What is Permanent Establishment (PE) of a Company in New Zealand?

The Tax Counsel Office (TCO) in New Zealand has thoroughly reviewed a complex arrangement involving an overseas parent company (OS Co) and its New Zealand subsidiary (NZ Co). 

In this setup, OS Co uses its wholly owned NZ Co to provide services, which raises important issues under New Zealand’s Income Tax Act 2007. The review focuses on key aspects like OS Co's residency status, whether a permanent establishment is created in New Zealand, and potential implications under anti-avoidance rules. These evaluations are critical to ensure adherence to New Zealand's tax regulations and manage any tax-related consequences stemming from the arrangement.

Arrangement

The arrangement involves OS Co setting up NZ Co to operate in New Zealand. Employees from OS Co temporarily move to New Zealand and work for NZ Co under fixed-term contracts while on leave. NZ Co provides services to OS Co at fair prices. Crucially, OS Co does not have its main office, management team, or directors overseeing operations in New Zealand. Apart from their temporary assignment under NZ Co, OS Co's employees do not perform any work in New Zealand. Additionally, OS Co's main customers, who are based overseas, do not have any business activities or authority in New Zealand.

Main Issues and TCO's Findings

1. Residency Status:

   TCO examined whether OS Co or its main customers qualified as "resident in New Zealand" under the Income Tax Act 2007. To be a resident, a company must be incorporated in New Zealand, have its head office, centre of management, or directors in New Zealand. TCO found that neither OS Co nor its customers met these criteria, so they were not residents of New Zealand.

2. Permanent Establishment (PE):

   TCO investigated whether the arrangement created a "permanent establishment" (PE) for OS Co or its main customers. A PE is a fixed place of business where a company conducts part or all of its operations. TCO concluded that OS Co and its customers did not use, access, or conduct business through NZ Co's premises in a way that would establish a PE in New Zealand.

3. Section GB 54:

   This section targets large multinational groups supplying goods or services to New Zealand. TCO determined that OS Co did not intentionally supply goods or services to New Zealand customers, and NZ Co did not facilitate such supplies, so section GB 54 did not apply.

4. Source of Income:

   TCO assessed whether OS Co's income came from New Zealand. Since OS Co operated internationally, used NZ Co for services, and did not earn income from New Zealand, TCO concluded that OS Co did not have any income sourced from New Zealand.

5. Assessable Income:

   TCO determined if the arrangement generated "assessable income" for OS Co or its customers. Since OS Co and its customers were based overseas, earned income abroad, and did not earn income from New Zealand, they did not have assessable income under this section.

6. Tax Avoidance:

TCO examined whether the arrangement was set up to avoid taxes under section BG 1. After reviewing the business reasons and legal aspects, TCO found that the arrangement did not have a tax avoidance purpose or effect, so section BG 1 did not apply.

Conclusion

The thorough review by TCO shows that using a New Zealand subsidiary to provide services to an overseas parent company does not make the parent company or its customers residents of New Zealand, establish a permanent office, or generate taxable income in New Zealand. The arrangement was found to be legitimate, and New Zealand collects the right amount of tax from NZ Co based on fair market terms.