The Inland Revenue has released its much anticipated proposals
to extend the scope of the thin cap regime and restrict the
existing safe harbours.
The thin cap regime limits interest deductions claimed by
foreign-owned New Zealand companies with debt to equity ratios
exceeding certain thresholds.
Submissions can be made by 28 June 2013.
The changes were first proposed in January this year and the
go-ahead was confirmed as part of the Budget Day announcements. It
was announced in January that the changes would:
widen the application of the regime to include:
groups of non-residents "acting together", and
more trusts with settlements made by non-residents.
amend the rules for calculating the worldwide group debt
percentage to exclude:
related-party debt, increased asset values resulting from
internal sales, and
capitalised interest when a deduction has been taken in New
This week's "official's note" responds to
submissions made on the January paper and sets out the details of
how the modified regime will work.
The proposal to extend the reach of the thin cap rules to groups
"acting together" had the potential to be wide-reaching
and create significant uncertainty. The original proposal was that
"acting together" would not be defined, but at least
include groups explicitly co-operating through a written or tacit
shareholder agreement and groups being effectively co-ordinated by
a person or group.
Inland Revenue recognises that the "acting together"
test could be uncertain and problematic. To address these concerns,
a three-limb test is proposed to determine whether a group is
"acting together" sufficiently. The thin cap regime will
50% or more of the entity's shares are owned by a group of
non-residents who (directly or indirectly) hold debt in the entity
in proportion to their equity in the entity
the entity has fewer than 25 shareholders and the shareholders
have a shareholders' agreement that sets out how the entity
should be funded, and 50% or more of the shares are owned by
50% or more of the entity's shares are held by
non-residents that are effectively co-ordinated by a person or
group of people, such as a private equity manager or managers.
The three-limbed "acting together" test would not work
in the context of trusts. Accordingly, the "acting
together" test as originally outlined will be applicable. That
is, the "acting together" test will include explicit
co-operation and effective co-ordination of non-residents making
settlements on the trust.
Related party debt
The change to exclude related-party debt from the worldwide
group debt percentage is going ahead, with one minor exception. The
rule will not apply to shareholder debt of a publicly listed
company which is publicly traded debt owed to a shareholder owning
less than 10% of the company.
Increased asset values resulting from internal sales
Inland Revenue is going ahead with the change to ignore
increased asset values in debt percentage calculations where the
increased value results from internal sales.
The change announced in January was to exclude capitalised
interest from the value of a group's assets for the debt
percentage calculations if a deduction for that interest has been
taken in New Zealand. Inland Revenue is now considering limiting
the exclusion for capitalised interest to assets that are not
carried at fair value.
Submissions close on 28 June 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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