NEW ZEALAND Law and Practice Contributed by: Greg Neill, Fred Ward and Callum Burnett, Russell McVeagh
tion provided by the non-resident subsidiary is not in accordance with the arm’s length principle. 6.5 Controlled Foreign Corporation-Type Rules New Zealand has a comprehensive controlled foreign company (CFC) regime, under which income may be attributed to New Zealand resident shareholders in respect of their interests in non-local subsidiaries. The CFC rules apply to New Zealand residents holding an income interest of at least 10% in a CFC (essentially being a foreign company controlled by five or fewer persons resident in New Zealand). Attributed CFC income of a person is taxable income and may arise irrespective of any dividends paid by the non-local subsidiary. No attribution of income will generally be required if the CFC passes an “active” business test. A CFC will pass the active business test if it has passive income that is less than 5% of its total income. In broad terms, “passive” income would include rent, royalties, cer - tain dividends and interest. For these purposes, the relevant income amounts are measured using either financial accounting or tax measures of income. The position is different for non-local branches of New Zealand companies, given that a branch is strictly a part of the same legal entity for New Zealand tax purposes. No attribution of income therefore occurs under the CFC rules (as there is no separate foreign company controlled by New Zealand residents). 6.6 The Substance of Non-Local Affiliates The New Zealand CFC rules do not make any distinc - tion based on the substance of the non-local affiliate. 6.7 The Sale of Shares in Non-Local Affiliates New Zealand does not have a comprehensive capital gains tax regime. However, the definition or concept of income does include profits and gains from certain transactions that would conventionally be regarded as capital in nature (see 2.7 Capital Gains ). Shares held by a New Zealand company in a non- local affiliate would typically be expected to be held as capital assets, as the shares form part of the structure
of the corporate group. Any gain derived on a disposal of those shares should accordingly not give rise to a New Zealand income tax liability (as being attributable to the realisation of a capital asset).
7. Anti-Avoidance Provisions 7.1 Overarching Provisions
The Income Tax Act contains a general anti-avoid - ance provision, which provides that a tax avoidance arrangement will be voided against the Commissioner for income tax purposes. A “tax avoidance arrange - ment” is defined as an arrangement that has tax avoidance as its sole purpose or effect, or as one of its purposes or effects if the tax avoidance purpose or effect is not merely incidental. Pursuant to relevant New Zealand case law in this area, the essential question is whether an arrange - ment, viewed in a commercially and economically realistic way, makes use of a specific legislative pro - vision in a manner that is consistent with Parliament’s purpose for that provision. If it does, the arrangement should not, by reason of that use, be a tax avoidance arrangement. The Income Tax Act also empowers the tax author - ity to counteract any tax advantage that a person obtains from or under such an arrangement, including by reconstructing the arrangement in a manner that removes the tax advantage. In addition to the general anti-avoidance provision, the Income Tax Act contains a range of specific anti- avoidance provisions that relate to the application of particular provisions in the Act and particular transac - tions or arrangements.
8. Audit Cycles 8.1 Regular Routine Audit Cycle
New Zealand’s Inland Revenue does not have a regu - lar or routine audit cycle. Commencement of an audit may arise under several different circumstances, including:
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