New Zealand: Proposed changes to foreign investment consent rules to include tax measures

The New Zealand Government has announced a range of changes to the foreign investment consent rules, to be enacted as part of the second phase of its reform of the Overseas Investment Act 2005. A summary of the Government's announcement can be found here. 

The announcement follows the release in April 2019 of a consultation document by the New Zealand Treasury that noted a concern about "overseas persons acquiring sensitive New Zealand assets and not paying enough tax in New Zealand. This could be viewed as contrary to the [Overseas Investment] Act's purpose, which recognises that it is a privilege for overseas persons to own or control such assets." 

The consultation document proposed a number of measures to address this. While the details of the proposals in relation to tax have not yet been confirmed, it is understood that the rules will provide for consideration of the prospective investor's tax compliance history, and disclosure to the Inland Revenue Department of the proposed investment structure and its expected tax consequences.

Consideration of tax compliance history

New Zealand's existing overseas investment regime requires overseas persons to obtain consent from the Overseas Investment Office prior to investing in significant business assets or sensitive land. To obtain consent to invest in either category of sensitive asset, the overseas person (or the individuals with control, defined broadly to include shareholders with 25% or more ownership, directors, or in some cases senior management) must meet the "investor test". 

Currently the scope of the investor test is broad, including a good character test that requires consideration of any offences or contraventions of the law, and any other matters that reflect adversely on a person's fitness to have the particular overseas investment. 

Under the announced changes, the good character test will be replaced with a more targeted list of factors that decision-makers considering an application for investment consent should take into account. The scope of offences or contraventions to the law that are considered will be narrowed to convictions (or allegations where formal proceedings have commenced) in relation to certain serious criminal offences or civil contraventions.

However, it is understood that the rules will also specifically provide for consideration of:

• Penalties for tax evasion or similar acts (including equivalents in other jurisdictions); 
• Penalties for an abusive tax position (including equivalents in other jurisdictions); and 
• Tax defaults, where the investor has failed to pay an amount of tax payable of more than NZ$5 million (this will not include merely late payments).

The likelihood of special rules in respect of tax-related issues reflects the fact that in some jurisdictions, the tax authority itself (without needing to secure a conviction or judgment of a court) can impose material civil penalties (such as penalties for tax evasion). It is understood that decision makers considering an application for foreign investment consent will be able to consider these penalties once they are imposed by a tax authority, whether or not those penalties are challenged in court. However, if a court overturns a penalty, that penalty will no longer be taken into account.

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