Let’s talk about tax.
Or more particularly let’s talk about tax residence for companies and trusts.
Following Mr Thiel’s post a reader asked about the non- resident purchaser stats that LINZ produces. And so I wrote a post on that. I really did. But as I was going through it it became clear to me that the LINZ stuff was actually super hard. Even for you dear readers. And – given I hadn’t taken yet taken you through the joys of tax residence for companies – super hard was actually super impossible.
So dear readers today you get company residence. And hang in there coz next week you get a discussion of the LINZ data where I try to clear the smoke and mirrors that is those stats. But that is next week. So back to tax residence and companies.
Ok now companies have separate legal personalities and so they can contract and do stuff independent of its shareholders. And the total wheeze is that if the company fails shareholders are not liable for its debts if their capital is fully paid. They do lose the dosh they put in as capital and of course if that was spent on deductible expenses and it is a closely held company those losses can be offset against other taxable income. But you know that already so you won’t get any more on that from me today.
So back to residence. As a company is its ‘own person’ the concepts of prescence or connections with New Zealand used for actual people make no sense with them. They need their own bespoke tests. And in New Zealand they are:
- Head Office
- Directors control
- High level management
If anyone of those is in New Zealand then game on – New Zealand resident – taxable on worldwide income. Or at least before a treaty comes in.
But looking at that list and thinking about how often in tax policy the statement ‘a company is a vehicle for its shareholders’ is used. What is not on that list?
Well done – shareholding. A company could have 100% foreign shareholders – hit one or all of those tests and still be prima facie taxable on its worldwide income in New Zealand. The opposite also applies. A company could have 100% New Zealand shareholders and meet none of those tests. It then would be non-resident and so not taxable on its worldwide income. Now because that is just too cute there are other – controlled foreign company – rules that then come in. But they are for another day.
So key message – residence does not equal shareholding or beneficial ownership. Now in practice there will be significant overlap coz NZ companies are really for NZ resident shareholders. But won’t be a complete set.
And joy of joys other countries have similar tests:
Australia – incorporation or directors control
Canada – Incorporation or directors control
China – incorporation or place of effective management
UK – incorporation or place of effective management
US – incorporation
And yes dear readers – you’ve got it – two countries could claim a company. A NZ incorporated company with effective management offshore in UK or China or Australia or Canada could be claimed by those countries too. Similarly an Australian incorporated company with NZ high level management will get claimed by both Australia and New Zealand.
And then – as with Mr Thiel – the treaty will decide who gets the rose. With companies the test in the treaty is usually the place where the high level decisions aka place of effective management is. So as with Mr Thiel there is domestic law tax residence and residence for the purpose of a treaty. And the music finally stops with the treaty.
Ok well done. Now that wasn’t too hard. Now let’s try trusts. In a trust is a settlor that puts in stuff; a trustee that legally owns the stuff and manages it on behalf of the beneficiaries.
For those of you who followed the foreign trusts thing you may have heard something like ‘ NZ has a settlor based system for taxing trusts’. Now that is almost right. New Zealand has a settlor based system for the taxation of distributions. The residence of the trustee, however, is the starting point for the taxation of trusts.
And the tax residence of the trustee is the tax residence of the company or individual that is the trustee. So again the residence of the trustee could be completely different from the residence of the settlor or the residence of the beneficiaries.
Now why I am labouring this potential disconnect will make more sense next week. Feel free to pre read the LINZ reports in the first link.
NZ has settlor based system for the taxation of (trust) distributions”. I thought that for a trust with non-resident trustees earning only foreign sourced income but with a NZ resident settlor, NZ taxed its undistributed (trustee) income. This is an important exception to normal residence and source principles, ie we can tax the foreign sourced income of the non-resident trustees. And we can go the NZ settlor if the non-resident trustees don’t cough. In short, we tax the worldwide undistributed (trustee) of any trust settled by a NZ resident (or using modern vernacular “youse our bitch”)
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Yes that is right. And I originally had a sentence to that effect but changed it to the more oblique ‘starting point’. It just got too complicated as this is really just a lead in post to next week.
I would argue that in practice it is the agency rules that means the settlor is liable are the real rules rather than the taxing the foreign trustee.
These rules are also not widely known as many people think with a non- complying trust they are sweet until they distribute. And in some cases they are but in other cases they are up for full taxation on the foreign income they thought they were hiding.
I feel all non- complying trusts should be disclosed as much for a recording of resident settlors foreign assets for current account purposes as for tax. But that is on the long list of potential future posts.