New legislation - 2006: Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006 [2006 No 3]

Resident withholding tax on dividends paid by non-resident companies

Section NF 2(1) of the Income Tax Act 1994 and section NF 2(1) and NF 2(4) and (4B) of the Income Tax Act 2004

An amendment ensures that trans-Tasman imputation credits are taken into account in calculating resident withholding tax (RWT) deductions from dividends paid by non-resident companies.

A second amendment relaxes a requirement for RWT to be deducted from dividends paid by non-resident companies to New Zealand shareholders, if the dividendpaying company has a fixed establishment in New Zealand and is not required by generally accepted accounting practice to present financial statements in New Zealand dollars.

Background

Non-resident companies with a fixed establishment in New Zealand are required to deduct and account for RWT from dividends paid to New Zealand shareholders. However, an exemption applied if, among other things, the dividend was paid in a currency other than New Zealand dollars.

Two issues were subsequently identified:

• RWT deductions should be able to be reduced by the amount of any trans-Tasman imputation credits; and
• the exemption where dividends were not paid in New Zealand dollars no longer targeted the dividends it was designed to exempt, because non-resident companies could pay dividends to New Zealand shareholders in New Zealand dollars, because that is more convenient for those shareholders.

The rationale for the requirement to deduct RWT was to address tax avoidance concerns that can arise if a nonresident company has no business operations in its home country, but has a branch operation in New Zealand. It should be unnecessary for a non-resident company which has significant business interests in its home country as well as in New Zealand to deduct RWT from dividends paid to New Zealand shareholders, because there is a low risk of tax avoidance in these circumstances.

If the non-resident company's financial statements are not required by generally accepted accounting practice to be presented in New Zealand dollars, this is an indication that there are significant home-country interests.

Key features

Paragraphs (b), (c) and (d) of section NF 2(1) have been amended to ensure that trans-Tasman imputation credits are taken into account when calculating RWT on dividends paid by non-resident companies.

Section NF 2(4)(a) has been amended to provide that a non-resident company is not required to deduct RWT from dividends paid to New Zealand shareholders if it is carrying on a taxable activity through a fixed establishment in New Zealand, and the Commissioner is satisfied that:

• the dividends are not attributable to, or effectively connected with, a fixed establishment outside New Zealand; and
• the dividends are payable in a currency other than New Zealand dollars, or the non-resident company is not required by generally accepted accounting practice to express its financial statements in New Zealand currency.

Application date

The amendments to section NF 2(1) apply from 1 April 2003, the date of introduction of the trans-Tasman imputation rules.

The amendment to section NF 2(4) applies from 1 April 2007. This will allow sufficient time for relevant shareholders to be informed about the change.

Other pages in: Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006 [2006 No 3]

• Temporary exemption from tax on foreign income for new migrants and certain returning New Zealanders
• Clarification of treaty override power
• Rewrite amendments
• Reimbursement for the use of a private motor vehicle
• Organisation approved for charitable donee status
• Amendments to disputes rules
• Miscellaneous technical amendments
• GST on goods outside New Zealand at the time of supply
• GST and distributions from a trust made for no consideration between associated registered persons
• GST and international postage stamps
• GST and credit contracts legislation
• Bloodstock write-down rates
• Duty on racing
• GST on goods and services supplied to security holders
• Trans-Tasman imputation credit-streaming
• Regrassing and fertilising expenditure
• The addition of Spain to the grey list
• Unacceptable tax position
• Reverse takeovers and continuity rules
• Increase in the child tax rebate
• Income tax exemption for gaming machine income of gaming trusts
• Tax consequences of natural disasters
• Taxation of foreign hybrids and foreign tax credit rules
• Exemption for rights to benefit from employment-related foreign superannuation schemes
• New disclosure and recordkeeping rules for foreign trusts
• Treatment of distributions from cooperatives
• ACC attendant care payments
• Venture capital investment alongside the Venture Investment Fund
• Corporate migration
• Allocation of research and development tax deductions
• Taxation of share-lending transactions
• Fringe benefit tax
• Depreciation rates
• Aligning provisional tax payments with GST
• PAYE subsidy for small businesses

Date published: 23 Jun 2006

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