New Zealand: Income Tax Treatment of Payments to Non-resident Software Suppliers

Last Updated: 18 November 2003
Article by Anton Joseph

New Zealand Inland Revenue Department has released Interpretation Guidelines dealing with the income tax treatment of payments for computer software made to non-resident suppliers.

The Guidelines also analyse the impact of double tax agreements on such payments. The tax treatment would vary depending on whether the non-resident supplier is deriving royalties or business profits. If the payment received by the non-resident supplier is income or royalties derived from New Zealand, then the payment will be subject to taxation in New Zealand.

However, under double tax agreements, business profits will be subject to tax in New Zealand only if the non-resident supplier derives the income through a permanent establishment in New Zealand.

Royalties, under double tax agreements are liable to withholding tax in New Zealand, subject to a maximum specified by the relevant agreement.

The Guidelines examine the tax implications of the following transactions:

  • A sale of the copyright in a computer program
  • A licence of a copyright right in a computer program
  • A sale of a copy of a computer program subject to copyright
  • A lease of a copy of a computer program
  • A supply of services for the development or modification of a computer program
  • The supply of know-how relating to a computer program

What is "Royalty"?

Royalty is defined in the Income Tax Act 1994 as:

" a payment of any kind, whether periodical or not and however described or computed, to the extent to which it is derived as consideration for-

  1. The use of, or the right to use, any copyright, patent, trademark, design, or model, plan, secret formula or process, or other like property or right;
  2. ………………………….
  3. ………………………….
  4. ………………………….
  5. The supply of scientific, technical, industrial or commercial knowledge or information;
  6. The supply of any assistance which is furnished as a means of enabling the application or enjoyment of anything referred to in any paragraphs a. to e.
  7. ………………..

Whether or not that payment is an instalment of the purchase price of any real or personal property:

Classes of income derived in New Zealand

The following are the classes of income derived in New Zealand:

  1. Income derived from any business wholly or partly carried on in New Zealand;
  2. Income derived from any business carried on out of New Zealand to the extent that that income consists of …………… royalties;
  3. Income derived from the sale or other disposition of any property, corporeal or incorporeal, situated in New Zealand;
  4. Income from contracts made wholly or partly performed in New Zealand
  5. Royalties
  6. Payments of any kind to the extent to which they are paid as consideration for the use of, or the right to use, in New Zealand, any personal property…

Royalties are deemed to be derived in New Zealand if they are:

  • Paid by a person who is resident in New Zealand and not paid in respect of a business carried on by a person outside New Zealand through a fixed establishment outside New Zealand; or
  • Paid by a person who is not resident in New Zealand and are allowed as a deduction to the person for the purposes of tax in New Zealand.

1. Sale of copyright rights

Since this is an outright sale of the right and not an assignment of a right to use the copyright, the consideration is not royalty.

The payment will not be taxable in New Zealand unless it is derived from New Zealand. This is possible if the non-resident is carrying on a business in New Zealand. Under double tax agreements, the income will be subject to New Zealand only to the extent the income is attributable to a permanent establishment of the non-resident in New Zealand.

2. Licence of a copyright right

The consideration received falls within the definition of royalty and if is deemed to be derived in New Zealand . It will be liable to tax in New Zealand. Withholding tax subject to any limitation in the relevant double tax agreement will apply.

3. Sale of a copyrighted article

In this case the copyright over the computer program remains with the seller. Therefore the payment will not be royalty.

The consideration may still be liable as business profits, subject to the relevant double tax agreement.

4. Lease of copyrighted article

Apart from producing rental income, licensing of copyrighted articles can also be considered as finance leases. Finance leases will be treated as sale and loan back transactions. The interest component will be considered as income and be subject to non –resident withholding tax, subject to limitations in the relevant double tax agreement regarding interest.

5. Supply of services for the development or modification of computer programs

Payments to the non-resident supplier will be liable to withholding tax, subject to limitations in the relevant double tax agreement.

Payments could also be business income, depending on the circumstances.

6. Supply of know-how relating to computer programs

These payments would fall within the definition of royalty and be liable to withholding tax, subject to limitations in the relevant double tax agreement.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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