A New Zealand trust holding European assets is a structure that works well in its own jurisdiction and is regularly misread outside it. The misreading runs in both directions. Advisers in Europe sometimes treat it as an offshore vehicle of the kind their administration is trained to distrust. Settlors sometimes treat it as a jurisdictional answer to a question their own state of residence will decide for itself.
Neither view survives contact with the mechanics. New Zealand taxes trusts on a settlor basis rather than a residence of trustee basis, which produces results that surprise a European reader on first reading, and it operates a registration and disclosure regime for the trusts that fall outside its charge. A European authority looking at the same trust will apply its own attribution rules, which will not be the same ones.
What New Zealand taxes, and at what rate
The starting point is the trustee income charge. Inland Revenue sets out the trustee income tax rates applying to trusts and estates from 1 April 2024 for income not distributed to beneficiaries. Where the trust earns 10,000 New Zealand dollars or less in a tax year, measured after annual deductions and before losses brought forward, the rate is 33 per cent. Above that figure the rate is 39 per cent. For earlier years, this income was taxed at a flat 33 per cent. The threshold is not an administrative concession but a defined term, and the de minimis trust definition in section HC 40 of the Income Tax Act 2007, inserted with effect from 1 April 2024, measures it by the trustee’s net income for the year excluding amounts treated as trustee income under the minor beneficiary and close company beneficiary rules.
Two exceptions to the 39 per cent rate are worth noting because they change the answer for particular families rather than particular structures. Where an estate continues to earn income while it is being wound up, that income is taxed at 33 per cent for the tax year in which the person died and for the following three years, after which it is taxed as if the estate were a trust. And a trust settled to care for disabled beneficiaries pays at 33 per cent regardless of the amount it earns, with the qualifying support payments enumerated by Inland Revenue.
The rate runs the other way for two categories of distribution. Distributions falling under the minor beneficiary rules and under the corporate beneficiary rules are taxed at 39 per cent. A settlement on a trust is not income for tax purposes.
The settlor test, and the date that anchors it
The concept a European reader has to absorb is that New Zealand classifies a trust by reference to its settlors rather than by reference to where its trustees sit. Inland Revenue defines a foreign exemption trust as one for which no complying trust election is effective for the year and where either of two conditions applies: no settlor of the trust has been resident in New Zealand at any time from the later of 17 December 1987 or the date on which a settlement was first made on the trust, or the trustee uses or has previously used the foreign sourced income exemption under section HC 26 of the Income Tax Act 2007, which exempts foreign-sourced amounts derived by resident trustees.
Two consequences follow that European advisers regularly miss. The first is that a New Zealand resident trustee does not, by itself, bring the trust’s foreign sourced income into the New Zealand charge. The second is that the arrival of a New Zealand resident settlor changes the classification, and it can happen without any decision being taken about the trust. A family member who moves to Auckland and later adds value to the trust has done something with consequences.
That is why the settlor definition, and the concept of a settlement, deserve attention before rather than after. Section HC 27 of the Income Tax Act 2007, which asks who is a settlor, makes a settlor of any person who transfers value to the trust, for the benefit of the trust, or on the terms of the trust, and the terms on which the value moves are not the test. The transfer can be made directly or indirectly and by one transaction or a number of connected transactions. Providing services to the trust for less than market value, where they are more than incidental to its operation, is enough on its own, and so is providing financial assistance with an obligation to pay on demand where the right to demand is not exercised or is deferred. Somebody can therefore become a settlor without anyone having described what they did as a settlement.
Registration is not optional, and the filings name people
For the foreign sourced income exemption to be available, Inland Revenue requires the contact trustee to register the trust and to comply with ongoing disclosure and annual return processes. Registration can be applied for at the establishment date where the trust starts with a New Zealand resident trustee, at the appointment of a New Zealand resident trustee, or at the income tax return due date for the return for which a trustee meets the requirements to be a foreign exemption trust. There is additional time where all trustees are natural persons who are not professional trustees and are being appointed as trustees of their first foreign trust.
The statutory basis is section 59B of the Tax Administration Act 1994, on registration and disclosure by a foreign exemption trust, with the time limits in section 59C. What that section asks for is the part European advisers should read twice, because it reaches past the settlors. The contact trustee must give the name, address, jurisdiction of tax residence and taxpayer identification number of each settlor, of each trustee, of each beneficiary with a fixed interest, and of every person holding a power to appoint or dismiss a trustee, to amend the trust deed, or to add or remove a beneficiary, together with every person who can control the exercise of such a power or control a trustee in the administration of the trust.
The fees are modest and the consequence of ignoring them is not. Registration carries a fee of 270 New Zealand dollars including goods and services tax, which is not payable where all of the trustees are natural persons and none of them is a professional trustee, and the annual return carries a fee of 50 New Zealand dollars including tax. Inland Revenue states the sanction plainly, which is that non-compliance with the disclosure rules can cost the trustee access to the foreign sourced income exemption for the relevant income year and can also attract a civil penalty of up to 1,000 New Zealand dollars. Section HC 26 makes the same point as a matter of statute, because registration at the time the foreign sourced amount is derived is written into the conditions of the exemption rather than sitting beside them.
The annual cycle that follows is the point European advisers should register. A registered New Zealand foreign trust files an annual return with its financial statements, and section 59D of the Tax Administration Act 1994, on the annual return for a foreign exemption trust, sets out what goes into it: the date, amount and nature of each settlement made in the return year and the identifying details of the settlor who made it, the date, amount and nature of each distribution and the identifying details of the beneficiary who received it, and details of every addition or alteration to a particular given earlier. Records are governed by section 22 of the same Act, on the keeping of business and other records, which requires a resident trustee of a foreign trust to keep them in English or te reo Māori and at a place in New Zealand, unless the Commissioner authorises another language or another place, and to retain them for at least seven years.
The structure is therefore transparent to the New Zealand authority by design, and the information it holds is exchangeable. A structure that is documented, registered and reported is not a structure that hides anything, and that is the correct way to present it to a European inspector. The presentation problem arises where the family has not been told what is being filed on its behalf and is surprised when the same names appear in a European enquiry.
What a European authority will actually ask
A European tax authority looking at a New Zealand trust does not begin with New Zealand law. It begins with its own attribution rules, and the questions those rules generate are the ones set out below.
It will want to know who provided the assets, when, and whether that person was resident in its territory at the time. It will want to know who can decide what happens to the assets, and whether anyone resident there holds a power of appointment, revocation or veto. It will ask who receives distributions and whether any of the recipients are resident there. It will test whether the trust is irrevocable in substance or only in form, where it is administered, and whether a resident of that state in practice directs the trustee.
The answers determine which of several possible treatments applies, among them attribution of the income to the settlor, taxation of beneficiaries on distributions received, and treatment of the trust as transparent. The classification of the vehicle under New Zealand law does not decide the European answer, and a memorandum that only sets out the New Zealand position answers half the question.
The Netherlands shows what the first of those treatments looks like once it is written down. Article 2.14a of the Wet inkomstenbelasting 2001, which attributes a separated private fund to the person who separated it, treats the assets and liabilities and the income and expenditure of an afgezonderd particulier vermogen as belonging to the person who set that property aside, whether the separation was made during life or on death. The rule that catches families sits in the second and third sentences of the first paragraph rather than in a paragraph of its own. Once the person who separated the property has died, the same assets and income are attributed to the heirs, each in the same proportion as their entitlement under the succession, and on the death of an heir the attribution passes to that heir’s own heirs on the same basis. The Belastingdienst states the same position for the return, namely that the fund is attributed to the person who contributed the property and, after that person’s death, to the heirs, each for their share. The sixth paragraph lets an heir out only where it is shown that neither that heir nor their partner is a beneficiary of the fund and that neither of them can become one, and the fourth paragraph pulls a disinherited person back in where that person, their partner or a relative in the direct line is in fact a beneficiary.
The exception that advisers reach for is narrower than its reputation. The seventh paragraph takes out of attribution only those assets, liabilities, income and expenditure shown to belong to the capital or the profit of an enterprise carried on by the separated private fund, and only so far as it is shown that the profit of that enterprise is subject to a profit tax in the state or the states in which it is carried on. It is an exception for an enterprise, not an exception for a trust that happens to be resident somewhere that levies a corporate tax, and a trust that holds a portfolio does not acquire an enterprise by holding it.
There is a second order point here about evidence. Because these tests are about facts rather than about labels, the material that decides them is correspondence, board and trustee minutes, and the record of who was consulted before a distribution was made. Families accustomed to informal decision making produce a record that reads as though the settlor was still in charge, whatever the deed says.
The reserved powers problem
The single feature that most often converts a defensible structure into a contested one is reserved power. A trust in which the settlor retains the ability to direct investments, to replace the trustee at will, to add and remove beneficiaries, or to require distributions, is a trust in which a European authority will say the settlor never really gave anything away. The point is sharpened by the fact that those are the very powers the New Zealand registration already records by name under section 59B.
This is not a New Zealand problem. It is the same problem in every trust jurisdiction, and it is aggravated where the trust deed is generous with powers because the family asked for comfort at the outset. The comfort is bought at the price of the argument the family will need later.
The practical answer is to decide, at the drafting stage, which powers are genuinely necessary and to place the rest with a person whose independence can be demonstrated. A protector who is a professional in another jurisdiction, exercising a defined and limited power, is a different fact from a protector who is the settlor’s spouse holding an unrestricted power to remove the trustee.
Reporting on the European side
Whatever the substantive treatment, the reporting obligations in the European state of residence are separate and are the more common source of trouble. The Dutch position is again the clearest illustration, because the Belastingdienst requires the value of the fund itself to be declared and not only the amounts received from it, by the person who contributed the property, by that person’s heirs, by anyone holding a concrete right against the fund such as a right to distributions, and by the fiscal partner of a contributor. Where an obligation is framed that way it bites on holdings rather than on receipts, which is why a family that has taken nothing out can still be late.
Running alongside it is the automatic exchange, which decides who reports the trust rather than whether the family does. Under Annex I to Council Directive 2014/107/EU, which brought the common reporting standard into European law, a trust whose gross income is primarily attributable to investing, reinvesting or trading in financial assets and which is managed by a depository institution, a custodial institution, a specified insurance company or another investment entity is itself a financial institution. It then reports the holders of its equity interests, which for a trust means any person treated as a settlor or beneficiary of all or a portion of it and any other natural person exercising ultimate effective control over it, a beneficiary being anyone who has a right to a mandatory distribution or may receive a discretionary one. A trust that is not managed in that way is a passive non-financial entity, and the reporting falls instead on the financial institution that maintains its account, which reports the controlling persons. The Directive defines those, for a trust, as the settlors, the trustees, the protectors if any, the beneficiaries or classes of beneficiaries, and any other natural person exercising ultimate effective control. Either way the same names reach the state of residence, and the classification changes only who sends them.
Those domestic obligations attach to the individual, not to the trustee, and they are frequently not communicated to the family by anyone. A trustee in Auckland has no duty to work out what a beneficiary must file in the beneficiary’s own state of residence, and the family adviser who set the structure up may not have been asked to.
The consequence is a penalty exposure that is entirely avoidable and is often larger than the tax at stake. The fix is administrative: a written note, refreshed annually, of who has to report what and where, delivered to the persons who have to file rather than kept on the trustee’s file.
Where a New Zealand trust makes sense, and where it does not
Read plainly, the regime is coherent. New Zealand does not tax the foreign sourced income of a trust with no New Zealand settlor, it requires that trust to be registered and reported, and it taxes trustee income on a graduated basis where the trust is within its charge. There is nothing opaque in it.
What it does not do is answer the question that matters to a European family, which is how their own state treats the arrangement. Where the settlor and the beneficiaries are resident in a state with strong attribution rules, a New Zealand trust does not change the tax outcome and adds an administrative layer. Where the family is genuinely dispersed, where the assets are outside the settlor’s state, and where succession rather than tax is the object, it can be the right vehicle.
The test to apply before establishing one is simple to state and uncomfortable to answer. Assume the European authority learns everything, because through the exchange of information it will. Would the structure still be defensible on its own terms. If the answer depends on the information not arriving, the structure is not a structure.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.