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Inland Revenue

Tax Policy

Chapter 1 - Introduction

1.1 Like many countries, New Zealand imposes non-resident withholding tax (NRWT) on dividends, interest and royalty payments to non-residents. NRWT applies at a different rate depending on whether the payment is a dividend, interest or royalty.

1.2 As shown in table 1, NRWT rates are generally reduced if New Zealand has a double tax agreement with the non-resident’s country. There are also arrangements under domestic law that reduce the impact of NRWT in certain circumstances.

Table 1:
NRWT rates in domestic law and double tax agreements
  Dividends Interest Royalties
Domestic law rate 30% if unimputed;
15% if imputed.
15% generally, but:
0% if the non-resident is not associated with the interest payer and the 2% approved issuer levy is paid.
Typical NZ DTA rate (some treaties include higher rates). 15% 10% 10%
Protocol to NZ-US DTA (not yet in force). 15% generally, but:
5% for dividends if a company investor has a 10% or higher stake in the company paying the dividend; and
0% for dividends if a company investor has an 80% or higher stake.
10% generally, but:
0% for interest received by a lending or finance business unrelated to the interest payer, provided (in the case of New Zealand-sourced interest), the 2% approved issuer levy is paid.

1.3 Along with company tax, NRWT helps to ensure that non-residents are taxed on the income they earn from New Zealand. It raises revenue by taxing dividend, interest and royalty payments made by New Zealanders to foreign investors. It provides a backstop to the company tax base by limiting the extent to which these payments can be used to shift New Zealand income offshore.

1.4 In some countries, NRWT can be used to reduce taxes in the non-resident’s home country on the dividend, interest or royalty payment. Notwithstanding this, NRWT can still add to the cost of funds for New Zealand businesses in certain circumstances. For example, lenders will often contractually require the borrower to bear the cost of the NRWT in the loan agreement.

1.5 New Zealand has some existing measures, such as the approved issuer levy (for interest paid to an unrelated party) and supplementary dividend tax credits (for imputed dividends), which help to reduce the impact of NRWT on inbound financing and investment, without undermining the role that it plays in sustaining company tax revenues.

1.6 Concerns have been raised that the current approved issuer levy (AIL) and NRWT rules may be one factor hindering the development of New Zealand’s corporate bond market. This paper examines the question of whether the approved issuer levy should apply at a zero rate (rather than the usual rate of 2 percent) on interest paid on corporate bonds which meet certain criteria.

1.7 Because of the fiscal costs and risks of removing NRWT and AIL on interest, it would be useful to receive submissions on the extent to which AIL affects bond issuance and the way that businesses raise funds, relative to other factors.

1.8 To manage the fiscal risks posed by related party and closely held debt we suggest in this paper that certain criteria would be used to limit the zero rate of AIL to widely held debt. Submissions are sought on the suggested changes outlined below.

Summary of suggested changes

AIL would apply at a rate of zero for interest paid on qualifying bonds.

A “qualifying bond” would be a debt security that belonged to a group of identical debt securities that satisfied the widely held test or the stock exchange test.

The widely held test would require:

  • the debt securities to be held by at least 100 investors (who are not associated or who could not reasonably be expected by the issuer to be associated); and
  • no person (or group of persons that the issuer could reasonably expect to be associated with each other) holds more than 10 percent of the debt securities (disregarding an underwriter for the first year).

The issuer would be required to apply the test annually to check that the thresholds were still satisfied.

The stock exchange test would require the debt securities to be listed on a recognised stock exchange.


A debt security would not be a qualifying bond if:

  • it has been issued through a private placement that is limited to a select group of investors; or
  • it has not been openly advertised to the target market during the book-build process; or
  • it is an asset-backed security – that is, any security where the interest payments are financed by cashflows from a pool of financial assets.

How to make a submission

1.9 Submissions should be made by 30 October 2009 and be addressed to:

NRWT and the bond market
C/- Deputy Commissioner, Policy
Policy Advice Division
Inland Revenue Department
PO Box 2198
Wellington 6140

Or e-mail: [email protected] with “AIL, NRWT and the bond market” in the subject line.

1.10 Submissions should include a brief summary of their major points and recommendations. They should also indicate whether it would be acceptable for Inland Revenue and Treasury officials to contact those making the submission to discuss the points raised, if required.

1.11 Submissions may be the source of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Those making a submission who feel there is any part of it that should properly be withheld under the Act should indicate this clearly.