High net-worth individuals (HNIs) and business owners set up structures that they hope will ensure their assets and investments are held efficiently to guarantee optimal returns and wealth preservation/ succession. A popular structure generally adopted for this purpose is Private Trust Arrangement. A Private Trust may be set up locally or offshore to warehouse investments of the HNIs within and outside Nigeria. Private Trust ensures confidentiality as regards ownership and management of the Settlor’s assets. Private Trusts set up as an irrevocable Trust, protects the assets held in trust from liabilities that may arise against or affect the Settlor in his personal capacity due to bankruptcy, business dissolution etc. Do these attributes still hold, considering the Organisation for Economic Co-operation and Development (OECD)’s Common Reporting Standard (CRS) in relation to automatic exchange of information and the provisions of the Finance Act, 2019? Where the tax authority is privy to information on assets and investments held in a Trust, especially that which is set up in a tax jurisdiction other than Nigeria, are privy to the tax authority, will the income therefrom be taxable in Nigeria?
In this article, we examine the intricacies surrounding disclosure and taxation of income attributable to a Private Trust arrangement with focus on Offshore Trusts.
Taxability of Income from Offshore Trusts in Nigeria
The Personal Income Tax Act 2011 as amended (PITAM) provides that an individual, resident in Nigeria is taxable on his worldwide income. This indicates that the income distributed to a Nigerian-resident Settlor or a Beneficiary from a Trust is taxable in Nigeria. In addition, where the Trust is administered in Nigeria, a risk that the entire income of the Trust will be taxable in Nigeria and not only the amount distributed could arise in certain situations. Paragraph 1 of the second schedule to PITAM provides that the income of a Trust shall be deemed to be income of the Settlor of the Trust where the Settlor retains or has a right over the capital assets of the trust; retains or has a right over the income derived from the capital assets of the trust; makes use of the income of the trust by borrowing from it; and resumes control or the spouse resumes control over the asset or income of the Trust. Hence, the risk that the entire income derived by the Trust will be taxable in the hands of the Settlor will arise in the aforementioned instances.
With respect to Offshore Trust, there is a school of thought that supports the argument that only the amount distributed from an Offshore Trust to a taxable person in Nigeria will form a taxable income in Nigeria and not the entire income derived by the Offshore Trust from the assets/ investments held in trust. Such income will then be exempted from tax where it is brought into Nigeria through Government approved channels, such as the commercial banks.
The second schedule of the PITAM provides that where a Trust retains some of its income (i.e. undistributed income) and the undistributed income is not reinvested by the Trust, such income will become liable to tax in the hands of the Trustee. Will this provision be applicable to an Offshore Trust, considering that the Trust will also be governed by the respective legislations of the country where it is administered? A twist to this is that where the income of a Trust administered in Nigeria is deemed to be the income of the Settlor based on the earlier discussed instances, the Settlor may be held liable for tax payable on such undistributed income. Hence, can we say that a Nigerian-resident Settlor will be liable to tax on the undistributed income from his Offshore Trust especially where it is revocable or discretionary in nature?