Why the wealthy use taxation black holes in New Zealand and Panama

There will always be an army of pin-striped accountants to devise how best to ‘optimise’ multinationals’ tax exposure (read: how much, and in which country, their profits will be taxed), but the clues so far from Konrad Mizzi’s trans-continental set-up and the way he justified his historic earnings prior to becoming an MP, is that the Mizzi family is minimising a large amount of tax on their wealth.

The trickle of information form the new Labour deputy leader, who still intends retaining an offshore trust in New Zealand and company in Panama, is that his family wants to park a significant property and wealth portfolio offshore to safeguard that money for their children’s future, and possible only repatriate smaller sums at a time. But in the meantime, they will pay no tax on that wealth, and only when smaller amounts are repatriated to a beneficiary's home country.

It would be a costly set-up requiring financial administrators in opposite corners of the world, and one that reflects the reality of two spouses who live in two different continents.

So how will the new New Zealand foreign trust work?

If Mizzi has ‘X’ amount of cash, he can safeguard this wealth by putting that money in an offshore trust. Mizzi has already declared that he is the settlor of the trust, because he created the trust, while his family are the beneficiaries of the trust.

What we don’t know so far is who runs the trust on his behalf – it is probably Nexia BT, the financial advisors who set up the trust on his behalf, because they also own Mossack Fonseca’s Malta office, a branch of the notorious Panamanian tax advisory that has set up shell companies used by the world’s villains (the company has disputed this claim, saying that no court or government record has ever identified Mossack Fonseca as the creator of ‘shell’ companies or linking it to criminal activity).

Nexia, as trustees, will run the trust according to the trust deed, which contains instructions on what to do with the money itself: invest it in other companies for example, so as to expand the wealth inside the family trust.

Mizzi legally controls his money using the trust deed, but at law the money belongs to the trust ‘and not to Mizzi’.

And that money will be protected, especially for the children of the Mizzis, if the spouses are hit by a claim from a creditor, or in case of marital breakdown.

Mizzi can designate when the trust terminates so that the property or assets are distributed to his children, thereby helping him secure the family’s financial future while also paying out annual stipends for the purposes of education.

Additionally, the trust can function as a company. This means Mizzi can instruct that the trust lends money to him or invest that cash, which he can repay with interest, which in turn would minimise his tax.

Mizzi last submitted his ministerial declaration of assets for 2014, in which he declared two properties – one in London, UK and the other in Malta – as well as 4,000 shares in Malta International Airport, €310,000 in bank deposits, €329,000 in loans, and a €76,000 income. While Malta Independent columnist Daphne Caruana Galizia posted the sale of the apartment he lived in at £550,000 (€695,000), MaltaToday is informed that Mizzi rented the London apartment in question, whose address is available since Mizzi was listed on the UK electoral roll of 2011 at that address. A deed search carried out by this newspaper displayed no sales in Mizzi's name.

Does this wealth justify the creation of Mizzi's trans-continential set-up? Maybe it is his wife's wealth that is being channelled into the trust. Mizzi has mentioned his family inheritance - and that also means Sai Mizzi Liang's inheritance. But as two politically exposed persons (PEPs), it is also a set-up that cam conceal the source of their income, the type of confidentiality that only a vast amount of wealth might justify.

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Panama connection

The New Zealand Foreign Trust regime is a sacred cow of New Zealand law, a veritable ‘Fort Knox’ of asset protection.

Under the Income Tax Act 2007, which allows non-residents like Mizzi to pay zero tax in New Zealand provided that he, as settlor, does not conduct any taxable activities in New Zealand.

Neither of the Mizzis is so far living in New Zealand – his wife Sai Mizzi currently serves as Malta consul and trade envoy to Shanghai, although Mizzi says her contract will not be renewed after August 2016 – so there is still a missing link here: the Panama company.

Under New Zealand law, a trust can open accounts anywhere in the world and New Zealand will not tax these monies if they are foreign-sourced.

The big question is what type of Panama company has been incorporated, and why? If the trust owns a Panama IBC (international business company) and is conducting its business outside of Panama, it is exempt from all local taxes including income tax, capital gain tax, dividend tax, and stamp duty on transfer of corporate shares, and other property.

The key is that the money is held offshore – neither in Panama, nor in New Zealand – 'suspending' the tax payable on any wealth only until that income is ‘brought back home’ onshore. The question is when will that wealth be taxed?

Out there in a big black hole guarded by financial advisors, is a large amount of wealth that will not be taxed until it gets ‘sucked out’ into its beneficiaries’ tax jurisdictions. Legally, surely enough. But moral? Not much.