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Inland Revenue

Tax Policy

PIEs with non-portfolio interests in CFCs or FIFs

(Clauses 7(1), 9(2), 12, 18, 23 and 26(2))

Summary of proposed amendments

Proposed amendments will deem all CFC interests held by a portfolio investment entity (PIE) to not be CFC interests. Note this will not mean that the foreign company would stop being a CFC, it just means the PIE will use the FIF rules as opposed to the CFC rules. A similar amendment will prevent PIEs from using the attributable FIF income method.

Application date

The changes would apply to income years beginning on or after 1 July 2011.

Key features

Under proposed amendments to sections EX 14 and EX 34 an investor would only have a CFC interest if they have a 10% or more interest in the controlled company and if they are not a PIE. If they are a PIE they will have an ordinary (non-CFC) FIF interest in the company.

Proposed amendments to section EX 46 would prevent a PIE from using the attributable FIF income calculation method.

A proposed amendment to section CW 9 will prevent all PIEs from accessing the foreign dividend exemption (currently only multi-rate PIEs are excluded from this exemption). Note that PIEs will not actually be taxed on foreign dividends as they will be treated as only having FIF income from their FIFs (see section EX 59(2)).


The interaction of the PIE rules and the active income exemption rules can lead to individuals who invest through a PIE being treated differently to other individual investors. If PIEs were able to access the active income and foreign dividend exemptions they would be able to pass foreign income through to their members with no New Zealand tax. In contrast, New Zealand tax would be payable in cases where a non-PIE company distributed untaxed foreign income.

Under the existing rules, PIEs can hold a 10-20% interest in a CFC (that is not a foreign PIE equivalent). In such cases they are required to apply the active income exemption to such interests. However, if the investors in the PIE held their share of the CFC directly, they would usually be required to use a FIF calculation method (as an interest of less than 10% in a CFC is not a CFC interest).

PIEs that have a 10% or greater interest in a CFC or FIF should not be considered to have a CFC interest, should not be able to use the attributable FIF income method to access the active income exemption, and should not be able to use the dividend exemption in section CW 9.