NEW ZEALAND Law and Practice Contributed by: Ashton Goatley, Henry Willis, Sarah Keene and Erin Hickey, Webb Henderson
with the taxpayer’s worldwide group). In general, a foreign-owned New Zealand taxpayer’s interest- bearing debt cannot exceed 60% of its net assets, or 110% of the debt-to-net assets ratio of its worldwide group, without a tax deduction for inter - est expenditure effectively being denied. Conces - sions apply to third-party limited recourse debt used in Crown-sponsored PPP projects. The Inland Revenue is currently consulting on two options that could expand this to some private investment by non-resident investors. • If there is a change in a company’s ultimate share - holding of more than 51%, net operating losses (NOLs) can only be carried forward and used to off - set future taxable income if the company has suffi - cient “business continuity” until the earlier of: (i) the end of the income year in which the company’s tax losses have been used; or (ii) five years after the more-than-51% change in the company’s ultimate shareholding. As such, NOLs have the potential to be a valuable tax attribute that can be priced into M&A transactions in New Zealand. • As New Zealand does not have a comprehen - sive CGT, intellectual property can potentially be “exported” to lower-tax countries without a blanket exit charge applying. 9.4 Tax on Sale or Other Dispositions of FDI Unlike some other countries, New Zealand does not have tax-preferred entities/vehicles that are available to non-resident investors (eg, real estate investment trusts). Investments are generally held through New Zealand companies or, where appropriate, branches or partnerships. While New Zealand does not have a comprehensive CGT (see 9.1 Taxation of Business Activities ), gains from the disposal of capital assets are, in certain cir - cumstances, subject to tax. For example, gains from the disposal of land are taxable in New Zealand if the land is acquired with any intention or purpose of disposal; and tax treaty relief is generally not avail - able (and refer to 9.1 Taxation of Business Activi- ties – Other Taxes regarding the New Zealand Labour Party’s proposed limited CGT). In addition, gains from the disposal of personal property (eg, shares) are tax - able under domestic law if acquired with a dominant purpose of disposal, or if acquired and disposed of as
part of a profit-making undertaking or scheme. Where such gains are derived by non-residents, tax treaty relief may be available (noting that relief is not auto - matic, so if there is an applicable tax treaty, its terms
must be carefully reviewed). 9.5 Anti-Evasion Regimes
Foreign-owned New Zealand tax-paying entities are generally subject to specific anti-avoidance rules, including “restricted transfer pricing” rules, thin capi - talisation rules (see 9.3 Tax Mitigation Strategies ), and hybrid and branch mismatch rules (which were enacted – or revised – in 2018 as part of New Zea - land’s response to the OECD’s “base erosion and New Zealand’s general transfer pricing rules are based on a notional arm’s length standard, and are intend - ed to prevent non-residents and their New Zealand subsidiaries from eroding New Zealand’s tax base via non-arm’s length arrangements. The “restricted transfer pricing” rules specifically apply to inbound related-party debt of NZD10 million or more, and pro - vide a detailed framework within which interest rates are required to be set by reference to the borrowers’ (and their worldwide groups’) credit ratings, and ignor - ing certain terms that would otherwise affect pricing. Hybrid and Branch Mismatch Rules In addition, the hybrid and branch mismatch rules aim to prevent taxpayers from benefiting from different countries’ tax systems by obtaining “double deduc - tions” for the same expenditure, or taking tax deduc - tions for expenditure in New Zealand that is not cap - tured as income in another country. These rules are similar to the equivalent rules in the UK and Australia. Permanent Establishment (PE) Avoidance Rule A PE avoidance rule was also introduced in 2018, which, in general terms, can deem a non-resident to have a PE in New Zealand for tax purposes if its employees or related parties carry out activities in New Zealand to facilitate the non-resident’s sales in New Zealand, where such activities do not give rise to a PE under an applicable tax treaty. profit shifting” initiative). Transfer Pricing Rules
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