Foreign shares held by active insurance CFCs

New 2011 legislation amends the CFC rules so that an active business exemption for insurance companies will apply for related holdings of foreign shares.

Section EX 58(7) of the Income Tax Act 2007

Section EX 58(7) amends the controlled foreign company rules so that an active business exemption for insurance companies will apply in respect of related holdings of foreign shares. This change is retrospective, to ensure affected taxpayers do not have an unintended tax liability.


Under the CFC rules, a New Zealand insurance company that uses a controlled foreign company (CFC) to conduct an insurance business offshore can apply to the Commissioner of Inland Revenue for a special exemption from the CFC rules. This is provided as a temporary measure until more detailed rules are developed for applying an active income exemption to active financial CFCs.

Under the existing tax rules, when a CFC holds shares in another foreign company, those shares are generally taxed as though they were held directly by the New Zealand shareholders in the CFC. In contrast, CFCs that hold bonds are treated as holding the bonds themselves.

As a consequence of this approach a New Zealand insurance company with an insurance CFC was required to attribute income from any foreign shares that are held as part of the CFC's insurance business.

This result was inconsistent with the fact that no New Zealand tax will be payable on bonds when these are held by insurance CFCs that qualify for the special exemption.

Because the core business of insurance CFCs involves making investments in financial markets, it is not appropriate to tax foreign shares or bonds when these investments are used to support the insurance business.

One condition for getting the special exemption is that the CFC's investments must be commensurate with the insurance policies that the CFC sells in its jurisdiction. This prevents the CFC from holding an excessive amount of investment assets. The Commissioner of Inland Revenue would be able to revoke the exemption if this occurred.

Key features

Section EX 58 applies when a person has an income interest of 10% or more in a CFC and that CFC has an interest in a FIF. Because of section EX 21(33) income earned by the FIF is not treated as being income of the CFC. Instead, the FIF income is attributed to the New Zealand person.

Section EX 58(7) stops the general "look-through rule" in section EX 58 from applying in respect of a CFC that meets the requirements of a determination made by the Commissioner under section 91AAQ of the Tax Administration Act 1994.

Application date

Section EX 58(7) applies to income years beginning on or after 1 July 2009.