Income Tax Treaty between the United States and New Zealand

 

United States-New Zealand Tax Treaty

New Zealand International Tax Compliance Rules

Quick Summary.  New Zealand is comprised of two major islands located in the South Pacific.  

New Zealand imposes a flat tax on the consumption of goods and services (the GST).  

In 2018, the country adopted the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018, which aligns with the OECD’s BEPS framework.  Among its aims, the framework imposes restrictions on multinationals’ interest rates, imposes hybrid mismatch rules, artificial permanent establishment rules, and profit shifting rules, as well as amendments to an existing thin capitalization regime.  

U.S.-New Zealand Tax Treaty

In 2019, New Zealand adopted the Taxation (Research and Development Tax Credits) Act 2019.  The act provides for certain credits on research and development expenditures.  

New Zealand Tax Treaty.

Currency.

  • New Zealand Dollar (NZD)

Common Legal Entities.

  • Public/Private Limited Liability Companies
  • Partnership
  • Limited Partnership
  • Trust
  • Sole Proprietorship
  • Branch of a Foreign Corporation

Tax Authorities

Tax Treaties.

  • New Zealand is party to approximately 40 tax treaties and 19 tax information exchange agreements.
  • The OCED’s MLI entered into force for New Zealand on 1 October 2018.
  • In 2019, New Zealand entered into a Doubt Tax Agreement with the People’s Republic of China that modernized its prior 1986 agreement.  

Corporate Income Tax Rate.  

  • Corporate income tax rate: 28%
  • Branch tax rate: 28%

Individual Tax Rate

  • 0-14,000 (NZD) = 10.5%
  • 14,001-48,000 (NZD) = 17.5%
  • 48,001-70,000 (NZD) = 30%
  • Over 70,000 (NZD) = 33%

Corporate Capital Gains Tax Rate

  • There is no capital gains tax regime in New Zealand, although certain gains arising from profit-making schemes or undertakings and the disposal of personal property purchased with the intention of resale or for a business of dealing are taxable.

Individual Capital Gains Tax Rate

  • N/A (Same as Corporate Capital Gains Tax Rate)

Residence.  

  • Corporation – company is incorporated in New Zealand, its head office or center of management is in New Zealand, or control of the company by its directors is exercised in New Zealand.
  • Individual – resident of New Zealand for tax purposes when the individual has a permanent place of abode in New Zealand or has been in New Zealand for more than 183 days in any 12 month period. An individual who is a first time resident or a returning New Zealander who has been a nonresident for more than 10 years may qualify to be a transitional resident. As such, the individual generally will be taxable on only their New Zealand-source income and worldwide income from personal services for 48 months from the date the individual becomes a resident.

Withholding Tax.

            Dividends.

  • Residents – tax may be required to be withheld at source from certain types of dividend payments made to New Zealand resident taxpayers, at a rate of 33%. Dividends paid by a resident company from profits already taxed may carry imputation credits for the tax paid.
  • Nonresidents – Dividends paid to a nonresident are subject to a 30% nonresident withholding tax to the extent they are not fully imputed. Fully imputed dividends are subject to a 0% rate where nonresident has a 10% or more voting interest in the company. In most other cases, the rate will be 15%.

            Interest.

  • Residents – tax may be required to be withheld at source from certain types of interest payments made to New Zealand resident tax payers at the following rates: 10.5%, 17.5%, 30%, or 33% (and 45%, as from April 1st, 2020, if a taxpayer has not provided the payer with an IRD tax number).
  • Nonresidents – Interest paid to a nonresident is subject to a 15% rate, which may be subject to further reduction under an applicable tax treaty. New Zealand also has an approved issuer levy regime that allows an approved issuer to pay a 2% levy so that the nonresident withholding tax is applied at a 0% rate on registered securities where the parties are not associated.

            Royalties.

  • Royalties paid to nonresidents are subject to a 15% nonresident withholding tax rate of 15% which may be subject to further reduction under an applicable tax treaty.

Transfer Pricing.

  • Generally, when a taxpayer correctly applies the OECD transfer pricing guidelines and demonstrates through documentation that its transfer pricing positions satisfy the arm’s length principle, these tax positions also should meet the requirements of New Zealand’s transfer pricing rules.
    • For branch operations, the Inland Revenue does not follow the OECD authorized approach for the attribution of profits to a permanent establishment.
  • Advance pricing agreements (APAs) are possible.
  • New Zealand-headquartered taxpayers that have global revenue in excess of EUR 750 million are required to comply with CbC reporting (based on BEPS action 13). New Zealand subsidiaries of foreign-owned multinational groups are not required to provide a notification to the Inland Revenue.
  • A New Zealand borrower with NZD 10 million or more in aggregate cross-border related party borrowings must consider related party financing arrangements and capital structures against certain threshold criteria.

CFC Rules.

  • A foreign company is a CFC if a group of five or fewer New Zealand residents has a control interest of over 50% in the company or, in certain circumstances, where a single New Zealand resident has a control interest of 40% or more or where there is a group of five or fewer New Zealand residents that effectively control the company’s affairs.
  • New Zealand’s CFC rules encompass an active income exemption, a limited exemption for certain Australian CFCs, a foreign dividend exemption and a comprehensive interest allocation regime.
  • Generally, New Zealand resident with an income interest of 10% or more in a CFC has attributed CFC income from that CFC where the active business test is not met, or the Australian exemption is not available. Only certain types of income (generally passive income) derived by the CFC are attributed. 

Hybrid Treatment.

  • For income years beginning on or after 1 July 2018, domestic rules apply to counter hybrid and branch mismatches that exploit differences in the tax treatment of an instrument, entity or branch under the laws of two or more countries to eliminate, defer or reduce income tax.

Inheritance/estate tax

  • None.

Overview

New Zealand imposes tax on net income at the national level. The definition of income subject to tax is expansive; capital gains, however, are normally not included for income tax purposes.  Taxable income is computed on an annual basis and is either taxed by assessment or by withholding tax.  Aside from certain exceptions, New Zealand residents and nonresidents are generally subject to the same rules and tax rates on New Zealand-source income. New Zealand has special provisions with respect to foreign dividends and offshore income earned through controlled foreign companies. 


Individuals 

Individuals resident in New Zealand are taxed on their worldwide income. An individual’s taxable income is the sum of all gain and profits from the following sources: employment income; business income; pension income; and investment income (dividends, interest, and royalties). New Zealand has no capital gains tax as such and capital gains are normally not included in income for income tax purposes. Profits from the sale of personal property or real property and some unrealized capital accretions may, however, be included in income in certain circumstances. Losses can be carried forward indefinitely to offset future net income from any source.

New Zealand-source dividends and interest income are subject to resident withholding tax. Royalties are not subject to resident withholding tax.

Generally, no deductions are allowed to employees for expenses incurred in producing employment income. Employees, as well as other individuals, are entitled to allowable tax credits, which are deducted from income tax payable.


Corporations

Companies that are resident in New Zealand are taxed on their worldwide income. The definition of company is broad and confers company status for tax purposes on unit trusts, incorporated societies, and credit unions. For income tax purposes, a company is resident in New Zealand if it passes any one of the following four tests: (1) it is incorporated in New Zealand; (2) it has its head office in New Zealand; (3) it has its “center of management” in New Zealand; or, (4) it is controlled by its directors in New Zealand.

In general, all income derived by a corporation is taxable business income; this includes income from sales of goods and services, commissions, rents, royalties, rents and dividends.  Capital gains are generally not subject to tax. Profits from the sale of personal property or real property and some unrealized capital gains may, however, be included in the taxable income in certain circumstances.

Dividends received by a resident company from a wholly-owned subsidiary resident in New Zealand are exempt from tax.  Most foreign dividends received by resident companies are exempt from tax.  New Zealand uses an imputation system.

As such, the payment of tax by a resident company gives rise to “imputation credits,” which the company can attach to its dividends when paying them out to its shareholders. The dividends are grossed up in shareholders’ hands by the value of imputation credits attached to the dividends. The value of those imputation credits is limited by the amount of income tax paid by the distributing company.  Shareholders can use the attached imputation credits as tax credits against their tax liability. Corporate recipients may convert excess imputation credits into tax losses. 


Other Taxes

Inheritance, gift and wealth taxes

Gift duty is imposed on the donor of gifts made within a 12-month period, depending on the value of the gifts. Gifts below certain amounts are not subject to the duty.  New Zealand does not levy a wealth tax.

Other indirect taxes

New Zealand imposes a goods and services tax (“GST”) which is a value-added tax on the consumption of goods and services. Although the GST is levied at each stage of the economic chain, it is ultimately borne by the final customer. The GST due on any sale is a percentage of the sale price less all the tax paid at the preceding stages.

Tax Treaty Network – International Tax Attorneys

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Do you have questions about New Zealand Tax Treaties? Schedule a consultation with one of Freeman Laws International Tax Experts Today!