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Inland Revenue

Tax Policy

Chapter 7 - Other matters

Qualifying company and shareholder are associated persons

7.1 Section YB 12 of the Income Tax Act treats a partnership and a partner in the partnership as associated persons. However, an exception exists for limited partners. A limited partnership and a limited partner in the partnership are associated persons only if the limited partner has a partnership share of 25 percent or more.

7.2 An ordinary company and a shareholder are associated persons if the shareholder has a voting interest of 25 percent or more in the company. This is consistent with the associated person rules for limited partnerships.

7.3 As a result of qualifying companies being treated as a partnership and their shareholders as partners for income tax purposes, section YB 12 would apply. Consequently, a qualifying company and its shareholders would always be treated as associated persons, regardless of whether the shareholder has an interest in the qualifying company of 25 percent or more. Even though the new qualifying company rules will be mainly based on the limited partnership rules, the application of section YB 12 is appropriate because a qualifying company is a closely held entity with the shareholders typically managing the company, which is not the case with limited partners.

7.4 For the disposal of film property, section DS 4(5) provides that an LAQC and an LAQC shareholder are associated persons. The removal of the LAQC regime and application of section YB 12 to qualifying companies and their shareholders will supersede section DS 4(5), which will be removed.

Anti-avoidance provisions

7.5 There are currently a number of specific anti-avoidance provisions relating to qualifying companies – in particular, those in sections GB 6 and HA 12 of the Income Tax Act.

7.6 Section GB 6 applies when a company share has been subject to an arrangement whose purpose is to defeat the intent and application of the qualifying company rules, and when this arrangement allows a company to enter into the qualifying company rules. In such cases, the company is treated as not being a qualifying company. Section HA 12 provides that an LAQC is considered to be not eligible to be an LAQC if a share in the company has been part of an arrangement whose purpose is to defeat the intent and application of the qualifying company rules.

7.7 Officials consider that the general anti-avoidance provision in section BG 1 should be sufficient to cater for the situations that sections GB 6 and HA 12 are intended to address. Therefore, it is proposed to remove these specific anti-avoidance provisions as part of this reform.

Goods and Services Tax Act 1985

7.8 Under the Income Tax Act, qualifying companies under the new rules will be treated as companies for the purposes of the Goods and Services Tax Act 1985, and the company would be the taxable person rather than the shareholders.