Controlled foreign companies (CFCs) are companies based overseas but controlled by New Zealand residents. They must not be a tax resident in New Zealand or must be treated as foreign under a double tax agreement.
A company may be a tax resident in New Zealand if it's incorporated in New Zealand or has a head office, centre of management or controlling directors in New Zealand.
Controlled foreign companies must be controlled by New Zealanders
'Control’ usually means total ownership of the non resident company by a New Zealand resident.
However, control can also exist where:
- 5 or fewer New Zealand residents have a control interest of more than 50%
- 5 or fewer New Zealand residents control the shareholder decision rights
- a single New Zealand resident has a control interest of 40% or more, and no non associated non resident owns a larger control interest.
Control interests include:
- voting rights
- any shareholding
- any shareholding decision making rights
- the right to receive income from the company
- the right to receive distributions from the company’s new assets.
We use the highest percentage of any one control interest type to decide if a company is a controlled foreign company.
How controlled foreign company income is taxed
Generally, income is taxed under the controlled foreign company rules when you have income interests of 10% or more in controlled foreign companies. This income is handled differently depending on whether the business is active or non active.
In active businesses you are not taxed on controlled foreign company income or losses. You may be taxed on providing some personal services.
In non-active businesses you're taxed on your proportional share of passive income and losses.
Branch equivalent tax accounts
Branch equivalent tax accounts (BETAs) can be used by individuals, not companies, who are New Zealand tax residents. These accounts help to prevent double taxation of attributed foreign income you get from:
- an income interest of 10% or greater in a CFC
- a FIF where the income from it is treated as if it were from a CFC.
BETAs record a credit for New Zealand income tax paid on the attributed income from the CFC. You can then offset that credit against any income tax payable when you receive dividends from that CFC.
If you use a BETA, you need to complete a Branch equivalent tax account return - IR308 and send it to us with your individual income tax return - IR3.
Tell us about your interest in a controlled foreign company
In most situations you must tell us about your interest in a controlled foreign company. You can do this in a Foreign investment fund / controlled foreign company disclosure - IR458.