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CFCs must have the following three attributes to be considered a CFC:
CFCs are companies
They include most entities that have a legal existence separate from that of their members, as well as some other entities such as unit trusts.
CFCs are non-residents
A company that is a CFC must be foreign. This means it must not be tax resident in New Zealand, or must be treated as not being tax resident under a double tax agreement. Being incorporated in New Zealand is the most common reason for residence here, but a company may also be resident if its:
- head office is in New Zealand
- centre of management is in New Zealand, or
- directors exercise some or all control of the company in New Zealand.
You can find out more about how to determine a company's residence in our Interpretation Statement IS 16/03:Tax Residence.
If the company is not a foreign company, it will be liable for tax on its worldwide income as normal and the CFC rules will not apply to it.
CFCs are controlled by New Zealand residents
A non-resident company will not be a CFC unless it is controlled by New Zealand residents. The most common case of control is 100% ownership of the non-resident company by a New Zealand company. However, control exists whenever a:
- group of 5 or fewer New Zealand residents has total control interests of more than 50%, or
- single New Zealand resident has a control interest of 40% or more and no unassociated non-resident owns a greater control interest, or
- group of 5 or fewer New Zealand residents can control the exercise of shareholder decision-making rights for the company.
Control interests are not limited to voting rights. They can include:
- any shareholding
- any shareholder decision-making rights
- the right to receive income from the company, or
- the right to receive distributions from the company's net assets.
The rules require that the highest percentage of any of these interests is used to determine whether or not there is control. There are also rules that aggregate the control interests of associated persons.
There are more details and examples on determining whether you hold an interest in a CFC in the Tax Information Bulletin Vol 2, No 3, Appendix, Controlled Foreign Companies (October 1990).
However, this document was issued for the old CFC rules and a number of concepts are no longer applicable (eg calculating branch equivalent income or loss) or have been amended (eg the associated persons test).
New Zealand legislation
Income Tax Act 2007
- YA 1
- YD 2
- EX 1, EX 2-7