Skip to main content
Inland Revenue

Tax Policy

Losses of controlled foreign companies – transition

(Subclauses 70(1) and 70(2))

Summary of proposed amendment

The Bill proposes rewording transitional provisions dealing with losses arising under the old international tax rules, and being carried forward under the new international tax rules, to ensure the policy intent of these provisions is realised.

Application date

Income years beginning on or after 1 July 2009.

Detailed analysis

All references are to the Income Tax Act 2007 unless stated.

Subsections IQ 2B(1) and IQ 2B(2)

These provisions are intended to reduce carried-forward losses of controlled foreign companies (CFCs). This is because the losses arose at a time when all income was expected to be taxed, whereas only passive income will be taxed under the new international tax rules.

CFC losses are “ring-fenced” by country, so that they may be used only to offset CFC income from the same country. References to “a CFC or FIF that is resident in a country” were intended to refer to this ring-fencing, but may have created doubt that the transitional provisions apply to carried-forward losses of CFCs that have been liquidated or migrated.

The Bill rewords the provision to make clear that the transitional rule applies to all ring-fenced losses, as intended.