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Tax Rules for rental income earned by Controlled Foreign Companies (CFC)

A New Zealand tax resident may have a controlled foreign corporation, which is involved in business of rental. Different tax rules apply for such corporations.

The CFC rules were reformed in around 2009 to make New Zealand businesses compete globally and provide certain exemptions to them. If CFC is in a business of rental this can add some complexities in calculating the exemptions.

General rule of thumb is rental income is attributable income. However, certain exemptions are provided in the legislation.

 

Legislation

 

Section EX 20(B) the Income Tax Act 2007 explains Attributable CFC amount:

rent of a type referred to in subsection (6):

Attributable CFC amount: rent

(6) Rent derived by a CFC is included in an attributable CFC amount under subsection (3)(e) if the rent is not of a type referred to in subsection (7) and is from—

(a) a lease or sublease of land:

Attributable CFC amount: exclusions from rent

(7) Rent derived by a CFC from a source referred to in subsection (6) is not included in an attributable CFC amount under subsection (3)(e) if the rent is—

(a) from land in a country or territory with which the CFC has a taxed CFC connection:

(b)from property other than land, to the extent to which the rent relates to the use of the property in a country or territory referred to in paragraph (a):

Firstly, we need to look at is the rental income from the land or other property such as rental car business etc. If this is from a business of rental (other than land), this would be exempt from attributable income to the extent it used in a same country. per EX20(b)(7)(b)

Rent from lease or sub lease of land from a CFC will be attributable. However, it will be excluded from attributable income if the income is from land in a country or territory with which the CFC has a taxed CFC connection or from property other than land, to the extent to which the rent relates to the use of the property in a country or territory referred to in paragraph (a) (Section EX 20 (B) Subsection (7) (a) & (b)).

 

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