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New rules for taxing controlled foreign companies and foreign dividends

The Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 introduces new rules for the taxation of foreign companies controlled by New Zealand residents and for foreign dividends received by New Zealand companies.

The Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill was introduced into Parliament on 2 July 2008. It received its first reading on 6 August 2008, the second reading on 4 August 2009 and its third reading on 15 September 2009.

At the report-back stage of the bill the Finance and Expenditure Committee recommended a number of changes to the legislation, including deferring the application dates of many of the reforms. A number of substantial amendments were also made by Supplementary Order Papers 224, 34 and 35. The resulting Act received Royal assent on 6 October 2009.

The new Act amends the Income Tax Act 2007, Income Tax Act 2004, Tax Administration Act 1994, Income Tax Act 1994, Income Tax Act 1976, Estate and Gift Duties Act 1968, Stamp and Cheque Duties Act 1971, Taxation Review Authorities Act 1994, Taxation (Business Taxation and Remedial Matters) Act 2007, Companies Act 1993, Insolvency Act 2006, Income Tax (Depreciation Determinations) Regulations 1993, Goods and Services Tax Act 1985, Goods and Services Tax (Grants and Subsidies) Order 1992, KiwiSaver Act 2006 and the KiwiSaver Regulations 2006.

Introduction to the new rules for taxing controlled foreign companies and foreign dividends

The new rules represent a fundamental change to how New Zealand taxes offshore income earned through controlled foreign companies.

Exemptions from attribution requirement

Under the new rules, the grey list and conduit exemptions have been repealed.

Attributable income

Attributable income is referred to in the Act as the attributable CFC amount (a gross concept defined in section EX 20B) and as net attributable CFC income or loss (a net amount determined under sections EX 20C to EX 20E).

Mechanics of attribution

There is a signposting provision in section EX 18A showing the scheme for finding a person's attributed CFC income or loss under the new rules.

Interest allocation rules

Interest allocation rules have been extended to outbound entities: New Zealand residents with an income interest in a CFC.

Foreign dividend exemption

Section CW 9 provides that a dividend from a foreign company is treated as exempt income if derived by a company resident in New Zealand.

Transitionals, consequentials and repeals

Provision has been made to deal with various transitional and consequential matters arising from the new rules for CFC income and foreign dividends.

Disclosure requirements for CFCs

Residents must disclose an income of 10 percent or more in a CFC.