New Zealand Trusts & PIE Funds (U.S. Tax Guide & IRS Reporting) - Golding & Golding

New Zealand Trusts & PIE Funds (U.S. Tax Guide & IRS Reporting) – Golding & Golding

New Zealand Trusts & PIE Funds (U.S. Tax Guide & IRS Reporting)

When it comes to New Zealand and the United States, there are two common (and complex) issues which taxpayers need to beware of when filing their US tax return, FBAR, FATCA Reporting and other informational returns.

The first issue involves the U.S. taxation and reporting reporting a New Zealand Trust; the second issue is U.S. taxation and reporting PIE Funds.

Issue 1: New Zealand Trusts

A New Zealand Trust is a common (non-complex) planning tool in New Zealand. The purpose of the trust is to coordinate assets, and hold property — including certain income and investments.

While the reporting is relatively non-complex in New Zealand, the impact on a U.S. Tax Return can be daunting.

This is compounded when the client also has investments in PIE funds., which can have an impact on Passive Foreign Investment Company reporting (aka PFIC).

New Zealand Trusts are Common

In New Zealand, trusts are very common. Oftentimes, when a client approaches us from New Zealand — they will have a New Zealand Trust in place. The trust will usually include their personal residential property, in addition to any rental properties and other income being generated from passive investments which are being held in the trust.

Unlike other foreign trusts that are used to hid income or assets, the New Zealand trust is not tax-exempt. In other words, taxes are being paid one way or another on the income that is being generated from and/or flowing through the trust (depending on who it is being attributed to.)

Thus, while it may take some complex tax planning and analysis to take apart the trust in order to determine how to apply foreign tax credits and reporting for U.S. purposes – the there are usually substantial tax credits available.

Alternatively, when a person approaches us from a “Tax Haven” location and has foreign trust in place – the analysis is different.

With Foreign Trusts in tax havens, there are more complex issues involving the flow (or lack of flow) of income to and from the trusts, income assigning, tax liabilities, etc.  which can paint a much more complicated scenario in terms of getting into compliance.

FBAR for a New Zealand Trust

What it comes to a New Zealand trust, even if the foreign account is in the name of the trust, it still must be reported annually on the FBAR, when the aggregate total of foreign accounts exceeds $10,000 dollars USD on any given day of the year.

In other words, just because the accounts are being held in the Trust Name instead of your individual name — does not mean you can avoid reporting.

Form 8938 for a New Zealand Trust

Under most circumstances, you will be able to report a foreign trust on a Form 3520-A instead of having to file a form 8938 for the trust (sometimes duplicate reporting is beneficial).

This depends on the specific facts and circumstances of your situation, but usually you do not have to file both a form 8938 and 3520 for the same asset/trust.

In addition, you may have to file a form 3520 as well depending on whether or not received any trust distributions from the trust.

Issue 2: PIE Funds (Portfolio Investment Entities)

PIE funds are also very popular and in New Zealand.

The reason why the PIE Fund investment is popular, is because of the substantial returns and tax savings the plan can provide. For example, as provided by the Kiwibank website:

The maximum tax rate on interest income on all PIE investments is 28%, even if your regular tax rate is higher.

When you sign up for a PIE investment, make sure to select the correct Prescribed Investor Rate (PIR). If you choose a PIR that is too low, you may end up being taxed at your normal marginal tax rate.

If you choose a PIR that is too high, you won’t be able to get a refund of the additional tax. Use the calculator below to work out your correct PIR, and to help decide if a PIE product is right for you.

Prescribed Investor Rate (PIR)

A prescribed Investor Rate can be complicated, but at its core, it is the rate of return selected for the investment.

In determining which PIR you qualify for, the investor goes through a series of analyses on issues including:

  • Whether the person is a New Zealand Tax Resident
  • Current income levels
  • Taxable income vs. Taxable Income + PIE Income
  • Individual vs. Business vs. Charity

Important of PIE Reporting

The reason why it is important understand how the PIE Fund works, is because under most circumstances when a New Zealand person has a PIE Fund (even if the fund was purchased before the investor became a US person) they may end up with some significant tax liability.

That is because under many circumstances, the PIE Fund is similar to a foreign mutual/equity/investment fund.

And, as you may or may not be aware, foreign mutual funds are almost always considered passive foreign investment companies (PFIC)

PIE Funds and PFIC Status

If a person has a PFIC, then there is a much more complicated tax analysis and reporting that must be performed. Specifically, it will be important to note whether there are any distributions, excess distributions, ‘rollovers’ (or equivalent) and if so, for how much, which investments, and which years.

With that said, depending on when you learned about your investment being a PFIC, you may qualify for certain elections such as a MTM or QEF.

New Zealand and U.S. Tax Law

With the implementation of FATCA (and the signing of the FATCA Agreement by New Zealand) the U.S. government is taking a deeper interest in ensuring reporting and disclosure compliance of individuals and businesses involving New Zealand.

Specifically as to New Zealand, with the recent FATCA agreement signing (2014) along with the previously executed Income Tax Treaty, it appears New Zealand has every intention of reporting taxpayers to the U.S. Government and IRS.

U.S. Tax Treaty with New Zealand

United States and New Zealand have an income tax treaty in place. The main purpose of the tax treatment is to ensure proper tax treatment of monies earned by US citizens,New Zealand citizens, expats and residents of each other’s country. When a tax treaty is in place, it will usually provide for reduced taxes on passive income, the elimination of certain taxes such as foreign interest income earned by residents of the other country, and the prevention of double taxation.

A copy of the U.S. and New Zealand Tax Treaty.

Worldwide Income

The requirement to file U.S. tax returns (unless a person is otherwise exempted or excluded) is a requirement that comes along with being a US citizen and/or legal permanent resident. Under U.S. tax law, the United States taxes U.S. taxpayers on their worldwide income.

That means that even if you are a U.S. Expat and earn the money outside of the United States (Whether you are a resident of the U.S or not), you are required to file a U.S. tax return, report the income, and usually pay tax on the money (Unless the Foreign Tax Credit or Foreign Earned Income Exclusion applies).

New Zealand and FATCA

FATCA is the Foreign Account Tax Compliance Act. It is a global law developed by the United States for the purpose of cracking down on international tax fraud in offshore tax evasion. More than 110 countries have agreed to enforce FATCA and many thousands of foreign financial institutions have agreed to report US account holders to the United States. For more information on FATCA, Click Here.

New Zealand is just the latest in the recent group of foreign countries who have relented and signed a FATCA Agreement.

As a result of the signing of this agreement, the window of opportunity to get into compliance before it is too late is closing fast. If a Foreign Financial Institution reports your information to the United States and you are audited or examined before you have an opportunity to get into compliance, penalties can be very steep…reaching upwards of 100% value of your foreign account.

Foreign Account Reporting – Bank, Investment & Retirement

There is a lot of misinformation and confusion online regarding requirements report foreign bank accounts, foreign retirement accounts, foreign investment accounts and the interplay between foreign account reporting for individuals and FATCA.


FBAR (report of foreign bank and financial account) and FATCA are two acronyms that are used synonymously, but they are different.

FBAR (Treasury Department Form FinCEN 114)

The FBAR aka FinCEN 114 is a form, which is required to be filed by any US taxpayer who has an annual aggregate total of more than $10,000 overseas. It does not matter whether the money is in one bank account or scattered over numerous bank accounts; moreover, it does not matter if your account has $10,000 in it – it is important to remember that the threshold requirement is more than $10,000 in total of all your foreign accounts.

*Whether or not a Country has entered into a FATCA agreement has no bearing on whether you as an individual or business are required to report your foreign accounts.

The following is a brief summary of FBAR Reporting, in general:

If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance.

There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOJ) filing initiatives, and FATCA (Foreign Account Tax Compliance Act). Filing FBARs and ensuring compliance with IRS International Tax Laws, Rules, and Regulations is extremely important for anyone, or any business that maintains:

  • Foreign Bank Accounts
  • Foreign Savings Accounts
  • Foreign Investment Accounts
  • Foreign Securities Accounts
  • Foreign Mutual Funds
  • Foreign Trusts
  • Foreign Retirement Plans
  • Foreign Business and/or Corporate Accounts
  • Foreign Life Insurance Policies 
  • Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
  • Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
  • FATCA (IRS Form 8938)

As described above, the goal of FATCA is to reduce offshore tax fraud and evasion. Like the FBAR, whether or not a foreign country has entered into a FATCA Agreement has no bearing on whether a FATCA form 8938 has to be filed. While there are many aspects and facets to FATCA, for individual taxpayers the main issue is form 8938. To learn more about the FATCA Form 8938, please Click Here.

Unlike the FBAR that has been unwavering threshold for filing, the threshold requirements for an 8938 vary, and are based on whether a person is married or single and/or whether they reside in the United States or outside of the United States

Estate Tax Treaty

The United States and New Zealand do not yet have an Estate Tax Treaty in place. Therefore, if you are a citizen or resident of Country and/or the United States and have assets in one or both countries is important to speak with an experienced international estate planning attorney to determine what potential tax liabilities there may be.

Foreign Insurance – U.S. Tax

Foreign life insurance is a source of confusion for many individuals – rightly so, since the IRS has been unclear regarding the reporting requirements. Essentially, if the foreign life insurance policy has a surrender value, then it must be reported on an FBAR and/or 8938 (if the individual otherwise meets the threshold requirements).

In addition, if the insurance policy is a hybrid policy/annuity that generates current income such as interest, bonus or dividends than that income must be reported as well. It generally does not matter if the income is not actually distributed and/or whether you paid foreign tax on the earnings already.

Common Corporate Structures – De Facto

The United States has very strict rules when it comes to foreign corporations. In order to circumvent the very comprehensive reporting requirements necessary to get into tax compliance for foreign corporations, the IRS has laws in place to allow “disregarding of the entity.”

On a very basic level what that means is that if you have an entity such as an LLC, you may be able to disregard the entity for tax purposes. Thus, while you still have LLC protection for your business (if for example it was sued), you do not have to go through the rigorous reporting requirements of the LLC as if it was a corporation. Rather, you can simply disregard the entity and report all of the income, taxes, deductions etc. directly on your 1040 tax return form/schedule C.

When it comes to foreign businesses, certain businesses must file in the United States as a corporation. In other words, even if it is a one-person business that may seem similar to a U.S. single member LLC (SMLLC) – which would otherwise qualify for being disregarded – the IRS will not allow certain for business structures to be disregarded.

At the current time, Thailand is listed in IRC (Internal Revenue Code) as having a De Facto Corporate Status for all “Limited Companies.

What Can You Do?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe.

Golding & Golding, A PLC

We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.