Doing business in New Zealand - Grant Thornton

full amount of underlying company
tax of any dividend be allocated as an
imputation credit (ie, dividends need
not be fully imputed). However, rules
govern the ability of the payer company
to vary the ratio of imputation credits
allocated to dividends within any year.
Transfer pricing
New Zealand’s transfer pricing regime
seeks to protect the integrity of the
New Zealand tax base by ensuring
that all cross-border transactions with
associated persons are priced, for tax
purposes, on an arm’s-length basis.
There are various methods available
for determining the arm’s-length
amount of consideration. Generally,
New Zealand’s rules follow OECD
guidelines.
Thin capitalisation
New Zealand has thin capitalisation
rules applying to both inbound
investment (where a single non-resident
controls a New Zealand taxpayer,
including branches of non-residents)
and to outbound investment (where
New Zealand companies controlled by
New Zealand residents have interests in
CFCs or non-portfolio FIFs).
These rules aim to ensure that New
Zealand taxpayers do not deduct a
disproportionately high amount of
the worldwide group interest expense.
Interest deductions are denied to the
extent that interest-bearing debt is
greater than:
• 75% of total assets of the New
Zealand taxpayer (reduced to 60%
from the 2011/12 income year for
inbound investment)
• 110% of the worldwide debt
percentage for the group.
There are certain minimum thresholds
that have to be met for outbound
investors prior to these rules applying.
Qualifying companies
From the 2011/12 income year, the
Qualifying Company (QC) regime is
closed for new entrants. Any existing
QCs have the option to continue under
this regime or, alternatively, transition
into a new entity including a new
“look-through company” vehicle (see
below).
Previously, a New Zealand resident
company that had five or fewer
shareholders and derived minimal
overseas income could elect Qualifying
Company status. The effect of QC
status is that although the QC is a taxpaying
entity in its own right, capital
gains can generally be distributed taxfree
without the necessity of liquidation
as is ordinarily required.
A QC could then elect Loss
Attributing Qualifying Company
(LAQC) status, so that losses of
the LAQC could flow through to
shareholders in proportion to their
shareholdings. For income years
starting from 1 April 2011, losses can
no longer be attributed to shareholders
so the LAQC rules are effectively
redundant.
Look-through companies
A new tax vehicle, the “look-through
company” (LTC), was introduced
with effect from the 2011/12 income
year. It is a flow-through vehicle and
is treated like a partnership for income
tax purposes. All income, expenses, tax
credits and losses flow through each
year to shareholders in proportion
to their shareholding, subject to the
application of a loss limitation rule
(which effectively seeks to limit the
losses allocated to a shareholder to
the extent of their investment in the
LTC). An LTC will still be treated as a
company for company law purposes.
Portfolio investment entities
A portfolio investment entity (PIE) is a
collective investment vehicle (eg, listed
company, managed fund or KiwiSaver
scheme) which has elected to become
a PIE subject to the various eligibility
requirements being met.
A PIE is taxed on its investment
income at the prescribed investor rates
elected by its investors. From 1 October
2010, these rates are 0%, 10.5%, 17.5%
and a capped rate of 28%. PIE tax at a
rate greater than 0% is a final tax for
those investors who have selected the
correct rate.
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