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Global tax guide to doing business in New Zealand
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|Global tax guide to doing business in New Zealand by Kenyans247(1): Sun 08, November, 2020 08:11am|
New Zealand imposes corporate and income tax on its residents. Non-residents are taxed on income arising in New Zealand.
There are currently no gift duties, stamp duties, land taxes or inheritance or wealth taxes in New Zealand. Capital gains tax applies only in limited circumstances. Income tax is the most prevalent form of tax in New Zealand.
Double-taxation treaties (DTTs) with various countries may create an exemption from full tax liability within New Zealand. Such exemptions exist to eliminate situations where an individual may be subject to double taxation. New Zealand has a network of DTTs in force with its main trading and investment partners.
The DTTs take precedence over the provisions of the Income Tax Act 2007 and contain "tie-breaking" provisions to determine residence and which country has the primary right to tax income. New Zealand has also entered into a number of tax information exchange agreements, with more being frequently added.
In this chapter
Financing a corporate subsidiary
Corporate income tax
The Anti-Money Laundering and Countering Financing of Terrorism
New Zealand operates under a common law legal system derived from the laws of England and Wales and augmented by domestic legislation and jurisprudence. The Treaty of Waitangi 1840 (an agreement between Great Britain and certain Maori tribes) and tikanga Maori (customary law) are also very relevant and important under New Zealand law.
The tax system in New Zealand is administered by the Inland Revenue (IRD). The IRD collects most of the revenue that the government needs to fund its programs and administers a number of social support programs.
Most business activity is carried out through limited liability companies. A limited liability company’s legal status limits the liability its shareholders have in the business to the value of their shares in accordance with English common law principles. Alternatively, an individual can conduct business as a sole trader.
Companies in New Zealand are registered legal entities and have certain basic elements consistent with most common law jurisdictions around the world:
At least one share, one shareholder and one director;
A registered office;
An address for service; and
An address for communication.
Companies in New Zealand typically have limited liability (although it is possible for a company to have unlimited liability). A limited company is liable in full for all obligations that it incurs but the shareholders are only liable for any unpaid money owing on their shares.
Registration/ licensing requirements
Companies and limited partnerships incorporated in New Zealand are registered under the Companies Act 1993 and the Limited Partnership Act 2008, respectively. Overseas companies and overseas limited partnerships can also be registered under these statutes.
An overseas company or an overseas limited partnership wishing to register in New Zealand must file an application for registration with the Registrar of Companies within ten working days of commencing business in New Zealand.
Given the recent implementation of the Foreign Account Tax Compliance Act (FATCA), the Common Reporting Standard (CRS) and a new foreign trusts disclosure regime, it is possible that New Zealand may follow international trends by requiring a ‘persons of significant control’ register. However, as matters currently stand, this does not appear to be an important consideration for the government and the Companies Office only records and makes publicly available information about the registered shareholder(s) and directors of a company. Details of ultimate beneficial ownership of companies are kept confidential and unregistered unless disclosure to New Zealand’s tax authority, the IRD is required pursuant to FATCA and/or CRS.
Overseas owned companies
Certain additional rules apply to overseas-owned companies or overseas registered companies doing business in New Zealand as a branch, including producing audited accounts (and possibly group accounts) for the publicly searchable Companies Office register.
Resident director requirements
From May 1, 2015 it became essential for all New Zealand companies to have at least one director who resides in New Zealand, or who resides in Australia and is a director of a company that is registered in Australia. These requirements do not apply to companies that have been incorporated overseas but are registered in New Zealand.
Look through companies
Where a company elects and qualifies to be a ‘look through’ company (‘LTC’) it becomes fiscally transparent for income tax purposes. The income expenses, tax credits, rebates, gains and losses of an LTC are passed on to the shareholders pro rata to their shareholdings in the LTC. To become an LTC and maintain LTC status, a company must meet the following criteria for the whole of each income tax year that it is an LTC:
It must be a company;
It must be a New Zealand tax resident company;
Shareholders in an LTC must either be natural persons or trustees (including corporate trustees);
It must not have more than five ‘look through counted owners’; and
The LTC must have only one class of shares.
A limited partnership (LP) in New Zealand is an incorporated entity separate from its partners, having at least one general partner and at least one limited partner. Any person or body corporate (whether or not resident in New Zealand) can be a partner and there is no limit on the number of partners.
At least one general partner who is a natural person must be resident in either New Zealand or in Australia and be a director of a company that is registered in Australia. If the only general partner is a company registered in New Zealand then the resident director requirements will naturally apply to that company.
An LP is fiscally transparent for tax purposes and not taxed at the partnership level. Generally, an LP will be structured so that only the limited partners receive income. Limited partners who are not resident in New Zealand will not be subject to tax in New Zealand on their share of the income generated by the LP – provided the income does not have a New Zealand source.
In both a domestic and international context LPs have a range of applications including warehousing assets, and private placement collective investment schemes. LPs are also commonly formed for the transaction of agricultural, mining, mercantile, manufacturing or other business purposes. This can be particularly desirable where one or more of the investors is or are resident abroad because it can obviate withholding tax requirements and reliance on double tax treaties.
The Partnership Law Act 2019 provides that a partnership is the relationship, which subsists between persons carrying on business in common with a view to profit.
An ordinary partnership is a partnership comprised of defined individuals bound together by contract between themselves to continue together for some joint object either indefinitely or for a limited time. An ordinary partnership is essentially comprised of the persons originally entering the contract with one another. In this it differs from a company or limited partnership in which the members are constantly changing. It is common in New Zealand for professionals (such as lawyers and accountants) to organise themselves as ordinary partnerships
The term “joint venture”’ is common in the New Zealand business vernacular and describes an enterprise subject to joint control by two or more undertakings, which are economically independent of each other. Rather than being an entity or structure with defined characteristics it connotes an association of persons for the purposes of a particular trading, commercial, mining, or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill.
Real Estate Investment Trusts
There is no specific real estate investment trust (REIT) legislation to regulate the activity of REITs in New Zealand. Listed property trusts and companies on the NZX are governed by the NZSX/NZDX Listing Rules, the Financial Markets Conduct Act 2013, the Companies Act 1993 and by their trust deed or constitution. REITs in other forms (for example, unlisted property trusts) are also governed by the Financial Markets Conduct Act 2013 (if offers are made to the public) and the legislation specific to their legal form (unit trusts in operation before commencement of the Financial Markets Conduct Act 2013, for example, are governed by the Unit Trusts Act 1960).
Trusts in New Zealand
New Zealand does not determine the tax residency of a trust based on the tax residence of its trustees as is the case in many other jurisdictions. Instead, New Zealand has a settlor-based regime which means the New Zealand tax treatment of a trust depends on where the settlor of a trust resides.
There are three types of trusts for New Zealand tax purposes:
Foreign trusts; and
A complying trust is a trust that has been settled by a New Zealand resident settlor and where all New Zealand tax filing obligations have been met and all of the trust’s income has been taxed in full in New Zealand.
A foreign trust is a trust that has not had a New Zealand resident settlor at any time between December 17, 1987 and the date of a distribution.
A non-complying trust is a trust that is neither a complying trust nor a foreign trust.
There are ordering rules that apply to determine the source of distributions from foreign and non-complying trusts. The ordering rules exist to prevent the trustee from manipulating distributions and making tax-free distributions ahead of, or instead of, taxable distributions.
The New Zealand income tax implications of distributions made under a trust turns on:
The classification of the trust (i.e. is the trust complying, non-complying or foreign). A trust’s classification can change from distribution to distribution therefore the classification should be confirmed each time a distribution is made;
The nature of the distribution;
The source of the distribution; and
Whether the beneficiary is a New Zealand tax resident.
The following table summarises the tax treatment of distributions from complying, foreign and non-complying trusts in New Zealand
Complying Trust Foreign Trust Non-complying Trust
Pre 1/4/88 accumulated income Exempt income Exempt income Exempt income
Corpus Exempt income Exempt income Exempt income
Arm's length capital gain Exempt income Exempt income Taxable distribution taxed at rate of 45%
Non-arm’s length capital gain Exempt income Taxable distribution taxed at beneficiary’s marginal rate Taxable distribution taxed at rate of 45%
Post 1/4/88 accumulated income Exempt income Taxable distribution taxed at beneficiary’s marginal rate Taxable distribution taxed at rate of 45%
Trustee income Taxed at trustee rate of 33% Income derived from New Zealand taxed at trustee rate of 33% Taxed at trustee rate of 33%
Beneficiary income Taxable distribution taxed at beneficiary’s marginal rate Taxable distribution taxed at beneficiary’s marginal rate Taxable distribution taxed at beneficiary’s marginal rate
Please note April 1, 1988 is the date that the current tax regime applying to trusts came into force in New Zealand.
Financing a corporate subsidiary
Companies in New Zealand are financed by either debt or equity. A company financed by equity typically issues shares to the financier in exchange for capital contributed. Capital may be returned to a shareholder by dividend on profits or on a solvent winding up. In both cases the directors must be satisfied that the company is able to fulfil balance sheet and cash flow solvency tests.
Debt Financing - Financial Arrangement Rules
New Zealand has financial arrangement rules, which are a set of rules that require all returns on “financial arrangements” to be taxed on a progressive nature over the term of the financial arrangement using a spreading method.
A financial arrangement is broadly defined and includes virtually any arrangement where there is a delay in giving or receiving consideration; including any debt instruments and securities such as bank accounts, loans and most derivatives. There are some exceptions that may be applicable in certain circumstances.
A person who is subject to the financial arrangement rules must account for all income and expenditure under the rules using an applicable spreading method regardless of whether the financial arrangement is of a revenue or capital nature. For example, in the context of a foreign currency bank account this would include any foreign exchange movement.
Withholding tax implications
Resident withholding tax (RWT) is imposed on interest at 28% for companies. Certain limits of exemptions may apply.
Where a dividend is paid to a resident shareholder, RWT must generally be deducted such that the total of the attached imputation credits and RWT is 33% of the gross dividend (for example RWT of 5% must be deducted if a dividend is fully imputed except where the dividend recipient is another resident company and elects for no RWT to be withheld).
‘Inbound’ thin capitalization rules apply to New Zealand taxpayers controlled by non-residents, including branches of non-residents. The aim of the rules is to ensure that New Zealand entities or branches do not deduct a disproportionately high amount of the worldwide group’s interest expense. This is achieved by deeming income in New Zealand when, and to the extent that, the New Zealand entities in the group are thinly capitalized (i.e. excessively debt funded).
The inbound rules include situations where non-residents are 'acting together' and include trusts where the majority of settlements have come from non-residents or from entities subject to the thin capitalization rules.
The ‘outbound’ thin capitalization rules are intended to operate as a base protection measure to prevent New Zealand residents with Controlled Foreign Company (CFC) investments and certain Foreign Investment Fund (FIF) investments from allocating an excessive portion of their interest cost against the New Zealand tax base.
An apportionment of deductible interest is required under the thin capitalization rules when the debt percentage (calculated as the total group interest bearing debt/total group assets net of non-debt liabilities of a New Zealand entity or group) exceeds both:
60% (for ‘inbound” thin capitalization) or 75% (for “outbound” thin capitalization) and
110% of the worldwide group’s debt percentage.
Approved Issuer Levy (AIL)
Non-resident withholding tax does not need to be deducted from the interest paid on borrowings when:
The New Zealand borrower and overseas lender are not associated;
The borrower is registered as an approved issuer;
The debt instrument is registered;
The borrower pays a tax-deductible AIL equal to 2% of the interest paid and which cost may be passed on contractually to the holder; and
The rate of AIL reduces to 0% on bonds that meet certain requirements e.g., offered to the public issued in NZD and listed on a recognized stock exchange or are widely held, and other requirements.
There is no stamp duty in New Zealand.
Corporate income tax
Income tax rate
Corporate taxation for New Zealand resident companies is at the rate of 28% on their worldwide income. An overseas company is taxed at the same rate, but only in respect of income that has a New Zealand source.
There is no comprehensive capital gains tax in New Zealand.
New Zealand operates an imputation system under which the payment of company tax is imputed to shareholders. Imputation credits can be attached pursuant to a ratio of 28/72 to cash dividends paid. Imputation credits reduce tax payable on a dividend received by a shareholder. There are rules in relation to limits on carrying forward and the use of imputation credits in future years, which attempts to prevent streaming of imputation credits. There is a requirement for a continuity of shareholding of at least 66% to carry imputation credits forward.
Overseas companies that are carrying on business in New Zealand must register as an overseas company with the Companies Office.
If operated by a non-resident, the branch will be treated as a non-resident company for New Zealand tax purposes. Branch profits are subject to ordinary corporate rates of taxation, and there is no withholding tax on repatriated profits. A branch may also use utilise branch losses to offset foreign income.
Computation of taxable income
New Zealand resident companies are taxed on their worldwide income. Non-resident companies (including branches) are taxed only on their New Zealand-sourced income.
Taxable income is calculated by subtracting allowable deductions from assessible income. Example of corporate deductions include:
Depreciation and amortisation;
Research and development costs;
Net operating losses; and
Payments to foreign affiliates.
There are no provincial (state) or municipal income taxes in New Zealand.
Income tax reporting
New Zealand has a self-assessment tax regime meaning taxpayers are required to file an income tax return reflecting their assessable income and deduct expenses for a tax or income year. Financial statements are required to be submitted to the IRD by the income tax return date.
The standard tax year is April 1st to March 31st however a company can apply to the IRD to have a non-standard balance date in certain circumstances.
New Zealand has a comprehensive transfer pricing regime based on the Organisation for Economic Cooperation and Development Transfer Pricing Guidelines. The purpose of New Zealand’s transfer pricing regime is to seek to protect the New Zealand tax base by ensuring that cross-border transactions (at least for tax purposes) are in accordance with the “arm’s length” principle.
The transfer pricing rules apply to arrangements for the acquisition or supply of goods, services, money, intangible property, and anything else (other than non-fixed rate shares) where the supplier and acquirer are associated persons. Various methods are available for determining the “arm’s-length consideration.” The taxpayer is required to use the method that produces the most reliable measure of the amount that independent parties would have paid or received in respect of the same or similar transactions. Inland Revenue has published guidelines that make it clear that documentation is required to support a taxpayer’s transfer prices
Withholding tax on passive income
Dividends, interest and royalties paid by a New Zealand resident company to non-residents are subject to non-resident withholding tax which is generally payable at 15% on interest and royalties, and 30% on dividends. These rates are subject to modification by double-taxation agreements between New Zealand and the recipient’s country of residence.
Withholding tax on service fees
There is currently no specific withholding tax on service or management fees. However, the definition of royalty is very wide and can include what might be considered service fees in some other jurisdictions.
New Zealand has a pay as you earn (PAYE) regime. Any person who makes a PAYE income payment must withhold tax from the payment under the PAYE rules. The PAYE rules specify how much tax must be deducted and when it must be paid to the IRD.
Employer superannuation contribution tax (ESCT)
Employers’ contributions to an approved superannuation fund (excluding foreign schemes) are subject to ESCT. This includes employer contributions to KiwiSaver (which is a type of registered superannuation scheme).
ESCT is generally deducted at the employee’s relevant progressive rate based on the total salary or wages and employer superannuation cash contributions paid to the employee in the previous year.
Kiwisaver is a voluntary retirement savings scheme whereby employees choose to make contributions. The employer is required to make Kiwisaver deductions from the employee’s wages and forward them to the IRD. Employers must also pay compulsory employer contributions of at least 3% of the employee’s gross salary or wages.
Fringe Benefit Tax (FBT)
FBT applies to benefits provided by employers to employees such as motor vehicles, low interest loans and subsidized goods or services. It is levied on employers according to the taxable value of the fringe benefit provided. The tax rate can vary with the tax rate of the employee receiving the benefit.
A pension is treated as an item of salary or wages therefore tax should be deducted at the appropriate rate according to the PAYE tax deduction tables.
Not applicable in New Zealand.
Provincial payroll taxes
Not applicable in New Zealand.
Goods and services tax
GST is charged on the supply of goods and services made in New Zealand by a registered person in the course or furtherance of a taxable activity, provided that the supply made is not an exempt supply (for example, the supplies of financial services and residential rental accommodation). Registration is optional if supplies do not exceed NZD 60,000 in any 12-month period. The standard rate of GST is currently 15%. In certain circumstances, supplies are zero-rated, which means that GST is calculated at the rate of 0%.
Land Transfer Requirements
Due to recent changes to the Land Transfer Act 1952 to address potential taxation issues, overseas buyers are now required to provide an Inland Revenue Number (IRD Number) and any foreign equivalent of IRD Numbers at the time of purchase. In order for overseas buyers to apply for an IRD Number they must have a fully functioning New Zealand bank account.
Depreciation can be claimed on building fit outs, but not on most buildings or land. Until April 1, 2011, buildings acquired after March 31, 1993 could be depreciated at 4% diminishing value or 3% straight-line, based on an estimated useful life of 50 years. The plant and capital equipment are depreciated at different rates, reflecting their economic life. Any depreciation claimed in the past is clawed back as income if a building is sold at a profit over the tax book value. Depreciation deductions have been re-introduced for non-residential buildings from the 2020/21 income year at 2% diminishing value or, 1.5% straight line.
Fit outs on commercial premises are depreciable at the rates listed in Determination DEP 1. Residential building fit out is not depreciable. If a fit out has been historically depreciated at the same rate as the building, 15% of the tax book value of the building is treated as equal to the fit out, and depreciation at 2% straight-line is permitted.
The Anti-Money Laundering and Countering Financing of Terrorism
The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) is the cornerstone of the New Zealand anti-money laundering and countering terrorist financing regime. As with related legislation around the world, the AML/CFT Act requires a ‘reporting entity’ to conduct customer due diligence on a customer before undertaking any business activities with them.
In New Zealand, the definition of reporting entities includes:
Lawyers and conveyancers;
Real estate agents (from January 1, 2019); and
Businesses trading in high value goods.
Where a reporting entity establishes a relationship with a trust, that reporting entity must conduct an enhanced form of customer due diligence on the trust and certain persons associated with the trust. This is because trusts are internationally recognised as presenting a high risk of money laundering and terrorist financing.
In practice, this means that where a trust wishes to establish a relationship with a reporting entity (e.g., a bank), the trustees are required to provide detailed and comprehensive documentation so that the reporting entity can satisfy its obligations under the AML/CFT Act. This includes verified documentation about the trust, settlor, trustees, protector, beneficiaries, and the source of wealth.
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