Residence

New Zealand's comprehensive international tax measures are based on the concept of "residence" (residence for tax purposes, as distinct from citizenship). Non-residents are liable for New Zealand tax only on New Zealand-sourced income, whereas residents are liable for New Zealand tax on foreign-sourced income as well as New Zealand-sourced income (although the New Zealand tax liability is generally reduced by any foreign tax paid).

Foreign-sourced income of New Zealand residents

Foreign income distributed to a New Zealand resident is liable for normal New Zealand income tax or, in the case of foreign dividends distributed to a resident company, a 33% foreign dividend withholding payment. A credit for the foreign dividend withholding payment is deducted from the shareholder's liability once the dividend is passed on (in a similar manner to imputation credits).

In addition, under New Zealand's controlled foreign company (CFC) and foreign investment fund (FIF) rules, income is attributed and taxed as it accrues in the foreign entity, even though not yet distributed.

Under the CFC rules, the income of a foreign company is recalculated using New Zealand's income and expense recognition rules. New Zealand resident shareholders with interests of 10% or greater in a CFC are assessed for New Zealand tax on the proportion of the recalculated CFC income equating with their level of interest.

The FIF rules, which apply to interests in foreign entities not "caught" under the CFC rules, reduces the compliance costs of New Zealand investors by offering alternative methods for calculating attributed income.

An exemption from the requirement to attribute foreign income under the CFC and FIF rules applies to most interests held in the foreign entities resident in "grey list" countries (currently Australia, Canada, Germany, Japan, Norway, the United Kingdom and the United States). The aim of the grey list exemption is to minimise compliance costs.

Because New Zealand residents are able to claim foreign tax credits, New Zealand would gain little revenue from making interests in grey list companies subject to the CFC and FIF rules.

Foreign-sourced income derived by a trust whose settler is a New Zealand resident is subject to New Zealand tax, even if the trustees of the trust are non-resident. The rate of tax imposed on trustee income is 33%.

New Zealand-sourced income of non-residents

Non-residents can carry on business in New Zealand either by way of a branch operation or a subsidiary company.

A non-resident company operating in New Zealand through a branch is liable to New Zealand tax on all New Zealand-sourced income, at the rate of 33%. Distributions from a branch to its head office are not separately taxed because they do not represent a payment to a separate legal entity.

The New Zealand subsidiary of a non-resident company is taxed at 33% on its worldwide income. Distributions from the subsidiary to its parent company are also subject to non-resident withholding tax (NRWT).

Relief from double taxation on dividend distributions (income tax and NRWT) is provided through New Zealand's foreign investor tax credit (FITC) rules. Companies can pay a supplementary dividend which generates a tax credit (the FITC) for offset against company income tax.

Interest and royalties paid to the parent company are also subject to NRWT, but are deductible to the subsidiary, so no double taxation arises.

In certain circumstances, the liability to deduct NRWT from interest paid to offshore investors can be replaced by an approved issuer levy (AIL) of 2%, imposed on the resident borrower.

Measurement of New Zealand-sourced income

New Zealand has a comprehensive transfer pricing regime, based on the "arm's-length" principle, the aim of which is to measure accurately New Zealand-sourced income.

New Zealand also has a thin capitalisation regime applying to non-resident controlled companies which acts as a "backstop" to the transfer pricing regime. If a non-resident parent allocates an excessive proportion of its worldwide interest expense to its New Zealand operation, a deduction is denied to the extent of that excessive interest allocation.