Interpretation of tax treaties

Section BH 1 of the Income Tax Act 2007

A minor technical change has been made to clarify the relationship between domestic and treaty law.

Background

Section BH 1(7) clarifies that a reference in a double tax agreement to two persons being unrelated is to be read, if possible, as a reference to two persons being not associated. The clarification concerns the rules for interest paid to banks and similar financial institutions in new tax treaties with the United States (signed in December 2008) and Australia (signed in June 2009).

Under domestic law, a person may be exempt from non-resident withholding tax on interest paid to a non-resident provided they pay the approved issuer levy and are "not associated" with the lender (section RF 12 of the Income Tax Act 2007, section 32M of the Tax Administration Act 1994 and part VIB of the Stamp and Cheque Duties Act 1971).

For interest paid to banks and similar financial institutions, this exemption has now been written into New Zealand's tax treaties with Australia and the United States. The relevant treaty provisions require the lender to be "unrelated to" the borrower; section BH 1(7) clarifies that this is the same as the requirement under domestic law for the borrower and lender to be "not associated".

Key features

New subsection (7) has been added to section BH 1, clarifying that a reference in a double tax agreement to two persons being unrelated is to be read, if possible, as a reference to two persons being not associated.

Application date

Section BH 1(7) comes into force on 7 December 2009.