EscapeArtist Asset Protection
Limited Partnerships – Unlimited Possibilities
Jul 2nd, 2012
by Evgeny Orlov, Barrister – Equity Law
A quiet evolution of New Zealand’s offshore and favourable tax regime has been occurring since the introduction of the Limited Partnerships Act 2008 into law.
This relatively new vehicle has almost limitless potential to be one of the most powerful and useful tax structuring and asset protection mechanisms available in the asset protection industry.
Indeed, initially introduced to put New Zealand’s venture capital investment industry on the map, the actual applications and versatility of this structure are such that it has the potential if properly structured to legally minimise tax burdens of investment capital for the non–New Zealand investors.
Thus, whilst traditionally used by multinational corporations and investment funds, this structure can also provide wealth maximisation to the average business or family. In this article I will discuss how.
The Limited Partnership – The Essence of the Creature
The limited partnership is recognised in a number of jurisdictions such as the United States, India, some parts of Europe and Great Britain. Initially the limited partnership was designed as a way to arrange the affairs of partners in a venture and has its history set in the accounting and legal partnerships of England.
New Zealand Parliament (with Prime minister John Key at its helm – a former Merryl Lynch financier) decided to develop a mechanism which would maximise the tax benefits of a partnership with the protection of limited liability and thus conceived and then brought to birth the limited partnership.
The limited partnership has the certain advantages for those parties who are not resident in New Zealand and provided that the partnership does not do business in New Zealand and does not derive its income from New Zealand sources. Below I briefly list the main features:
There need to be at least two partners who can be either physical persons or corporations registered in any jurisdiction. The general partner is responsible for the administration of the partnership and can be sued by creditors of the partnership. Usually this is a professional corporation or a special purpose company that is established for the purpose of management. The limited partner is deemed by New Zealand law not to have the management or control of the partnership and cannot be sued for the partnership liabilities and debts. Thus, a limited partner has full protection and immunity from claim. However there is a further advantage that makes this structure unique – the limited partner not being in control or management is treated as a passive investor and thus is not deemed in control of a foreign corporation under the tax rules of most countries. This obviously has huge advantages!
The limited partner is fully protected under New Zealand’s strict Privacy Act in that his details are not made available on the public register and the Companies Office is prevented from releasing such details. That means that potential creditors and others seeking information are simply cannot obtain it.
Limited partnership’s (or LP) investments income and profits from them whether via shares, property, commodities, business ventures etc are completely income tax free because the limited partnership does not pay Income tax in New Zealand AT ALL. The partner pays tax on their profits (after deduction of their own and partnership’s expenses etc) at their own marginal rates . But if the LP’s income is sources out of New Zealand then they don’t pay the tax in New Zealand either in the jurisdiction where they are located. I.e. if the partner is a company of a zero-tax jurisdiction then zero tax is paid.
The partnership can have as many partners as it wishes and can regulate its affairs via the partnership agreement in any manner it wishes. Thus investors from different jurisdictions can group together for joint projects.
The New Zealand Limited Partnership can be perpetual and can exists as long as it remains on the register which can be forever if the partners so wish.
Uses for the Ordinary Businessman or Family
A New Zealand Limited partnership can minimise tax burden for the ordinary investor or businessman.
A lot of people say a lot of things about what they call offshore structures. on one hand there are those that wax enthusiastic about the possibilities of freedom form tax and personal freedoms. And on the other hand are the doomsayers that talk about the dangers of such structures, outflow of wealth etc.
Actually in my opinion both miss the point. Everyone including the tax departments themselves appear to be obsessed about the subject of tax avoidance and tax havens. However the subject of this article is the use of structures for investment not for tax avoidance. Tax evasion is not very clever idea because today’s banking and financial systems are getting so sophisticated that it is simply too risky and virtually impossible. However tax structuring or the structuring of one’s affairs legally and obtaining the maximum benefit from country’s tax laws is not illegal.
In fact there never has been nor ever will be anything illegal about placing your hard earned money to invest in overseas assets. Indeed Australians, English and American do it all the time via purchase of shares and funds. Further there is nothing wrong about buying overseas commodities and real estate to create portfolios for retirement. Many governments of even the highest taxation jurisdiction encourage families and businessmen to create retirement and superannuation funds to invest.
Having New Zealand Limited Partnership where the limited partner is an individual investor allows the partnership to invest in overseas assets such as shares, commodities and real estate without paying capital gains in New Zealand. And the agreement of a New Zealand limited partnership agreement can be so drafted as to take profit and distribute profit to a certain point in time – that point in time can be tailored to a time when that individual is no longer resident of that country.
Having your own intentional investment vehicle outside the jurisdiction where you reside also meets other important goals including confidentiality, the ability to retire tax free and not be taxed on worldwide income ever again after retirement, and asset protection to name a few.
Indeed most of those who make money from investing realise that it is suicidal to limit your investments to one country. Whilst the fortunes of countries change so does the value of their property, shares and currency.
And one of the easiest vehicles for doing these transactions would be a New Zealand limited partnership.
Investment Funds
The New Zealand Limited partnership is ideal as a venture capital fund. In fact, that was the original aim of its creation. Indeed if a New Zealand LP (which can have as many subscribers as it wishes) invests internationally then it pays no tax in New Zealand on investment gains. Neither do limited partners. Thus one can utilise this to pool investors funds in the same way as a PIE fund but without the securities regulations and restrictions since a limited partnership with non New Zealand subscribers (partners) is not regulated by the New Zeeland financial markets authority. The limitless possibilities of a limited partnership can include even a joint venture vehicle where partners get together for a certain project, eg the building of a hotel project or even a fund manager for listed funds.
The flexibility of the corporate vehicle, the simplicity of the laws surrounding this and the low set up cost men that the structure can also easily be utilised by a small group of businesses or individuals to do effectively what was previously thought to be the business of fund managers.
To give a simple example. It has long been believed that the only way to benefit from say the boom in real estate in Hong Kong would be to purchase a unit or share in a listed property fund. Such funds simply buy up commercial buildings and then distribute the profit/gain to the subscribers. The problem is that they take hefty management fees and often are too unwieldy to take advantage of the bargains.
There is nothing to stop say 15 individuals from forming a partnership in which they put in say 100,000 each. The 1.5 million will give them an opportunity to buy say a small commercial building in Auckland, Panama, Malta etc. They are likely to get a return if carefully selected of 10% with only a management fee paid to local real estate agent to collect the rental and their capital gain after time is tax free.
Utilising this structure [a New Zealand Limited Partnership] would allow individuals, their accountants and advisers to take charge of their international investments whilst at the same time having the buying power of pooled funds.
Combining with Trusts:
If the limited partners simultaneously gifts their income to a non resident New Zealand trust this creates even further advantages:
There are no gift duties in New Zealand. Hence, a gift of a settlor to the trust does not trigger any tax implications neither for a donor/settlor nor for a trust.
The beneficiaries of the trust can distribute the investment gains amongst themselves so as to minimise the tax exposure in their country of residency.
The funds so paid into the trust are virtually completely safe from attack by creditors of any kind whether they be spouses, creditors, the official assignee or indeed anyone trying to attack the assets of the ultimate owner of the partnership.
The addition of the non resident trust to this structure ensures maximum protection. This is how this works in practice as very simple example.
Let us say Johnny is born in England and is lucky enough to have parents who care about his financial future so they decide to create a fund for Johnny and themselves for their retirements, Johnny’s education etc. They set up New Zealand Limited Partnership in which Johnny or his company is a limited partner. The goal of this is to invest in say commercial property in New Zealand or elsewhere. According to the partnership deed the investment can only be sold say when Johnny reaches twenty one.
The property is bought from his parent’s savings for say 900,000. The income from that property and indeed all future proceeds from sale are gifted to a New Zealand Foreign Trust in which Johnny, his parents and Johnny’s future children are discretionary / final beneficiaries. This is what happens throughout the life of this vehicle as a hypothetical scenario:
Johnny’s parents get sued due to bad contract, borrow heavily to void the claim and then get made bankrupt by their bank. Their official assignee tries to arrest their share in the partnership – tough luck. The partnership is actually trustee of the trust and owns nothing. Therefore, Johnny’s parents are not in law the owners and therefore this is not their property. Under New Zealand law (unless the transfer was made to void bankruptcy or in very limited circumstances) the trust cannot be broken. Johnny and his family therefore are safe.
Johnny gets into an accident and has life saving operation for which he is not insured. The operation costs 200,000 and Johnny is sued – the official assignee tries to arrest the New Zealand property – tough luck again. Again the property belongs to the trust not to Johnny and therefore cannot be taken away. Similarly when Johnny gets married and divorced and his wife tries to take the property she cannot under New Zealand law.
In 15 years the property is worth say 3 million with compounded interest, savings of the rental of say $500,000. Johnny and his parents now wish to retire. Again simple – they move to a country which does not tax worldwide income or gives tax breaks to new immigrants (eg New Zealand, which does not tax worldwide income of new immigrants for 4 years) and then take the capital gain.
The above illustration demonstrates the benefits of utilising proper structure and planning investments in manner which will give maximum long term gains and asset protection. Indeed it is my firm belief based on experience that even a modest wage earner or small businessman can retire to a comfortable life if he uses the correct vehicle and takes the time to plan an internationally diversified investment strategy.
One of the best vehicles for offshore investment to get them to their goal is the limited partnership. I personally consider this the Ferrari of investment vehicles – have fun driving.
Editors Note: For additional information on this and similar topics, please see PremierOffshore.com
The New Zealand Finance Company – A Tax Free Offshore Banking Solution