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Inland Revenue

Tax Policy

Chapter 12 - Key definitions

12.1 The last three recommendations in the Final Report are about definitions. Most of the definitions are straightforward and they should be adopted so far as necessary. In this Chapter the question of how some significant definitions might be incorporated into New Zealand law is considered.

Financial instrument

12.2 Recommendation 1 applies primarily to “financial instruments”. Recommendation 1.2(c) is that countries treat as a financial instrument any arrangement where one person provides money to another in consideration for a financing or equity return.

12.3 In New Zealand a financial instrument would include a financial arrangement as defined in subpart EW. However, a number of the exclusions from the financial arrangement definition would not apply.

  • Given the purpose of the hybrid rules, a financial instrument would include shares in a company, as defined for tax purposes. It would not include an interest in a vehicle treated as fiscally transparent for New Zealand purposes, such as a partnership or look-through company.
  • Variable principal debt instruments would be included.
  • The definition should also include annuities, farm out arrangements, share lending arrangements and livestock or bloodstock hire purchases, since all of these seem to have some financing component, and could be entered into in a commercial context.

12.4 It is proposed that the remaining excepted financial arrangements would not be financial instruments. This means that operating leases would be outside the definition, while finance leases and hire purchase agreements would be within it.

Structured arrangement

12.5 The definition of a “structured arrangement” is set out in Recommendation 10 of the Final Report, and discussed in some detail. The core definition is that it is an arrangement where either:

  • the hybrid mismatch is priced into the terms of the arrangement; or
  • the facts and circumstances indicate that it has been designed to produce a hybrid mismatch.

12.6 Facts and circumstances which would be taken into account in determining whether or not an arrangement has been designed to produce a hybrid mismatch would include whether or not the arrangement:

  • incorporates a term, step or transaction used to create a hybrid mismatch;
  • is marketed as a tax advantage product where some or all of the tax advantage derives from a hybrid mismatch;
  • is marketed primarily to investors in a country where the hybrid mismatch arises;
  • contains features that alter the terms if a hybrid mismatch does not exist, for example, a tax gross-up provision; or
  • produces a negative return absent the hybrid mismatch.

12.7 To incorporate this definition into New Zealand law, it is proposed to use the existing “arrangement” definition, and to define a structured arrangement as one where either:

  • the hybrid mismatch is priced into the terms of the arrangement; or
  • the arrangement has a purpose or effect of producing a hybrid mismatch.

12.8 As with the existing Ben Nevis factors which apply in the context of section BG 1, we propose that the list of factors provided in the Final Report be reproduced in guidance, rather than being legislated. This is also the approach recommended by the Australian Board of Taxation.

Related persons

12.9 Recommendation 11.1(a) is that two persons are related if they are in the same “control group” (considered below) or:

  • one of the persons has a 25 percent or greater interest in the second; or
  • a third person holds a 25 percent or greater interest in both.

12.10 For this purpose, a person who acts together with another person in respect of the ownership or control of any investment in another person will be treated as also owning that other person’s investment.

12.11 Two persons will be treated as acting together in respect of ownership or control of an investment if:

  • they are family members. A person’s family members are:
    • persons who are within two degrees of relationship of the person, and those persons’ spouses;
    • the person’s spouse;
    • persons who are within two degrees of relationship of the first person’s spouse;
  • one regularly acts in accordance with the wishes of the other;
  • they have entered into an arrangement that has a material effect on the value or control of the investment; and
  • the ownership or control of the investment is managed by the same person or group of persons.

12.12 An investment in an entity can be a voting interest or an equity interest or both. A voting interest can apply to non-corporate as well as corporate entities, and is a right to participate in decision making concerning distributions, changes in the person’s constitution or the appointment of a director, broadly defined so that includes the persons who have management and control of an entity.

12.13 A look-through test applies to trace interests through interposed entities.

12.14 This approach is similar to that taken to determining whether or not two companies, two natural persons, and a company and a person other than a company, are associated under subpart YB 2 to YB 4 and YB 13 and YB 14, subject to the fact that for two companies, the test generally requires a 50 percent common ownership.[66] However, the application to trusts and partnerships seems somewhat different. While it would make sense to build so far as possible on existing definitions, it is likely to be preferable to do so by using a stand-alone definition which combines existing concepts plus the modifications necessary to ensure that New Zealand’s hybrid regime has the same scope as others enacted in accordance with Action 2.

Control group

12.15 Two persons will be in a control group if:

  • they are consolidated for accounting purposes, either under IFRS or applicable GAAP;
  • one of them effectively controls the other, or a single person effectively controls both;
  • one of them has a 50 percent or greater investment in the other, or a single person has a 50 percent or greater ownership of both; or
  • they are associated enterprises under Article 9 of the OECD Model Treaty, which defines when transfer pricing adjustments may be made. The Final Report states that countries should apply their own transfer pricing thresholds for this purpose, so that if transactions between two entities are subject to transfer pricing adjustments under domestic law, they are in a control group for purposes of the hybrid rules (Final Report, paragraph 367).

12.16 In determining control and ownership, the same rules apply as those in determining ownership interests for purposes of the related person definition. In particular, interests of persons who act together in respect of their interests, or are treated as doing so, will be aggregated as set out in paragraph 12.11 However, control is clearly a broader concept than ownership. For example, a substantial shareholder in a widely held company may have effective control over the appointment of directors, despite not having 50 percent of the rights to appoint the directors (Final Report, paragraph 364).

12.17 In the New Zealand context, in addition to the issues considered above in relation to the related person definition:

  • consideration will need to be given to whether the existing reference to “control by any other means” in section YB 2(3) would be interpreted by New Zealand’s courts in a manner consistent with its interpretation in the Final Report. If not, a separate definition may be required;
  • in accordance with the Final Report, two entities will be in a control group if they are associated persons for purposes of the transfer pricing provisions in subpart GC.


12.18 “Payment” includes non-monetary flows, such as a transfer of shares or any other asset. It includes not only things convertible into money, but also anything that would be paid for if provided at arm’s length. In New Zealand terms it would be covered by the definition of “money” which applies for purposes of the financial arrangement rules.

Submission point 12

Submissions are sought on any aspects of the OECD’s recommended definitions and how they could be adopted by New Zealand.


66 Also, the definition of a family member seems somewhat broader than the definition of a relative in section YA 1. For example, a person’s sister’s spouse is a family member but not a relative. We propose that the broader definition be used in this context.