Most Read Contributor in New Zealand, September 2016
After five years of reform of the tax rules for outbound
investment, Inland Revenue officials are now proposing changes to
an important inbound tax regime.
Inland Revenue released a paper on 14 January 2013 proposing to
broaden the thin capitalisation regime. The regime limits interest
deductions claimed by foreign-owned New Zealand companies with debt
to equity ratios exceeding certain thresholds.
The proposal is aimed at both widening the application of the
regime and limiting the application of the existing safe
Submissions on the Inland Revenue's
Issues Paper are due by 15 February 2013.
For inbound investment the thin capitalisation regime in effect
denies interest deductions to the extent that a New Zealand
group's debt to asset ratio is more than the greater of:
110% of its worldwide ratio.
Wider application of the thin capitalisation regime
The rules are proposed to apply where there is a group of
non-residents investing together, whereas the current rules are
focused on entities controlled by a single non-resident investor.
The group of non-residents must be able to collectively determine
the level of debt the company holds in the same way as an
individual controlling shareholder can, and so will affect some
private equity investment.
Inland Revenue is seeking comment on how the test for whether
there is a group should be determined. The proposals are for a
bright line threshold (i.e. a 50% foreign ownership threshold, with
an exception for listed companies) or a test of whether the group
of investors is "acting together" – a test that is
likely to be somewhat vague and would need to be teased out to know
what it would mean in practice.
The current thin capitalisation regime covers only complying
trusts where a single foreign investor makes more than 50% of the
settlements on the trust. Inland Revenue has proposed to extend
this to all trusts where a group of non-residents or another entity
covered by the rules makes more than 50% of the settlements.
Restricting the regime's existing safe harbours
The paper proposes to exclude related-party debt when
determining the worldwide group debt percentage. The current rules
do not work where the worldwide group is nearly the same as the New
Zealand group because the 110% safe harbour is always available.
This allows the group to use as much New Zealand debt as it wants
and still claim interest deductions because the New Zealand debt
percentage falls below the 110% threshold.
Increased asset values are proposed to be ignored where they
result from internal sales.
In the case of outbound groups, it is proposed that an
individual owner's interests would be consolidated with those
of the outbound group, rather than considered separately.
Capitalised interest is proposed to be excluded from the value
of a group's assets for the calculations if a tax deduction for
that interest has been taken in New Zealand.
Inland Revenue believes that these changes, aimed at increasing
tax collected from foreign investors, will not significantly affect
the level of inbound investment into New Zealand.
Submissions close on 15 February 2013.
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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