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COVID-19 has had unintended consequences that impact the tax residence rules. Individuals may be required to stay in New Zealand for longer than they were intending and/or are now stranded in New Zealand. Company directors and employees may be also be stranded in New Zealand or overseas as a result of COVID-19.

Company residence

The COVID-19 pandemic will not cause corporate taxpayers to be tax resident because directors of a company are confined or stranded in New Zealand. We can consider how a company is actually managed. If directors are stranded because of COVID-19, that will not change where the real business of a company is carried on. The occasional exercise of control by the directors from New Zealand, for example through a board meeting, will not make the company tax resident in New Zealand.

The COVID-19 pandemic will not cause corporate taxpayers to be tax resident because directors of a company exercise control of the company from New Zealand when that is not usually the case. Each case turns on its own facts and circumstances, but in terms of the director control test, what is relevant is where control is ordinarily exercised.

The tax residence of a company will not change because for a time directors exercise control from New Zealand when they would not normally do so. This may be, for example, because they cannot enter the country they would ordinarily exercise their directorial control from, or if they can, there are restrictions that make that impractical such as quarantine requirements. The occasional exercise of control by the directors from New Zealand, for example, through a board meeting, will not make the company tax resident in New Zealand. Where directorial control is ordinarily exercised can be viewed over a broader timeframe. Where there are some directors exercising control from New Zealand and others from another country, consideration can be given to where the majority ordinarily exercise control (if the powers of the directors are the same).

Similarly, in terms of the centre of management test, a broader consideration of the usual overall management of the company is appropriate. It is also necessary to look at the various levels of management of the company, not just management at the director level.

A Double Taxation Agreement (DTA) may also affect the residence of a company. If the company is also resident of another territory with which New Zealand has a corporate residence tie-breaker provision, the tiebreaker may result in the company being treated as non-New Zealand resident for DTA purposes in any event.

Because of the COVID-19 pandemic there is on-going change. The position set out above will be reviewed from 1 April 2021.

Permanent establishments (PEs)

The COVID-19 pandemic will not cause non-resident companies to have a PE in New Zealand because their employees are confined or stranded in New Zealand. A non-resident company will not derive New Zealand income because of a PE after only a short period of time. The fixed place needs a degree of permanency – the fixed place cannot be of a purely temporary nature.

For a PE to be present, the business must be carried out on a regular basis and it must be undertaken wholly or partly through the fixed place. Whether there is a PE is determined having regard to the facts and circumstances of each case, which includes the COVID-19 pandemic. It would be a relevant consideration that the non-resident company did not have a PE in New Zealand prior to COVID-19 and the presence of employees in New Zealand is short-term because of current travel restrictions.

Individuals

Ordinarily an individual will become tax resident in New Zealand if they are personally present in New Zealand for more than 183 days in total in a 12-month period.

The COVID-19 pandemic could cause individuals to have to stay in New Zealand longer than 183 days despite their plans to leave. An individual will not become tax resident in New Zealand under the day-count test just because they are stranded in New Zealand.

Conversely, an individual will become not tax resident in New Zealand if they:

  • are personally absent from New Zealand for more than 325 days in total in a 12-month period and
  • do not have a permanent place of abode here.

For individuals that are resident in New Zealand, the COVID-19 pandemic could prevent them from leaving New Zealand. This would delay their ability to meet the 325 day threshold required to be non-resident, despite their plans to leave and become non-resident. In this situation, the days where an individual is stranded in New Zealand will count towards meeting the 325 day threshold for becoming non-resident.

If a person leaves New Zealand within a reasonable time after they are no longer practically restricted in travelling, then extra days, when the person was unable to leave, will be disregarded for the 183 day test or included for the 325 day test (as relevant). The day-count test is based on normal circumstances when people are free to move.

Factors that may be considered in deciding if a person is practically restricted in travelling include both:

  • Border controls or entry restrictions. A person is unable to practically leave New Zealand if they cannot enter a country of which they are a citizen or permanent resident or visa holder.
  • The availability of commercial flights.

Personal considerations or preferences are not factors that impact on whether a person is practically restricted in travelling. Once there is no practical restriction on travel, then deciding to remain in New Zealand does not prevent days from being counted for the residence day tests. It does not matter whether they decide to stay in New Zealand because of the level of COVID-19 infection in their home country, or for other reasons. This includes wanting to go to a different country where entry restrictions still exist. Choosing to stay in New Zealand results in the person becoming tax resident under the ordinary application of the day tests.

Tests for an individual’s residence when applying other rules

The approach adopted to the residence tests as a result of COVID-19 and persons being practically restricted in travelling will affect how other sections which use the residence day tests apply.

An example is the foreign trust rules. The day tests are considered for whether someone is the resident settlor of a foreign trust. A settlor who is not tax resident in New Zealand, because the ordinary day tests rules are not being applied, is not tax resident in New Zealand for the purpose of the rules regarding foreign trusts.

Another example is the transitional residence rules. The meaning of a transitional resident refers to the day test rules in section YD 1. If a person’s residence is affected by the approach adopted to the residence tests for COVID-19, then this will also apply when considering the transitional residence rules.

Non-resident person performing personal or professional services in New Zealand on a short-term visit

A 92-day test provides an exemption for certain income that a non-resident person derives from performing personal or professional services in New Zealand during a short-term visit. In ordinary circumstances, income earned in New Zealand by a person providing these services is exempt if the visit to New Zealand is less than 92 days and the services are performed for someone who is not tax resident in New Zealand. However, if the visit is for more than 92 days, all income derived from the time of arrival is subject to tax in New Zealand and PAYE must be withheld by the employer.

The COVID-19 pandemic could cause service providers to have to stay in New Zealand longer than 92 days despite their plans to leave. If the service provider leaves or returns to their country within a reasonable time after they are no longer practically restricted in travelling, then any extra days when the person was unable to leave (that are in addition to the 92 days) will be disregarded.

Schedular payments and non-resident contractors

There is a 92-day test that excludes some payments from being schedular payments. These are payments for services provided by a non-resident contractor who has full relief from tax under a double tax agreement and is present in New Zealand for 92 or fewer days in a 12-month period. Because of the short-term period the contractor is present, the payment is not a schedular payment.

The exclusions of some payments from being schedular payments means that the withholding tax obligations in the PAYE rules don’t apply up until 92 days. Because of COVID-19 and assuming a person leaves or returns to their country within a reasonable time after they are no longer practically restricted in travelling, then extra days, when the person was unable to leave, will be disregarded.

Visiting crew of a pleasure craft

Certain non-resident crew members of a pleasure craft may be exempt from income tax for performing services relating to a pleasure craft while it is in New Zealand, if they are in New Zealand for no more than 365 days in a 2-year period. If this time is exceeded, a crew member becomes subject to New Zealand tax.

Some non-resident crew members may have planned to leave the country before the services they perform in New Zealand become taxable. Because of COVID-19, they are now unable to easily leave the country. If the non-resident crew member continues to perform the same services as they did before the current emergency conditions they should not lose the exemption, just because they are stranded in New Zealand.

Assuming a non-resident crew member leaves New Zealand within a reasonable time after they are no longer practically restricted in travelling, then extra days, when the crew member was unable to depart, will be disregarded.

Transitional residents

There is a 48-month test for transitional residents. If this time is exceeded, transitional residents become subject to New Zealand tax on their worldwide income. The period of transitional residence begins on the first day of residence in New Zealand. It ends when the person either stops being a New Zealand resident, or on the last day of the 48th month after the month in which the person first satisfied the residence tests (whichever is earlier).

Some transitional residents may have planned to leave the country before the 48-month transitional resident period ended. Because of COVID-19, they are now unable to easily leave the country. A person should not be regarded as no longer a transitional resident just because they are stranded in New Zealand because of COVID-19. If a person leaves New Zealand within a reasonable time after they are no longer practically restricted in travelling, then extra days, when the person was unable to depart, will be disregarded.

Example: Company residence

Tony’s Technology Ltd is incorporated overseas and was not tax resident in New Zealand before the present emergency.

Directors Tony, Tina and Terry are stranded in New Zealand and have been arranging board meetings online with Tim who is overseas. The reason for holding the board meetings with three directors in New Zealand is because of COVID-19 and the inability to travel.

Neither directors’ control nor centre of management have changed to New Zealand because of the emergency conditions. Tony’s Technology Ltd does not have tax residence in New Zealand.

Tony, Tina and Terry will leave New Zealand as soon as they are able.

Example: Company residency

Hannah Design Ltd is incorporated in Australia and was not tax resident in New Zealand before the COVID-19 pandemic.

Before lockdown, directors Hannah and Mary who are New Zealand based directors, travelled to Australia for board meetings. This has become impractical because of the quarantine requirements that would need to be adhered to both in Australia and on return to New Zealand.

As such, the normal pattern of board meetings has been temporarily suspended, with the New Zealand-based directors temporarily attending on-line.

This change, by itself, does not make Hannah Design Ltd tax resident in New Zealand.

Example: Permanent establishment

Karen Consultants Limited is incorporated overseas and is not tax resident in New Zealand.

Three employees are stranded in New Zealand because of COVID-19. There was no permanent establishment in New Zealand before the impacts of COVID-19. The employees’ extended presence in New Zealand is unplanned and short-term. There are no other changes in the company’s circumstances.

Karen Consultants Ltd does not have a permanent establishment in New Zealand and will not derive New Zealand sourced income because of the employee’s presence during the emergency. The employees will leave New Zealand as soon as they are able.

Example: Individual residency - 183-day test

Jane was visiting New Zealand on an extended holiday as the guest of a friend. She had been present in New Zealand for 170 days in a 12-month period when under the present emergency she became stranded in New Zealand. She was advised that she could not fly home.

For the purpose of the day test she will remain fixed at 170 days for the period from when is unable to leave New Zealand up to and including the day when she departs. That is so long as she leaves New Zealand after a reasonable number of days from when she is no longer practically restricted in travelling.

Jane has not become tax resident in New Zealand. Jane plans to leave as soon as she is able.

Example: Individual residency – remaining with medical condition

Francis has a medical condition that places her at higher risk of more severe symptoms from Covid-19. She plans to remain in New Zealand for twelve months hoping that things will get better in her home country. Assuming she does not already have a permanent place of abode in New Zealand, Francis will become New Zealand tax resident on an ordinary application of the 183-day test. All of the days Francis has been present in New Zealand are counted. This is because the concession of not counting days when someone is stranded in New Zealand only applies if they leave within a reasonable time after they are no longer practically restricted in doing so. The 183-day test applies with effect from the first counted day.

Example: Individual residency – choosing to travel to country with entry restrictions

Richard was on a series of work assignments in different countries prior to the pandemic and was on a backpacker holiday in New Zealand until being affected by lockdown. He is unable to depart for his next backpacker holiday destination. He becomes able to return to the United Kingdom, where he holds permanent residency. He chooses to remain in New Zealand hoping to continue on to his next backpacker holiday destination, when that border ultimately opens. Once Richard has been present in New Zealand for 183 days or more in a 12-month period, he will become New Zealand tax resident on an ordinary application of the 183 day test. All of the days Richard has been present in New Zealand are counted. This is because the concession of not counting days someone is stranded in New Zealand only applies if they leave within a reasonable time after they are no longer practically restricted in doing so. The 183-day test applies with effect from the first counted day.

Example: Individual residency - 92-day test for non-resident employees

Peter was providing IT consulting services on behalf of his overseas based employer while present in New Zealand to assist a related business. Peter pays tax on his income in his home jurisdiction. It was intended that his stay would be for 70 days, but he has become stranded in New Zealand.

For the purpose of the 92-day test he will remain fixed at the day count as it was from when he was unable to leave New Zealand up to and including the day when he departs. So long as Peter leaves New Zealand within a reasonable time after he is no longer practically restricted in travelling his income remains exempt even though he has stayed longer than 92 days. Peter plans to leave as soon as he is able.

Example: Individual residency - 92-day test for non-resident contractors

Jim is a contractor based overseas who visited New Zealand to provide some specialist engineering advice on a construction project. Jim’s stay was intended to be for 70 days but he has become stranded in New Zealand.

For the purpose of the 92-day test he will remain fixed at the day count, as it was from when he was unable to leave New Zealand and up to and including the day when he departs. So long as Jim leaves New Zealand within a reasonable time from when he is no longer practically restricted in travelling then he will not be considered to have received a schedular payment.

Jim has not become subject to the withholding tax obligations in the PAYE rules because he stayed longer than 92 days in these circumstances. Jim plans to leave as soon as he is able.