Among other matters, the Bill proposes amendments to strengthen New Zealand's thin capitalisation rules and to facilitate the implementation of foreign account information-sharing agreements entered into between New Zealand and other jurisdictions.
Thin capitalisation rules
New Zealand's thin capitalisation rules protect the tax base by effectively limiting deductions for interest where the debt levels of a New Zealand corporate group exceed prescribed thresholds. The Bill includes two primary amendments that are intended to address certain perceived deficiencies in the rules.
First, the scope of the rules has been expanded to apply to a scenario where a number of non-residents may be acting together in relation to their New Zealand investment. At present, in the case of a New Zealand company, the rules apply to that company if a non-resident has an interest in the company of 50% or more or otherwise has control of the company.
The changes proposed in the Bill mean that the rules will now also apply to such a company where a group of non-residents acting together holds such a controlling interest in aggregate where, if each non-resident was considered individually, the relevant ownership threshold would not be met. For these purposes the Bill introduces the concept of a non-resident owning body which would include, for example, non-residents holding debt interests in a New Zealand company in proportion to their equity interests (a funding structure commonly used in relation to private equity investment).
The definition of non-resident owning body has been the subject of significant amendment following the recommendations of officials. The changes are intended to increase certainty as to when a non-resident owning body will be formed.
Secondly, the Bill proposes a change to the test that requires taxpayers to compare the level of debt for a New Zealand group with that of the worldwide group of which the New Zealand group forms part. This test is designed to ensure that New Zealand debt levels are proportionate to the amount of genuine external debt of the worldwide group.
For the purposes of this test, taxpayers will now be required to exclude shareholder-linked debt from the calculation of worldwide debt to give a more accurate reflection of genuine external debt. Shareholder-linked debt will include debt guaranteed by shareholders in certain cases.
Foreign account information-sharing agreements
The provisions in the Bill relating to foreign account information-sharing agreements have been included to facilitate the implementation of FATCA under New Zealand law. New Zealand is currently negotiating an inter-governmental agreement (IGA) with the US and it is anticipated that the IGA will be signed in the coming weeks.
The Bill contains amendments that are required to bring the IGA into domestic law and to allow New Zealand financial institutions to comply with its terms. For example, in the absence of specific law change, many financial institutions were concerned that the provision of information under the terms of an IGA may breach privacy laws.
The proposed amendments are drafted in a broad manner to accommodate the possibility of New Zealand entering into similar agreements with other jurisdictions in the future.
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