NEW ZEALAND Law and Practice Contributed by: Greg Neill, Fred Ward and Callum Burnett, Russell McVeagh
holder can then use these imputation credits to offset their tax liability. This means that, where a dividend is fully imputed, the company’s earnings (being taxed at the company level and then again in the hands of the shareholder) will ultimately be taxed at the shareholder’s personal mar - ginal tax rate. For example, a fully-imputed dividend of NZD100 (being NZD72 cash and NZD28 imputation credits) may give rise to an individual tax liability of NZD39. The individual can use the NZD28 imputation credits to satisfy a portion of that liability, and pay only an additional NZD11 in cash. Gain on Sale of Shares Shares held by an individual shareholder in a closely held company will generally be held on capital account (ie, held for investment purposes), which means that the sale of those shares will give rise to a non-taxable capital gain. However, in certain circumstances (for example, where a shareholder is in the business of dealing in shares or acquired the shares with the dom - inant purpose of disposal for profit), any gains made on the sale of shares may be deemed to be income and taxed accordingly at the shareholder’s marginal tax rate. 3.5 Taxation of Individuals on Shares in Public Corporations New Zealand makes no distinction as to how indi - viduals are taxed on dividends from closely held com - panies compared to publicly traded companies. The same can be said regarding gains made on the sale of shares (see 3.4 Taxation of Individuals on Shares in Closely Held Corporations ). 4. Taxation of Inbound Investments 4.1 Application of Withholding Taxes New Zealand has the following withholding taxes that apply to returns on inbound investment. Interest Subject to certain exceptions, interest that is paid to non-residents will generally be subject to withholding tax at 15%, although this may be reduced to 10% under an applicable DTA.
New Zealand does not have a general exemption from interest withholding tax for widely held debt. There is, however, an option for borrowers to reduce the with - holding tax rate on interest paid to non-resident lend - ers to 0% by making certain registrations and paying a levy (known as the approved issuer levy, or AIL). A borrower will generally be eligible for this in respect of interest paid to a lender that is not associated with the borrower. The AIL regime is intended to reduce the burden on New Zealand borrowers of having to “gross up” interest paid to non-resident lenders for New Zealand non-resident withholding tax. The AIL applies at the rate of 2% of the gross amount of interest paid. It is payable by the borrower and is imposed as a levy rather than as a tax. Accordingly, it is unlikely to be creditable against foreign tax payable by the lender on its New Zealand interest income. The levy is generally deductible against income of a corpo - rate borrower, however, with the result that most cor - porate borrowers in New Zealand would be expected to bear only 1.44% of the cost of the levy. Dividends Dividends paid to non-residents are generally subject to non-resident withholding tax at a rate of 15% (to the extent fully imputed under New Zealand’s imputation regime discussed at 3.4 Taxation of Individuals on Shares in Closely Held Corporations ) or 30%, subject to the availability of tax treaty relief. However, the rate of non-resident withholding tax for such dividends may be reduced to 0% where the dividend is fully imputed and where the recipient has a 10% or greater direct voting interest in the payer. The withholding tax rates for dividends described above are generally capped at 15% in the case of persons resident in a country with which New Zealand has a DTA. Lower dividend withholding tax rates (typi - cally 5% or in some cases 0%) apply under certain of New Zealand’s DTAs, including those with Australia, Canada, China (PRC), Hong Kong SAR, Japan, Mexi - co, Samoa, Singapore, Turkey, the United States and Vietnam. The lower rates are available for dividends paid to a shareholder that is a company meeting rel - evant minimum ownership requirements and certain other criteria.
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