All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

New Zealand: New Zealand IRD releases issues paper on related party debt remission

harker.jpg

lester.jpg

Chris Harker


James Lester

Inland Revenue and Treasury have released an issues paper concerning proposed legislative changes to the tax consequences of the remission of intra-group debt (Related parties debt remission: An officials' issues paper (February 2015)).

Current law

Under New Zealand's financial arrangements rules, if one party (lender) forgives a debt owed by another party (borrower) or if that debt is cancelled or remitted by law, the borrower will generally have income equal to the amount of the debt remitted (debt remission income). Where the lender and borrower are related, however, there will generally be no corresponding deduction for the lender. In particular, no deduction for bad debt losses is permitted in respect of principal written off if the lender and borrower are related parties.

Debt remission income does not arise if, instead of the debt being remitted, it is repaid. One way intra-group debt can be repaid is for the lender to subscribe for shares in the borrower, with the borrower using the subscription proceeds to repay the debt. A recent Inland Revenue technical interpretation (QB15/01 Income tax: Tax avoidance and debt capitalisation), found that such an arrangement could, however, be subject to New Zealand's general anti-avoidance rule (GAAR) on the grounds that the issue of shares (especially if it does not change the ownership of the borrower) may be a mechanism to avoid debt remission income.

Inland Revenue's interpretation has been criticised as involving an overly broad reading of the GAAR (see 'NZ Inland Revenue releases draft GAAR guidance', International Tax Review, August 29 2014, commenting on an earlier draft statement by Inland Revenue). But it has also highlighted the fact that a remission of intra-group debt could result in net taxable income for the group even though the group's overall economic and financial position are unchanged.

Proposed changes

The issues paper proposes that there should be no debt remission income for the borrower when the borrower and the lender are both within the New Zealand tax base (which Inland Revenue says should include the situation where the borrower is a controlled foreign company (CFC)) and:

  1. they are members of the same wholly owned group of companies; or

  2. the borrower is a company or partnership; and

    1. all of the relevant debt remitted is owed to shareholders or partners in the borrower; and

    2. if the debt remitted was instead capitalised, there would be no dilution of ownership of the borrower after the remission and all owners' proportionate ownership interests in the borrower would be unchanged.

This proposal, if legislated, would apply retrospectively, from the commencement of the 2006-07 tax year. The issues paper also indicates Inland Revenue will not, pending the enactment of the proposed amendments, devote resources to enforcing the existing law.

Implications for non-residents

Inland Revenue's proposals are welcome. The current law, in providing for income to the borrower but no deduction for the lender on remission of intra-group debt, is incongruous given that the remission results in no income or gain to the group as a whole.

Non-residents should note, however, that the issues paper expressly does not address the question of inbound intra-group debt, indicating that "the use of related persons inbound debt is a key BEPS (base erosion and profit shifting) concern". Inland Revenue's concern appears to be that if a remission of inbound debt were made non-taxable, it might "further encourage New Zealand subsidiaries of foreign companies to push the 60% [thin capitalisation] debt/assets boundary by capitalising more debt when they are close to the boundary".

The arguments for intra-group debt remission not being taxable apply to inbound debt with the same force as for domestic or outbound debt. Further, if Inland Revenue is concerned about profit stripping using intra-group debt, maintaining a rule that treats the remission of such debt as taxable is not the answer. Maintaining that rule would in fact incentivise groups to keep such debt in place rather than remitting it or repaying it from the proceeds of a subscription of share capital so as to reduce their indebtedness. It is therefore to be hoped that when Inland Revenue decides on the final form of the proposals, the reforms will apply to all intra-group debt, regardless of the lender's tax residence.

Chris Harker (chris.harker@russellmcveagh.com) and James Lester (james.lester@russellmcveagh.com)

Russell McVeagh

Tel: +64 4 819 7345 and +64 4 819 7755

Website: www.russellmcveagh.com

More from across our site

This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree