This content is from: New Zealand

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

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 ( and James Lester (
Russell McVeagh
Tel: +64 4 819 7345 and +64 4 819 7755

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