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NZ Parliament Passes International Tax Amendments

by Mary Swire,, Hong Kong

04 May 2012

The Taxation (International Investment and Remedial Matters) Bill, introduced in October 2010 to reform taxation on the gains of New Zealand residents from their investments in overseas entities, has passed its final stages in Parliament.

The main proposal in the Bill, that now awaits only Royal Assent, is to continue the reform of New Zealand’s international tax rules by extending the active income exemption that currently applies to offshore subsidiaries, so that it also applies to joint ventures and other significant shareholdings in foreign companies, and removes a barrier to offshore expansion by New Zealand businesses.

The 2009 Income tax Act introduced an active income exemption for foreign companies that are controlled by New Zealand investors. The reform was designed to ensure that New Zealand businesses that expand offshore by operating subsidiaries in foreign countries can compete on an even footing with foreign competitors operating in the same country.

The Act did not, however, apply to interests of between 10% and 50% in companies that are not controlled by New Zealanders (so-called non-portfolio foreign investment funds - FIFs). Within this tranche, it has been seen that some investors take an active role in managing the foreign company or invest in companies that are strategically aligned with their own business (akin to a Controlled Foreign Company - CFC), rather than others where an investment is based mainly on expected dividends and share gains (akin to a portfolio shareholding).

The new Bill therefore aims to provide consistency of tax treatment between similar types of foreign investment. It achieves this by extending the active income exemption and active business test (with some small modifications) to non-portfolio FIFs.

The legislation will also introduce a zero rate of approved issuer levy on payments made by approved issuers to non-residents under some bonds, and modify the thin capitalization rules limiting the deductions allowed for interest payments by members of a group of companies that contains a CFC or is controlled by non-residents. With regard to the latter, it provides for an optional test based on the ratio of deductible interest expenditure to net cash flow.

TAGS: tax | business | interest | corporation tax | controlled foreign corporations (CFC) | legislation | venture capital | New Zealand | legislation amendments

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