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How controlled foreign company (CFC) income is taxed

Changes to the controlled foreign company (CFC) rules

New CFC rules have applied from the:

  • beginning of the 2010 income year for all entities with a balance date between 30 June and 30 September (inclusive), and
  • 2011 income year for all other entities.

New Zealand tax residents (other than transitional residents)

Generally if you have income interests of 10% or greater in CFCs that ... then you ...
are active businesses are not taxed on the CFCs' income or losses except for income from providing certain personal services.
are not active businesses

are taxed on your proportionate share of the CFC's passive income and losses only.

Passive income (see "Note" below) or loss derived or incurred by the foreign company is treated as being derived or incurred by the New Zealand resident shareholders. Any passive losses are ring-fenced to the jurisdiction of the relevant CFC, meaning they can only be offset against CFC income from the same jurisdiction.



Passive income is defined in legislation as the "attributable CFC amount". This includes financial arrangement income and certain rents, royalties, dividends, services income and will be attributed to New Zealand residents  that have an income interest in the CFC.

CFCs must be tested to determine if they are active businesses ("non-attributing active CFCs"). A CFC will be a non-attributing active CFC during an accounting period if its passive income amounts to less than 5% of its gross income. This is known as the "active business test".

Australian CFCs that meet certain requirements ("non-attributing Australian CFCs") receive a special exemption from the CFC rules.

Find out about these rules in our Policy and Strategy's Special report on the new rules for taxing controlled foreign companies and foreign dividends, October 2009.

In 2011, 2014 and 2016 some minor changes were made to the CFC rules. Read about these changes in the Tax Information Bulletin (TIB):

New Zealand legislation

Income Tax Act 2007

  • CQ 2
  • DN 2
  • EX 1-27