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 states the position for 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.
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.
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. Value transferred to a trust on other than arm’s length terms can constitute a settlement even where nobody described it as one, and the person who transferred it becomes a settlor for these purposes.
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 annual cycle that follows is the point European advisers should register. A registered New Zealand foreign trust files an annual return, a schedule of settlements and distributions naming settlors and beneficiaries, and a schedule of connected persons giving details of beneficiaries receiving distributions and new settlors making settlements during the return year. Financial records must be kept in New Zealand.
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 broadly the same across the continent.
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: attribution of the income to the settlor, taxation of beneficiaries on distributions received, treatment of the trust as transparent, or in some jurisdictions treatment as a separate taxpayer with its own residence. 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.
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.
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. Most European states now require residents to report interests in foreign trusts, whether as settlor, beneficiary or holder of a power, and several require reporting of the assets held rather than only of amounts received.
Those 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 advise a beneficiary in Madrid or Milan about their local filings, 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.