Current tax rules of Dividend Payment for Dual Resident Companies
The dividend exemption and corporate mitigation rules have been identified to have integrity issues. These issues bring situations where companies may be deriving income or paying dividends without anticipated NZ income taxation by changing their tax residence or obtaining tax relief. The proposed amendments aim to reduce the potential opportunities for foreign income to go untaxed in New Zealand.
Proposed Amendments to Dividend Payment for Dual Resident Companies
The amendments are aimed to mend integrity issues with NZ resident companies where under a double tax agreement, the residence tie breaks to another country. The amendments will:
- Remove the domestic dividend exemption in S CW 10 of ITA for certain dividends paid to NZ resident companies whose residence tie breaks to another country under a DTA
- Extend the corporate mitigation rules in subpart FL of the ITA to companies whose residence tie breaks from NZ to another country under a DTA.
The Domestic Dividend Exemption
New Zealand's domestic dividend exemption is set to be reduced, with certain dividends paid to a DTA non-resident company no longer to be exempted. However, the proposed changes come with certain exceptions.
- For instance, the exemption will still apply if all shareholders of the dividend recipient would be entitled to full exemption from NRWT under a DTA or if the total dividends received by the recipient are less than $1 million in each 12-month period.
- Another exception is if a company's tax residence changes within two years of receiving the dividend, and it has not paid a dividend while it was a foreign company.
These exceptions aim to limit the impact of the changes on smaller businesses and ensure the majority of dividends paid between New Zealand resident companies within a wholly owned group of companies will continue to be entitled to the exemption. Additionally, the domestic dividend exemption would generally be available to the extent a dividend is fully imputed. This would mean that fully imputed dividends paid by a wholly owned New Zealand tax resident company to its non-resident parent company would generally have NRWT applied at a rate of 0%.
NRWT Obligations for Dividends
To address the potential loss of New Zealand's right to tax the on-payment of dividends to another company, NRWT obligations would apply to dividends paid to a DTA non-resident company, and the definition of "non-resident passive income" would be expanded. The proposed changes would also introduce a two-year deferral of income for dividends within the scope of the proposed changes to the domestic dividend exemption.
Corporate Mitigation Rules
New Zealand's corporate migration tax rules ensure that companies migrating their tax residence from New Zealand pay tax on all their worldwide income earned while tax resident in New Zealand. Similar issues arise for New Zealand tax resident companies if they become non-resident for the purposes of applying a DTA. To address these issues, proposed new section FL 3 would apply to treat a New Zealand tax resident company as migrating from New Zealand immediately before it becomes a DTA non-resident company where certain triggering events occur. Deferring the application of the corporate migration rules for up to two years would provide an opportunity for taxpayers to remedy any inadvertent residence changes. These proposed provisions would ensure that New Zealand can tax the accumulated income and gains of the company before it becomes a DTA non-resident company and a DTA restricts or removes those taxing rights.
Effective Date
The amendments take effect from 30 August 2022.
Although we have summarised the changes for dual resident companies above, it is a new and therefore tricky area of law. Reach out to us below regarding any specific concerns.
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