Mexican construction tycoon (Juan Armando Hinojosa). Then it came to light that Jose Mourinho, the manager of the Manchester United Football Club, had a trust in New Zealand.

The most instructive instance, however, is that of Jho Low, a 35-year old Malaysian playboy billionaire. Low and his family consulted the Rothschild bank, which had set up several trusts for them in New Zealand. These trusts held assets in the United States worth US$265 million (a private jet, a hotel in Beverley Hills and other real estate in New York and Los Angeles) and other assets (the value of which has not been disclosed) in Singapore, Hong Kong and the United Kingdom. The US government had commenced proceedings in California, seeking forfeiture of the trusts’ US assets, on the ground that they were “traceable to an international conspiracy…to launder money misappropriated from 1Malaysia Development Berhad (1MDB), a strategic investment and development company wholly owned by the Government of Malaysia” and were consequently “derived from violations of United States law, including money laundering offences”: see Low Hock v Rothschild Trust (Schweiz) AG [2017] NZHC 25.

A register of foreign trusts: Problem solved?

As of December 2016, there were about 11,750 foreign trusts in New Zealand. In the wake of the publicity given to the Panama Papers, the NZ  government initially denied that there was a problem but within a fortnight it changed course and engaged a distinguished Wellington accountant, John Shewan, to review the law.

Shewan recommended that the IRD should maintain a register of foreign trusts; that foreign trusts should be required to register; and that the disclosure requirements should be beefed up. The trustee of a foreign trust should be required, on the setting up of the trust, to supply to the IRD a copy of the trust deed and the particulars of the settlor and the beneficiaries; and the trustee should also be required, every year, to supply to the IRD a copy of the trust’s accounts.

The government accepted Shewan’s recommendations and legislation giving effect to them was enacted on 21 February 2017. In accordance with section 59C of the Tax Administration Act 1994, the deadline for existing foreign trusts to register and to comply with the beefed up disclosure rules was 30 June 2017.

When the 30 June deadline expired, fewer than 3,000 of the NZ foreign trusts had registered. The other 9,000 or so had presumably either been wound up or moved to friendlier jurisdictions, such as Hong Kong. Such a move would ordinarily be easy to effect by arranging for the New Zealand-resident trustee to resign as trustee and transfer the trust’s assets to a new trustee (typically a company incorporated for the purpose) in the new jurisdiction. It seems reasonable to suppose that the trust deed would usually provide for the appointment of a new trustee in this way.

It would seem reasonable to infer that the 3,000 trusts that have registered are not being used to avoid or evade tax in any other country, or to conceal the proceeds of crime – though they might be being used for other dubious or unlawful purposes, such as concealing assets from a spouse, creditors, or other claimants. It also seems reasonable to infer, however, that at least some of the other 9,000 trusts that have not registered were being used for tax avoidance or evasion, or perhaps concealing the proceeds of crime.

It appears that the legislation implementing Shewan’s recommendations has solved the problem. That is, foreigners are no longer able to use trusts established in New Zealand to avoid or evade the tax they would otherwise have to pay in their home jurisdiction – or, at least, it is much harder for them to do so. The New Zealand government can hold its head up high and maintain plausibly that the country is no longer a tax haven (at least as far as foreign trusts are concerned).

On the other hand, the government is effectively on notice that it seems likely that, in the period from 1988 to 2016, several thousand foreigners established trusts in New Zealand for some illicit purpose. Whether it will do anything about those trusts or the people behind them remains to be seen.


This is an abbreviated version of an article available on SSRN at: Professor Michael Littlewood’s students have recently put together a book celebrating his first ten years back in the Faculty of Law at the University of Auckland.

Podcast: Using New Zealand Trusts to Escape Other Countries’ Taxes

This article has 1 comment

  1. The numbers tell a great story.
    For an interesting view from the antipodes, see JAC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2016] 1 WLR 160; [2015] EWCA Civ 139 [58]-[59]. The case concerned a freezing order against a Russian banker who was a beneficiary in a brace of trusts established in New Zealand with substantial UK assets. The Court of Appeal revealed at [27] that the corporate trustee’s registered address was that of a solicitors’ firm, ‘apparently, a “three-bedroom villa” in a suburb of Auckland’. Why this detail so piqued the Court’s interest is unstated, but it is followed by a recital of the Russian Deposit Insurance Agency’s belief that the trust was ‘simply a façade … to conceal Mr Pugachev’s continued ownership and control of the Bank.’ The freezing order was upheld and the litigation continues.
    On a more optimistic and prospective note, the New Zealand government’s response to recommendation 5.2 of the BEPS Action 2 Report suggests that action against fiscal abuse of New Zealand foreign trusts may go beyond the reporting regime to deemed trust residence if trust income would otherwise be taxable nowhere. See English/Woodhouse, Addressing Hybrid Mismatch Arrangements: A Government Discussion Document (IRD, September, 2016 [7.28], [7.29]; Base erosion and profit shifting – A summary of the key policy decisions

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