Application of the foreign investor tax credit rules to foreign investment PIEs

Sections HM 5, HM 17, HM 35, HM 55FB, LP 2, RF 8 and schedule 6, table 1B of the Income Tax Act 2007

These changes apply the supplementary dividend tax credit rules (also known as the foreign investor tax credit (FITC) rules) to foreign investment PIEs. This more closely aligns the tax treatment of non-resident portfolio investments made through foreign investment PIEs with that of portfolio investments made directly.

Background

In broad terms, the FITC rules ensure that the New Zealand tax rate on non-resident portfolio investment is limited to the company tax rate.  

The rules achieve this by allowing a New Zealand company to pay a "supplementary dividend" to portfolio non-resident investors to offset non-resident withholding tax payable on imputed dividends from the company. The company receives a tax credit equal to the supplementary dividend paid. The supplementary dividend is based on the amount of imputation credit attached to the dividend. This means the FITC rules apply to the extent that company tax has already been paid.

Previously, the FITC rules were only available to non-residents that made portfolio investments directly into New Zealand companies. As a result, non-residents investing through New Zealand PIEs were disadvantaged compared with those investing into New Zealand companies directly. Applying the FITC rules to foreign investment PIEs removes this distortion.

Key features

• Applying FITC is optional for foreign investment PIEs.
• The FITC mechanism applies at the level of the company paying the dividend to the foreign investment PIE.
• A FITC is only available when a New Zealand-resident company pays a dividend and related supplementary dividend to a foreign investment PIE that has notified foreign investors that have a less than 10% interest in the resident company and have a double tax treaty tax rate of 15% or more (these investors are referred to as "qualifying investors").
• The PIE must notify the company before the dividend distribution of the qualifying investors that it had on the date on which the legal entitlement to the dividend was determined. Notification enables the company to calculate and distribute the supplementary dividend to the qualifying investors.
• A supplementary dividend must only be paid when attached to a fully imputed dividend (or to the part of the dividend that is imputed) and is attributed to notified foreign investors that qualify for the payment of a supplementary dividend, unless the PIE chooses to pay NRWT on dividends.

Detailed analysis

Tax credits for supplementary dividends

Section LP 2

Section LP 2 allows a tax credit for supplementary dividends when a New Zealand-resident company pays a dividend and related supplementary dividend to a foreign investment PIE when:

• the foreign investment PIE has notified foreign investors that have less than a 10% voting interest in the company, and the foreign investors have a double tax treaty tax rate on the dividends and supplementary dividends of 15% or more (these investor are referred to as "qualifying investors"); and
• the dividend and related supplementary dividend are attributed to these qualifying investors, or the PIE chooses to pay NRWT on the dividends; and
• the foreign investment PIE notifies the company of the qualifying investors it had on the date on which legal entitlement to the dividend has been determined.

Notification requirements

Section HM 55FB

To enable the payment of supplementary dividends, it is necessary for the foreign investment PIE to notify the company paying the dividend of the qualifying investors it had on the date on which legal entitlement to the dividend has been determined.
The notification must be made after the company has declared a dividend but before the payment of the dividends. The information must be sufficient to enable the calculation and payment of a supplementary dividend. The company is also required to use the information supplied by the PIE in calculating the supplementary dividend.

NRWT calculation option

Section HM 44B

The foreign investment PIE can choose to pay NRWT on the dividends and related supplementary dividends when the PIE:

• receives dividends with imputation credits attached;
• receives related supplementary dividends;
• has "qualifying investors";
• pays the qualifying investors the total amount of the dividend and supplementary dividend; and
• pays the amount by the required time.

Rights to investment proceeds

Sections HM 5, HM 17, HM 35 and schedule 6, table 1B

The dividend and related supplementary dividend must be attributed to the qualifying investors. The entire amount of the dividend and the supplementary dividend is taxed at 15% as PIE income if the NRWT option has not been chosen.

This ensures that if NRWT has not been paid, the tax credit for supplementary dividends paid is clawed back at the PIE level.

Application date

The new rules apply from 2013-14 and later income years.