Meaning of "controlled foreign company"

Amendment to Income Tax Act that restores the meaning of 'foreign controlled company'. Applies from the beginning of the 2005-06 income year subject to provisions.

The amendment restores the meaning of "controlled foreign company", as given by section CG 4(2)(b) of the 1994 Act. The amendment has been made to section EX 1(1)(b) in both the 2004 and 2007 Acts.

The Rewrite Advisory Panel agreed with a submission that section EX 1(1)(b) of the 2004 and 2007 Acts did not correctly reflect the outcome given in section CG 4(2)(b) of the 1994 Act.

Under section CG 4(2)(b) of the 1994 Act, a foreign company was not a controlled foreign company if a non-resident shareholder's control interests were:

  • at least equal to or greater than 40 percent; and
  • there was no single New Zealand-resident shareholder having control interests greater than the control interests of the non-resident.

The provision is retrospective and has the effect of validating the actions of taxpayers who have continued to:

  • disclose their interests in a foreign company as an interest in a controlled foreign company; and
  • return their attributed CFC income from controlled foreign companies.

A savings provision applies to taxpayers who have taken tax positions in relation to whether the person has an interest in a controlled foreign company:

  • in a return of income filed before the last date of the period to which the savings provision applies; or
  • for the purpose of a disclosure requirement occurring before the last date of the period to which the savings provision applies.

The savings provision applies only if the tax position is based on the wording in section EX 1 of the 2004 or 2007 Acts.

Application dates

The amendments apply from the beginning of the 2005-06 income year with both the 2004 and 2007 Acts having been amended to give effect to this application, subject to the savings provisions described above.