A couple of days ago someone asked me how, exactly, New Zealand’s foreign trust regime allowed its clients to avoid paying tax in their home country. And I had to admit that I had absolutely no idea. But there’s a meandering article in the Australian Financial Review that touches on that very subject:
In 2013 Mossack Fonseca had been on a marketing drive, cutting its prices to build up its New Zealand office.
“Chase the money,” head office in Panama urged its New Zealand staff.
Mossack Fonseca offered two New Zealand products to its overseas clients: an NZ foreign trust, and a Look Through Company (LTC).
As long as the trust and the LTC had no income in New Zealand and had no New Zealand beneficiaries, then they paid no New Zealand tax.
But there was another advantage because technically the LTC was taxed, it’s just that the tax rate was set at zero.
One French investor who moved his holding company from Luxembourg to a New Zealand LTC knew he would pay no tax.
But New Zealand has a double-tax treaty with France, which meant that he could repatriate the profit to France where it was not taxable because it had already been “taxed” in New Zealand.
Usual disclaimer. I know absolutely nothing about foreign trusts, or tax law. Maybe there’s a totally reasonable explanation for this. But a tax rate set at zero percent sounds like a law that has been specifically designed to enable tax avoidance for offshore trusts. Does it play some other role? What’s the rationale? And when did that specific part of the law come into effect?