PPPs are back, but should they still be structured the same?

By Emma Marr & Hamish Tait

Public private partnerships (PPPs) – not seen in NZ government infrastructure procurement since 2018 – are back on the menu. That was the signal to the market from the National-led Government’s ‘refreshed’ PPP framework document released to the public late last year.

The basic principle underlying a PPP is that it is a collaboration between the Government and private investors, to finance, build and operate/maintain an infrastructure asset. In a New Zealand context, the Government has been clear that PPPs should not be used for all infrastructure delivery. Rather, the intention is they will only be used where having private investment is considered to improve delivery performance by creating stronger commercial incentives. 

Publicly available information shows that projects currently being looked at for procurement during 2025 and 2026 include:

• Northern Corridor – Waka Kotahi NZ Transport Agency 
• Christchurch Men’s Prison; Waikeria Prison PPP Expansion – Department of Corrections
• Waitakere and Rotorua Courts – Ministry of Justice 
• Linton Camp Barracks, Messing and Dining facilities – NZ Defence Force

With these projects in the pipeline, investors will soon need to make decisions about how best to structure their investments.

In that regard, the limited partnership (LP) has been the commonly used structure for nearly all PPPs and similar projects in New Zealand over the last 10 to 15 years. This structure helped to mitigate against adverse impacts of a company structure, including from tax loss forfeiture and (for New Zealand investors) exposure to thin capitalisation rules. However, a number of tax changes in these areas, and some new Inland Revenue views in respect of LPs, may mean that this assumption is worth revisiting – particularly depending on the tax profiles of the consortium members, and their relative priorities/exit horizons. It is also critical for the tax consequences of these long-term projects to be understood and planned for over the project life.

This article steps through some of the key points commonly considered as part of PPP structuring, such as:

• Thin capitalisation; 
• Tax losses and loss carry forward;
• Distribution/repatriation of funds;  
• Inland Revenue binding rulings/sign offs; and
• Other considerations such as investor mix. 

Thin capitalisation

The thin capitalisation rules generally limit interest deductions for non-resident owned entities where debt exceeds 60% of net assets plus non-debt liabilities (unless the worldwide group is more highly geared).  At one level, unless otherwise able to be managed, this rule tended to push some PPP structures towards LPs, given that thin capitalisation applies at the limited partner level (and therefore overall project economics were not impacted by the makeup of the consortium – e.g. non-resident investors ‘pulling’ the special purpose vehicle into the thin capitalisation rules). Instead, each investor was responsible for managing their own compliance with the rules.

However, since 2018, a specific concession for infrastructure project finance has existed to reflect that PPPs  are often highly geared, supported by the project economics without recourse to investors. This concession generally allows full interest deductibility for third-party project debt for PPPs structured within certain parameters (including a project length of at least 10 years after which the assets are required to be owned by the Crown). These criteria are intended to be met by projects carried out under the NZ standard PPP contract. The introduction of the concession has meant that in most scenarios the same thin capitalisation outcome should apply irrespective of the project vehicle (company vs LP). That is, provided the contractor has only third-party project debt, full interest deductibility should apply.

The Government’s upcoming projects will be the first PPPs procured since the new rules came in. Thin capitalisation will still need to be considered, noting that there are nuances around the slightly different rules can still apply for LPs versus companies. However, in principle, the new rules may mean that factors other than thin capitalisation will be more relevant to selecting the PPP project vehicle.

Tax loss continuity

Positive changes to the loss carry forward rules have been made since the last round of PPPs. In the past, company tax losses couldn’t be carried forward following a change in shareholding greater than 51%.  As PPPs involve significant upfront costs, preserving the value of tax losses accrued in the early phase of a project can be of great benefit, particularly if an investor exits before the project generates taxable profit.

A business continuity test, introduced from the 2021 income year, allows companies to carry forward losses following a breach of shareholder continuity if there are no major changes in the company’s business activities. The rules are relatively untested, including in infrastructure projects which inherently have some major changes to the activities carried on by the project vehicle through the project life cycle (albeit these are all known at the outset of the project).

Utilising an LP allows losses to flow through to limited partners as soon as they are generated, however an LP may not be the preferred vehicle for all investors in a PPP. The new loss carry-forward rules mean that a company may be a viable option to preserve losses even where a change of ownership may arise.  

Repatriation of funds

A PPP vehicle may be cash-flow positive before it is taxpaying. This means it has cash to distribute to investors, without imputation credits being available to offset tax payable on those dividends, or reduce withholding tax on dividends paid to non-resident shareholders. In that circumstance, the withholding tax payable on dividends is dependent on double tax agreements (DTAs), which can vary greatly in the rates applied (0%-15%, or up to 30% without a DTA).

As with losses, the use of an LP, depending on the specific structure of the PPP, can enable funds to flow back to limited partners without corporate tax being applied within the project vehicle, or withholding tax applying. Whether this is beneficial to the investors will depend on a number of factors, including each investor’s tax profile. 

Inland Revenue sign off

To date, the government/procuring agencies have generally required that successful bidders for PPP projects obtain binding rulings covering the key tax consequences of the project. It is expected that this will continue to be the case. Rulings have also generally been seen as positive by equity and debt sponsors, who value tax certainty over the life of the project.

Given some of the tax points outlined above, it can be expected that Inland Revenue will need to consider some tax issues that it has not previously considered as part of ruling applications on upcoming projects. Inland Revenue also issued public rulings (back in 2013) regarding some of the key tax treatments for PPP projects, but these generally did not cover points regarding the financing of the project (including the financial arrangements rules), or avoidance – which investors typically will want comfort on.

Other considerations

Consortia borrowing from non-resident third party lenders, who are able to pay the approved issuer levy (AIL, a deductible 2% on interest payments) instead of withholding tax on interest payments, will be subject to new, more forgiving rules, that allow retrospective registration of borrowers and securities, at the Commissioner's discretion. Previously, very strict rules did not allow late registrations, meaning that any delay in registration resulted in non-resident withholding tax at up to 15% being payable, significantly increasing the tax cost of borrowing. The new rules apply from 1 April 2025. 

New Zealand has formally implemented the OECD GloBE/Pillar Two rules. The rules apply to multinational enterprise groups (MNEs) with global turnover above EUR 750M, and ensure that MNEs pay at least 15% tax on their income in each country where that income is reported for financial reporting purposes. The rules also apply to inbound groups operating in New Zealand. The impact of the rules for any investor in a PPP should be considered at the initial structuring stage, to ensure any requirements are understood. 

Finally, an increased focus by the Inland Revenue on the tax treatment of realised investments means that all PPP participants should carefully consider whether investments are held on capital or revenue account. The analysis focuses on a number of factors, including the purpose or intention of the investor at the time of acquisition, with different tests depending on what is acquired. As the intention of the investor needs to be considered, the analysis may be different if a limited partner rather than a company structure is adopted. 

If you would like to discuss these in more detail, please contact your usual Deloitte advisor.

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