PIEs with non-portfolio interests in CFCs or FIFs

Sections EX 14, EX 34 and EX 46(3)

It is not appropriate for portfolio investment entities (PIEs) to use the active income exemption for their foreign investments. This is because there would be no New Zealand tax when PIEs distributed active income to their shareholders. In contrast, if a New Zealand company receives CFC or FIF income, New Zealand tax will usually be levied when unimputed dividends are paid to shareholders. Similarly, non-companies are taxable on foreign dividends received from CFC interests and interests in FIFs for which they use the attributable FIF income method.

For this reason sections EX 14 and EX 34 deem all CFC interests held by a portfolio investment entity (PIE) to not be CFC interests. Note that the foreign company will continue to be CFC, but the PIE will use the FIF rules as opposed to the CFC rules. Other persons with CFC interests in the CFC will continue to use the CFC rules.

A similar amendment prevents PIEs from using the attributable FIF income method.

Key features

Under sections EX 14 and EX 34 a person has a CFC interest if they have a 10% or greater income interest in the controlled foreign company and if they are not a PIE. If they are a PIE they will have a FIF interest in the company.

Section EX 46(3) prevents a PIE from using the attributable FIF income method.