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Where market support payments are made by New Zealand parents to offshore subsidiaries (usually distributors), we look to determine their exact nature and deductibility. It's essential that the primary question as to why a party would pay such subsidies at arm's length (taking into account other options realistically available) is answered fully in supporting documentation, ideally at the same time as the strategy's implementation.

Why would the parent do that?

Market support payments are not a catch-all or an open cheque book. They are a targeted response to a need to establish a market or brand or to promote a product. As such, they need documented authorisation and a specific goal with periodic checks to see what progress is being made. They also need a reviewable termination date.

Under some circumstances, a parent may consider a market so important that the distributor must be supported through the abnormal period. The payments made in this context will need to be evaluated using normal deductibility rules. This includes consideration that a payment may be made for the enduring benefit of the business and may therefore be capital in nature and not deductible.

Interest-free loans

In addition to payments being made for market support, we sometimes encounter examples of non-charging for certain transactions, usually loans (that is, interest-free loans). Such interest-free loans are often described to us as the provision of market support to the offshore subsidiary.

The critical question to be answered is whether an independent enterprise would be prepared to lend funds to a non-associated party on an interest-free basis in comparable circumstances. To date we have not identified or been presented with any examples of long-term interest-free funding being extended to third parties in the open market.

We are often told that interest-free funding is provided to start-up subsidiaries because of their inability to pay interest in the initial years of trading. The global financial crisis provided many examples of borrowers under financial stress. During that period, we noted some specific examples of interest deferrals. The examples are highly fact and circumstance specific, but in all cases, interest was capitalised for a period of time, usually with the terms of the amended agreement being reflected in a revised interest rate. We have not seen any examples of third-party interest-free funding being extended due to the borrower's inability to meet its interest obligations.

We have seen anecdotal evidence that franchisors may provide start-up advances. Again, this evidence suggests that those advances are either interest bearing or in some specific circumstances interest may be capitalised for an initial period. We are yet to see any circumstances where an independent enterprise would be prepared to lend funds to a non-associated party on an interest-free basis.

If there is a specific market support strategy being implemented, and payments arising under that strategy are being offset by way of another transaction, such as the non-charging of interest on a loan, that strategy and the calculation of the offsets should be fully documented taking into consideration the guidance provided above.