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New Zealand: High Court considers DTA tax sparing provisions

11 July 2017

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The High Court of New Zealand in Lin v Commissioner of Inland Revenue [2017] NZHC 969 has held that a New Zealand taxpayer is entitled to foreign tax credits (FTCs) for tax spared (under Chinese law) to Chinese companies that are treated as controlled foreign companies (CFCs) under New Zealand's CFC regime.

Tim Stewart Hamish Journeaux

The outcome of the case turned on the interpretation of Article 23 of the New Zealand/China double tax agreement (DTA).

Ms Lin, the taxpayer, was a New Zealand tax resident and, therefore, subject to New Zealand tax on her worldwide income. Under New Zealand's CFC regime, Ms Lin was attributed a share of the income derived by a number of Chinese companies (CFCs) in which she held interests.

The New Zealand Inland Revenue had allowed Ms Lin FTCs for Chinese tax paid by the CFCs under a provision of New Zealand's domestic law allowing a credit against New Zealand tax payable on attributed CFC income for tax paid by the CFC. But Inland Revenue denied her claim for FTCs for Chinese tax not paid by the CFCs because that tax had been spared under Chinese law (tax spared).

Article 23 of the DTA contains a tax sparing provision that deems an amount that would have been payable as Chinese tax but for an exemption from, or reduction of, tax granted under certain provisions of Chinese law, to be tax payable in China for the purposes of determining entitlement to FTCs. Ms Lin claimed that this provision in the DTA entitled her to FTCs in relation to the tax spared.

The tax sparing provision in the DTA specifically refers to "tax payable … by a resident of New Zealand". The High Court, however, held that when the DTA is interpreted in accordance with the Vienna Convention and the OECD commentary, the tax sparing provision should be read such that references to tax payable by a resident of New Zealand includes tax paid by the CFC. The reference to Chinese tax paid or payable by a New Zealand resident accordingly includes tax that is deemed to have been paid by a CFC for the purposes of the sparing provision. The effect of interpreting the DTA in this way was that Ms Lin was entitled, under Article 23 of the DTA, to FTCs for the tax spared, as well as for tax actually paid by the CFCs.

In reaching its conclusion, the court applied, by analogy, the OECD commentary relating to partnerships on the basis that New Zealand's CFC regime effectively treats CFCs as fiscally transparent. The court rejected Inland Revenue's submission that the commentary on partnerships was "deliberately limited to partnerships", and instead concluded that given New Zealand's tax treatment of CFCs, the CFCs could be considered sufficiently similar to partnerships for the principles applicable to partnerships to apply.

An interesting aspect of the court's reasoning was the reliance placed on expert evidence regarding the process by which a DTA is negotiated, the background to the particular DTA (with China), and the relevant OECD commentary. One inference drawn from this evidence was that when negotiating the DTA both China and New Zealand would have been aware that New Zealand was considering implementing a CFC regime. The reliance placed on this expert evidence is interesting in view of previous decisions in which New Zealand courts have rejected attempts by taxpayers to rely on expert evidence going to questions of interpretation.

The court's decision allows relief under the tax credit Article in the DTA in a broader range of circumstances than Inland Revenue has previously contemplated. The High Court's decision may not be the last word on the issue, however, as Inland Revenue has appealed the decision to the Court of Appeal.

Tim Stewart ( and Hamish Journeaux (
Russell McVeagh
Tel: +64 4 819 7527 and +64 9 367 8037

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