Foreign dividend exemptions
2012 legislation covers foreign dividend exemptions and applying the Foreign Investment Fund (FIF) rules.
Section CW 9 of the Income Tax Act 2007
Most foreign dividends are exempt from New Zealand tax. The exceptions to this general rule depend on whether the person who receives the dividend is a company, or not a company.
If the person is not a company, foreign dividends will be assessable income of the person if the person uses the attributable FIF income method, or if an exemption from the FIF rules applies (including the exemption for interests of 10% or more in CFCs). The exemptions from the FIF rules have been described previously.
If the person is a company, foreign dividends will be assessable income if they are paid in relation to fixed-rate shares or if the dividend is tax-deductible in the foreign company's country of residence. They will also be assessable income if certain exemptions from the FIF rules apply (most notably the exemption for interests in ASX-listed companies), as long as sections EX 34 or EX 35 do not also apply.
When a person uses the comparative value, deemed rate of return or cost method for a FIF, they are treated as not receiving dividend income from that FIF (see section CD 36(1)), so any dividends received are effectively exempt.
When a taxpayer uses the fair dividend rate method for a FIF there is only one rare situation where dividends from certain Australian FIFs are assessable income of the person (see the section CD 36(2) example below). In all other cases the dividends are effectively exempt (section CD 36(1)).
Foreign dividends are generally exempt when they are received by a New Zealand company. This is achieved by section CW 9(1). However, there are some complex exceptions to this. The effect of section CW 9 is summarised in the following table:
|Type of FIF interest||Dividends|
|The dividend is paid in relation to fixed-rate foreign equity or deductible foreign equity.|| Dividends are assessable income. |
(See sections CW 9(2)(b) and (c).)
| One or more of the following exemptions from the FIF rules applies: || Dividends are assessable income. |
(See section CW 9(2)(a).)
|All other cases.||Dividends are exempt income if received by a company.|
Section CW 9 achieves the above results. Section EX 20B(3)(a) mirrors section CW 9(2) by attributing income from these dividends when they are received by CFCs or FIFs for which the person uses the attributable FIF income method.
Section CW 9(3)(a) prevents any type of PIE from accessing the foreign dividend exemption previously; only multi-rate PIEs were excluded from the foreign dividend exemption. Note that dividends received by PIEs will only be taxed in cases where an exemption from the FIF rules applies. For attributing FIF interests, the PIE will use one of the methods listed in section CD 36(1) and so will be treated as not receiving dividend income from those FIFs.