1. Relief for dual resident companies
Although in many instances there will still be plenty of reasons to avoid becoming dual resident, New Zealand companies that do find themselves in that position may benefit from some of the proposed changes in the Bill. Under the proposed changes, companies which are dual resident will be able to:
o Offset tax losses with other group companies, subject to the usual continuity and commonality rules; and
o Continue as part of, or join a consolidated tax group.
Dual resident companies are currently excluded from the loss offset and consolidation regimes to prevent “double dipping” of expenditure. However, this integrity issue is now addressed by the hybrid and branch mismatch rules.
A further proposed change will allow (and in fact require) New Zealand companies that are also tax resident in Australia to maintain an imputation credit account. No election will be required (as is currently the case to maintain a trans-Tasman imputation credit account), and imputation credit balances existing at the time a New Zealand company becomes tax resident in Australia will be able to be retained and such entities would be eligible to be part of an imputation group.
With these changes set to be effective from 15 March 2017 (being the effective date of the ATO Ruling TR 2018/5), this will be of particular benefit to companies whose dual residency risk was caused by the Australian central management and control (“CMAC”) test.
2. Dual resident company integrity measures
Companies that are dual resident under the domestic rules of two jurisdictions need to look to the relevant double tax agreement (DTA) for the “tie-breaker”, to then determine how the DTA applies and whether relief is available.
The current Bill also proposes changes aimed at addressing integrity issues involving New Zealand companies whose tax residence tie-breaks to another country under a DTA (that is, they are treated as tax resident outside New Zealand under the relevant DTA), referred to as “DTA non-residents”.
While the first set of changes above provides relief for dual resident companies, these proposed integrity measures are targeted at restricting unintended benefits currently enjoyed by DTA non-residents. In particular, the proposed changes would:
Remove the exemption which applies to dividends paid within wholly-owned New Zealand groups for certain dividends paid to DTA non-resident companies. This may require NRWT to be withheld on certain dividends paid within wholly-owned New Zealand groups.
Extend the corporate migration rules to certain New Zealand companies whose residence tie-breaks to another country under a DTA, treating the company as migrating its residence to that other country in certain circumstances. This could essentially result in a deemed liquidation, disposal of assets and distribution to shareholders for tax purposes, giving rise to an income tax and/or NRWT liability for the company.
These changes are proposed to take effect from 30 August 2022 (the date of original introduction of the Bill), and in some instances, there will be a two-year grace period to allow the DTA non-resident to become a resident in New Zealand.
The implications of the integrity measures for DTA non-resident companies could have significant tax implications and therefore it is important that tax residency of New Zealand companies continues to be closely managed.
