Resident withholding tax on dividends paid by non-resident companies

Section NF 2(1) of the Income Tax Act 1994 and section NF 2(1) and NF 2(4) and (4B) of the Income Tax Act 2004

An amendment ensures that trans-Tasman imputation credits are taken into account in calculating resident withholding tax (RWT) deductions from dividends paid by non-resident companies.

A second amendment relaxes a requirement for RWT to be deducted from dividends paid by non-resident companies to New Zealand shareholders, if the dividendpaying company has a fixed establishment in New Zealand and is not required by generally accepted accounting practice to present financial statements in New Zealand dollars.

Background

Non-resident companies with a fixed establishment in New Zealand are required to deduct and account for RWT from dividends paid to New Zealand shareholders. However, an exemption applied if, among other things, the dividend was paid in a currency other than New Zealand dollars.

Two issues were subsequently identified:

• RWT deductions should be able to be reduced by the amount of any trans-Tasman imputation credits; and
• the exemption where dividends were not paid in New Zealand dollars no longer targeted the dividends it was designed to exempt, because non-resident companies could pay dividends to New Zealand shareholders in New Zealand dollars, because that is more convenient for those shareholders.

The rationale for the requirement to deduct RWT was to address tax avoidance concerns that can arise if a nonresident company has no business operations in its home country, but has a branch operation in New Zealand. It should be unnecessary for a non-resident company which has significant business interests in its home country as well as in New Zealand to deduct RWT from dividends paid to New Zealand shareholders, because there is a low risk of tax avoidance in these circumstances.

If the non-resident company's financial statements are not required by generally accepted accounting practice to be presented in New Zealand dollars, this is an indication that there are significant home-country interests.

Key features

Paragraphs (b), (c) and (d) of section NF 2(1) have been amended to ensure that trans-Tasman imputation credits are taken into account when calculating RWT on dividends paid by non-resident companies.

Section NF 2(4)(a) has been amended to provide that a non-resident company is not required to deduct RWT from dividends paid to New Zealand shareholders if it is carrying on a taxable activity through a fixed establishment in New Zealand, and the Commissioner is satisfied that:

• the dividends are not attributable to, or effectively connected with, a fixed establishment outside New Zealand; and
• the dividends are payable in a currency other than New Zealand dollars, or the non-resident company is not required by generally accepted accounting practice to express its financial statements in New Zealand currency.

Application date

The amendments to section NF 2(1) apply from 1 April 2003, the date of introduction of the trans-Tasman imputation rules.

The amendment to section NF 2(4) applies from 1 April 2007. This will allow sufficient time for relevant shareholders to be informed about the change.