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Inland Revenue

Tax Policy

Chapter 9 - Dual resident payers

9.1 Recommendation 7 applies to dual resident entities. It is similar to Recommendation 6, in that it deals with a situation where a single payment is deductible in two countries. However, in this case there is only one entity involved, and both countries regard it as a resident. Since it is not easy to differentiate between the two countries, Recommendation 7.1 is for both countries to deny the deduction to the extent that it is offset against non-dual inclusion income. As with Recommendation 6, any deduction that is disallowed can be offset against dual inclusion income arising in a later period.

9.2 Since only one taxpayer is involved, there is no limitation on the scope of Recommendation 7.

9.3 If both residence countries have hybrid rules, it is possible for the disallowance to give rise to double taxation – for example, if it is offset against non-dual inclusion income in both jurisdictions (see Final Report, Example 7.1). However, given that dual residence status is in most cases deliberate rather than accidental, it should be possible for taxpayers to be aware of the possibility of double taxation, and by adopting simpler structures, avoid it.

Application to New Zealand

9.4 New Zealand already denies a dual resident company the ability to use a loss to offset the income of other group companies (section IC 7(2)) and to join a tax consolidated group (section FM 31). While this substantially limits the kinds of structures that can give rise to double non-taxation using a dual resident company resident in New Zealand, it does not mean that there are no such opportunities. For instance, New Zealand could not be Country A in the Final Report’s Example 7.1, but it could be Country B.

9.5 The dual resident payer rule raises a number of issues that have been considered in previous chapters. In particular:

  • because a deduction is allowed to the extent of dual inclusion income, dual inclusion income needs to be defined – this is considered in Chapter 6;
  • determining whether or not a payment is deductible in the other country may require that issue to be determined earlier than when a deduction arises in that country, in which case the ordinary rules applying in that country should govern the question. At the same time the question requires certain entity specific rules in that country to be taken into account;
  • the rule can sensibly apply to non-cash deductions such as depreciation and amortisation. Accordingly it is not necessary to restrict it to payments;
  • some equity returns that are tax exempt or tax credited on the basis that they are paid out of tax paid income should still be treated as dual inclusion income;
  • disallowed amounts should be able to be carried forward and offset against dual inclusion income arising in a later year. Carry-forward will be limited in the same way as it is limited for losses;
  • attributed income under CFC rules cannot be treated as dual inclusion income;
  • credit for underlying foreign taxes may be limited; and
  • if an entity is unable to carry forward its disallowed loss in one country, the other country can allow the loss to be deducted (see Final Report, Example 7.1 paragraph 13).

Submission point 9A

Submissions are sought on the OECD’s Recommendation 7 and any issues that may arise in relation to its implementation in New Zealand.

DTA dual resident rule suggestion

9.6 In Chapter 13 of the Final Report it is suggested that countries should consider inserting into their domestic law a rule that deems an entity not to be resident if that entity is resident of another country through the operation of a DTA.[58]

9.7 If incorporated into New Zealand law, this rule would prevent an entity benefitting from a mismatch between New Zealand’s domestic law definition of residence and the definition of residence found in any of New Zealand’s bilateral DTAs.

9.8 Canada[59] and the UK[60] have domestic law to this effect. New Zealand law currently features a series of provisions that ensure that an entity that is non-resident under a DTA cannot access various features of the New Zealand tax system (such as maintaining an imputation credit account).[61] However, New Zealand’s rules are not comprehensive, which potentially allows room for abuse. In particular, a company could manipulate its place of effective management under a DTA to avoid New Zealand’s corporate migration rules (as they do not provide for a company becoming non-resident under a treaty).

Submission point 9B

Submissions are sought as to the OECD’s DTA dual resident rule suggestion.


58 At para 432.

59 Section 250(5) of the Income Tax Act 1985 (Canada).

60 Section 18 of the Corporation Tax Act 2009 (United Kingdom).

61 See, for instance, sections FN 4, FO 3, HA 6, IC 7, and OB 1 of the Income Tax Act 2007.