New Zealand Employee Benefit Trusts for Corporations Based in the Emerging Markets
Contributed by Henry Brandts-Giesen TEP, Helmores Solicitors, New Zealand
21 October, 2009
The Employee Benefit Trust ("EBT") concept has been used for a number of years to provide benefits to company executives in a manner that can be tax efficient and otherwise beneficial for both the employer and the employee. This form of remuneration reward is often utilised by profitable companies closely controlled by a small number of shareholders. The aim is to make commercially attractive payments to highly valued employees ("Key Executives") to facilitate their recruitment and provide for their ongoing motivation, remuneration and retention.
Historically, companies in the United Kingdom and Europe have established EBTs with trustees resident in jurisdictions such as Jersey, Guernsey and the Isle of Man to establish and administer such arrangements.
Nowadays there is an emerging new world order as year-on-year economic growth in the developing BRIC economies (Brazil, Russia, India and China) far exceeds that of the "old world". Forward thinking companies within these regions are increasingly looking for innovative solutions to their recruitment, retention and remuneration systems.
New Zealand Solutions
New Zealand ("NZ") is well situated to companies operating in the major economies of China, Japan, India, Taiwan, South Korea, Singapore and Indonesia and also offers many opportunities for Latin American and European companies who, in some cases, are constrained from using the "offshore" finance centres due to "blacklisting" by central governments.
NZ is relatively proximate in time and distance to some of the major emerging markets and is increasingly forming an integral link in cross-border wealth management solutions for high net worth individuals and their families as well as the companies by whom they are employed. This is largely due to the tax neutrality of "foreign" trusts and limited partnerships together with NZ's economic and political stability.
NZ is a respected OECD and FATF member jurisdiction with a solid commercial, professional and judicial framework and operates under a responsible anti-money laundering legislative framework.
Types of EBT
The establishment and constitution of an EBT will be unique to its circumstances and EBTs are as many and varied as the companies which settle them and the Key Executives who benefit from them. There are a number of different ways in which the company ("Company") may indirectly remunerate its Key Executives through an EBT structure including:
- awarding shares in the Company;
- awarding an option to purchase shares in the Company at a discount:
- awarding a cash bonus; and
- making cash loans.
The General Process
The general process may include the following steps:
- The Trustee enters into formal discussions with the Company and its tax and legal advisors to assess the viability of an EBT. An EBT must be tailored for the specific Company and its Key Executives and independent tax and legal advice taken in all relevant jurisdictions.
- The Company settles the EBT by the transfer of assets (such as cash or shares) to the Trustee to be held upon the trusts, powers and provisions set out in a specialised EBT trust deed under which the Key Executives and their families are beneficiaries.
- From time to time, a committee appointed by the Company ("Remuneration Committee") issues binding directions to the Trustee to make remunerative awards (usually in one of the forms outlined above) to Key Executives.
- The Trustee then creates discretionary sub-trusts in favour of Key Executives and transfers the remunerative awards to the relevant sub-trusts.
- According to the ongoing recommendations of the Remuneration Committee further remunerative awards may be provided by the Trustee to the Key Executives from time to time.
- In the meantime, the sub-trusts are administered by the Trustee for the benefit of the respective Key Executives and distributions may be made to them or their family members as appropriate.
One potential benefit to be gained from using an EBT is mitigation of personal income tax liability arising to the Key Executives. This may allow the Company to maximise the net remuneration package that it can provide to Key Executives which in turn may reduce the gross remuneration package that it is required to provide to such Key Executives. As a result this may assist the Company to retain the services of Key Executives over the long term in a manner which is also cost efficient to the Company.
Of course any tax advantages will depend on the income attribution and other tax laws of the jurisdiction to which the Company and the Key Executives are subject. However, by utilising a Trustee resident in an appropriate jurisdiction at the very least double taxation should be avoidable.
However, there are often other, more significant, benefits including:
- creating an investment nest egg from which Key Executives and future generations can benefit;
- avoiding forced heirship rules under applicable laws of residence or domicile which may constrain the devolution of family wealth;
- providing a safe haven against political, economic and social uncertainty;
- pre-migration or retirement planning;
- facilitating the orderly distribution of family wealth upon the death of Key Executives;
- protecting assets from claimants in business and family disputes; and
- confidentiality and legitimate protection from disclosure of personal or family wealth.
Taxation of Trusts in New Zealand
Where the settlor of a trust is resident outside NZ then a "foreign" trust will be exempt from assessment in respect of NZ tax on income and capital gains arising outside NZ. For practical purposes, therefore, the Trustee may make distributions out of a trust fund established in NZ without any withholding or deduction for NZ tax. There are no capital gains (except in limited circumstances), inheritance or wealth taxes levied in NZ nor is there any stamp duty, value added tax or equivalent forms of indirect taxation charged on the creation or transfer of assets to a trust. No gift duty is payable in NZ on the transfer of assets to an NZ trust by a non-resident of NZ.
The Trustee must be a "qualifying resident foreign trustee" and at least one director a member of, and therefore regulated by, the New Zealand Law Society or the Institute of Chartered Accountants. NZ trust law requires trustees to observe high standards of conduct.
Therefore, an EBT which is settled in NZ by a company resident in say China with an NZ resident trustee and which only receives income from China (or anywhere else other than NZ) will not be subject to tax in NZ.
Basic Structure Illustrated
Henry Brandts-Giesen TEP
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