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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.

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.

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: 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 - 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.