Application to non-residents with no fixed establishment

(Clauses 46(1), 46(2), 50, 51 and 53 to 55)

Summary of proposed amendment

The Bill proposes changes to the thin capitalisation rules to limit their application in the case of non-resident companies that do not carry on business through a fixed establishment in New Zealand. Such companies will no longer be subject to the rules if all their New Zealand-sourced income that is not relieved under a double tax agreement is non-resident passive income.

Application date

Income years beginning on or after I July 2011.

Detailed analysis

The thin capitalisation rules currently apply to non-resident companies that have New Zealand-sourced income that is not relieved under a double tax agreement, even if the company has an insignificant physical presence in New Zealand.

This is to ensure that such non-residents are not artificially lowering their taxable income by debt-funding their New Zealand activities or investments.

However, the inclusion of such companies causes difficulties with the definition of the “New Zealand group” under the rules, and may bring in non-resident entities that should not logically be included.

When the New Zealand-sourced income is “non-resident passive income”, it is subject to a withholding tax in New Zealand which is typically a final tax. That is, no interest deductions may be taken against the income. In such a case, it is not necessary to apply the thin capitalisation rules.

The Bill makes changes to stop the thin capitalisation rules applying to non-resident companies that are currently caught by the rules only because they have New Zealand-sourced income, but have purely non-resident passive income.