Trusts and Double Taxation Agreements

Abstract

This paper deals with trusts that are established in New Zealand or Australia, with locally resident trustees, but having foreign settlors and foreign-source income. For purposes of source country tax, it may be relevant whether there is an agreement to minimise double taxation between New Zealand or Australia on one hand and the source country on the other hand. This question can arise in two contexts. First, if by a double tax agreement a source country grants privileges to taxpayers who are “resident” in terms of the treaty in the destination country, will the source country treat a trustee who is resident in the destination country as so “resident” for purposes of the source country’s taxation rules? Secondly, where a country agrees to reduce or eliminate withholding tax on outward-flowing passive income that is received by beneficial owners if they are resident in the jurisdiction of the treaty partner, will the source country treat a trustee for foreign beneficiaries as a “beneficial owner” in terms of the treaty?

These questions relate particularly to accumulation trusts, the subject of this paper. Where trusts do not accumulate, but distribute income as it arises, most jurisdictions that recognize the concept of the trust treat the beneficiary as the taxpayer, not the trustee. That is so in respect of both fixed and discretionary trusts. As a result, in the context of distributing trusts, because the beneficiary is the taxpayer it is the residence of the beneficiary that matters, not the residence of the trustee.

Keywords: Income Tax, Trusts, Trust Law, Double Taxation Agreements, Accumulation Trusts, Jurisdiction

JEL Classification: K33, K34