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Brendan Brown |
Tim Stewart |
New Zealand has recently signed a double tax agreement (DTA) with Vietnam and completed the exchange of notes necessary to bring into force its revised DTA with Japan. These steps continue New Zealand's programme of expanding and updating its network of DTAs, which now extends to 39 DTAs (37 of which are in force).
New DTA with Vietnam
The DTA is New Zealand's first with Vietnam, reflecting the increasing importance of the relationship with Vietnam. The new DTA more closely follows the United Nations model than the OECD model in some respects, and so affords greater taxing rights to the source country than many of New Zealand's recent DTAs.
Thus, the business profits article provides that where an enterprise of a contracting state carries on business through a permanent establishment (PE) in the other state (the source state), the source state may tax: (a) the profits attributable to the PE; and (b) profits attributable to sales of goods or merchandise of the same or similar kind as those sold through the PE even if they are not attributable to the PE, but only if the competent authority of the source state considers that the enterprise has entered into an arrangement in relation to those sales to avoid taxation of those profits in that state.
The limits on source country tax on interest, dividends and royalties under the new DTA are:
Dividends: Limited to 5% of the gross dividend if the beneficial owner of the dividend is a company holding directly 50% of the voting power of the company paying the dividend. For dividends not qualifying for the 5% rate, the rate is 15%.
Interest: 10% of the gross amount.
Royalties: 10% of the gross amount.
For interest and royalties, the limitations on source country tax will not apply where the debt claim (in the case of interest) or relevant rights (in the case of royalties) are effectively connected with a PE or fixed base situated in the source country, or with activities referred to in Article 7(1)(b) (that is sales of goods or merchandise of the same or similar kind as those sold through the enterprise's PE even if they are not attributable to the PE, if the tax avoidance test in Article 7(1)(b) is satisfied). Such interest and royalty amounts therefore (in effect) form part of the PE's income, the source country tax on which is not limited by the DTA.
NZ/Japan DTA
The revised New Zealand-Japan DTA will apply to taxes withheld at source on or after January 1 2014. For New Zealand income tax it will apply for income years beginning on or after April 1 2014 and for Japanese income tax it will apply for income years beginning on or after January 1 2014.
The new DTA will replace the DTA concluded in 1963. Key changes include a reduction in the limits on source country tax:
Dividends: The DTA retains a source country limit of 15% for dividends but introduces a 0% rate where the beneficial owner of the dividend is a company that owns (and has owned for six months) directly or indirectly 10% of the voting power of the company paying the dividends. The 0% rate is only available if the recipient of the dividend is a company: (i) that is listed on a recognised stock exchange; (ii) that has at least 50% of its voting power owned directly or indirectly by five or fewer qualified persons; or (iii) for which competent authority approval is given.
Interest: Interest is exempt from source country tax if the beneficial owner is a financial institution unrelated to the payer that satisfies certain conditions (including, in the case of interest arising in New Zealand, the payment of approved issuer levy, which is a levy payable by the borrower at the rate of 2% of the interest paid). For other interest, source country tax is limited to 10%.
Royalties: Source country tax is limited to 5% of a gross royalty amount.
Other developments
New Zealand is negotiating DTAs with Luxembourg and the UK, and protocols with Austria, Belgium, Netherlands and India. In addition, New Zealand has recently concluded a revised DTA with Canada, a DTA with Papua New Guinea, and a protocol with Belgium, which have yet to come into force. The next year or so will therefore likely see further developments in New Zealand's DTA network.
Brendan Brown (brendan.brown@russellmcveagh.com)
Tel: +64 4 819 7748 Fax: +64 4 463 4503
Tim Stewart (tim.stewart@russellmcveagh.com)
Tel: +64 4 819 7527 Fax: +64 4 463 4503
Russell McVeagh
Website: www.russellmcveagh.com
