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New Zealand: Court of Appeal considers double tax relief article in DTA with China

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The New Zealand Court of Appeal has overturned a High Court decision allowing a New Zealand taxpayer foreign tax credits for tax spared (under Chinese law) to Chinese companies treated as controlled foreign companies under New Zealand's CFC rules.

The New Zealand Court of Appeal has overturned a High Court decision allowing a New Zealand taxpayer foreign tax credits (FTCs) for tax spared (under Chinese law) to Chinese companies treated as controlled foreign companies (CFCs) under New Zealand's CFC rules.


Ms Lin (a New Zealand tax resident) was attributed, under New Zealand's CFC rules, a share of the income derived by certain Chinese companies in which she held interests. The New Zealand Inland Revenue had allowed Ms Lin FTCs for Chinese tax actually paid by the CFCs under a provision of New Zealand law allowing a credit, for tax paid by the CFC, against New Zealand tax payable on attributed CFC income. However, Inland Revenue denied her claim for FTCs for Chinese tax spared under Chinese law (tax spared).

Ms Lin successfully challenged Inland Revenue's FTC denial in the High Court. (See 'New Zealand: High Court considers DTA tax sparing provisions' in the July 2017 edition of International Tax Review for our summary of the High Court proceedings.) Inland Revenue appealed the High Court decision to the Court of Appeal.

Court of Appeal decision

The question was whether the Chinese tax spared to the CFCs was "Chinese tax paid [which was deemed to include the tax spared]… in respect of income derived by a resident of New Zealand from sources in the People's Republic of China". The interpretation accepted by the High Court was that because the income of the CFC (on which Chinese tax was paid) was attributed to Ms Lin under New Zealand's CFC rules, tax paid by the CFC was tax paid 'in respect of' the income derived by Ms Lin. That is, it was enough that the tax was payable by the CFC on income that was attributed to Ms Lin under New Zealand's CFC rules.

The High Court had also relied on, by analogy, the OECD commentary relating to partnerships on the basis New Zealand's CFC regime effectively treats CFCs as fiscally transparent. The Court of Appeal dismissed that approach as involving a "largely diversionary focus on extraneous materials and analogies with other legal structures, at the expense of a close textual analysis" (Commissioner of Inland Revenue v Lin [2018] NZCA 38, at [23]). Instead, the Court of Appeal considered that the meaning of Article 23 was clear and (in the absence of any contrary intention) only allows credits for taxes actually payable (or deemed payable, in the case of tax spared) by the New Zealand tax resident.

The Court of Appeal concluded that the 'income' of the CFC was not 'derived' by Ms Lin in China, and the tax paid or spared to the CFC was not payable, paid by or spared to Ms Lin. Rather, the tax imposed, on two different persons, is 'in respect of' two different income streams.

Wider implications

Previously, the New Zealand Court of Appeal (in a precedent applied by the High Court in the Lin case, but not referred to in the Court of Appeal judgment) had held that DTAs had an 'international currency' and that their language 'should be construed on broad principles of general acceptation and having appropriate regard to the commentary and any travaux preparatoires' (Commissioner of Inland Revenue v JFP Energy [1990] 3 NZLR 536 at 540.) The Court of Appeal in Lin has opted for a more literal approach, opining that DTAs are to be interpreted according to the same principles as apply to private contractual instruments and that each DTA 'must be construed discretely, in accordance with its own particular terms' (At [20]). In this respect, the court's decision could have implications going beyond the particular issue concerning the scope of Article 23 of the DTA with China.






Brendan Brown ( and Matt Woolley (

Russell McVeagh

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