NEW ZEALAND Law and Practice Contributed by: Greg Neill, Fred Ward and Callum Burnett, Russell McVeagh
While a company’s direct shareholding may not change, the voting interests (and market value inter - ests) held by a corporate shareholder are subject to a “look-through” rule when determining shareholder continuity, and are treated as being held by the share - holders of the corporate shareholder. The effect of the look-through rule is that corporate chains of owner - ship are traced through to the ultimate shareholders. 5.5 Formula-Based Income Attribution As a general principle, no specific formulas are used to determine the income of foreign-owned local affiliates selling goods or providing services in New Zealand. 5.6 Deductibility of Intra-Group Management and Administrative Charges There is no standard applied in allowing a deduction for payments by New Zealand companies for manage - ment and administrative expenses. This includes local affiliates of multinational groups paying for intra-group services. However, such transactions are subject to the arm’s length principle under New Zealand’s trans - fer pricing regime. 5.7 Restraints on Related-Party Borrowing Related-party borrowing by a foreign-owned New Zealand company is subject to New Zealand’s thin capitalisation and transfer pricing regimes. These rules essentially determine the extent to which interest paid on such borrowings may be deductible for New Zealand tax purposes, having regard to the relative amount of New Zealand borrowing (in the case of thin capitalisation) or the pricing or terms of the borrowing (in the case of transfer pricing). It is also necessary to consider New Zealand’s hybrid mismatch rules in the context of related-party borrowing and whether a deduction is fully available for interest costs. 6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions Companies resident in New Zealand are subject to New Zealand income tax on their worldwide income. The main exception to that principle is an exemption that applies to dividends received by a New Zealand resident company from a foreign company.
Generally, where a New Zealand resident company derives assessable income from a foreign source in a country that has a DTA with New Zealand, that for - eign income should not be subject to foreign income tax (provided that the New Zealand resident compa - ny does not have a permanent establishment in that country to which the foreign income is attributable). Interest, dividends and royalties that have a foreign source and that are derived by a New Zealand resident company may be subject to foreign income tax, but this will generally be limited under an applicable DTA. Where a New Zealand resident company derives assessable income from a foreign source that is sub - ject to foreign income tax, it may be entitled to a for - eign tax credit for any foreign income tax paid on that income. 6.2 Non-Deductible Local Expenses The Income Tax Act provides that a person is denied a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving exempt income. A New Zealand holding company deriving only exempt income in the form of dividends from for - eign subsidiaries, for example, would not be expected to be able to claim deductions for its expenditure. 6.3 Dividends From Foreign Subsidiaries The general position is that dividends received from foreign companies are treated as exempt income of New Zealand resident companies and are therefore not taxable. This rule is subject to certain exceptions, including where dividends are derived by a “portfolio investment entity” (essentially a certain type of New Zealand collective investment vehicle). 6.4 Taxation of Intangibles Developed by Local Corporations Intangible assets developed by New Zealand compa - nies are able to be used by non-resident subsidiaries without the latter incurring local corporate tax. Cor - porate tax would generally be expected to arise for the local company, because a royalty or other charge would typically be paid by the non-resident subsidiary to the New Zealand-based owner of the asset. The use of the intangible asset may be subject to New Zealand’s transfer pricing regime if the considera -
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