Running a group of companies across two countries means you will need to be aware of tax residence rules, and carefully manage tax compliance across both jurisdictions.

A United States-incorporated company is automatically a United States tax resident. But in a classic flip situation, where US Holdco simply raises capital and holds shares, while the New Zealand company keeps running everything in much the same way it always did, US Holdco is potentially a tax resident in New Zealand as well. New Zealand’s tax residency rules are relatively broad and will capture a company being effectively run from New Zealand. This means US Holdco is likely a dual tax resident and has to register with both tax authorities (the IRS and Inland Revenue), file returns in both countries and work through the double tax treaties to ensure that it is not paying more tax than it should.

It is important to ensure that the functions of US Holdco and the New Zealand operating company are kept separate, to the extent possible, so that the revenue of the full group is not taxed in both places. Double tax treaties can help, but it’s better to limit the circumstances in which you rely on one.

Bear in mind (or rather have front of mind) that it’s easy to create tax obligations in many states in the United States, and double tax treaties don’t apply to state taxes. Share with your advisor full information about the movement of people between countries, any property (including inventory) you have in the United States, and any leases, bank accounts or third party logistics (3PL) arrangements you have in place. Pay close attention to the shipping arrangements you have with customers, when title passes, and who is importing the goods and taking responsibility for customs duties and local taxes. This is all crucial information for understanding your tax obligations in both countries.

Transfer pricing rules are very useful in these circumstances (and will need to be considered from a tax compliance perspective). Transfer pricing rules look at which entity is doing what, where, with what assets, and assuming which risks, and then ensure each entity is appropriately rewarded on an arm’s length basis. In other words, the transfer pricing rules make sure each entity is earning a return for what it is actually doing in line with the return that a third party would in similar circumstances.

Considering the transfer pricing position will help you be clear about where the profit should sit within the group and help support where the profit should be taxed. Getting the transfer pricing right early in your growth journey will make it much easier to comply as your business gets bigger and develops into new areas and opportunities. Compliance with transfer pricing rules will also be helpful should an eventual sale of the business be on the cards. While there is a level of documentation and analysis required to comply with the transfer pricing rules across jurisdictions (which inevitably increases as revenue grows), at the start of the journey taking a compliant and practical approach upfront and scaling up as necessary will prove efficient in the long term.

The investors in the group, who are likely to be a mix of New Zealand and United States residents (and possibly other countries as well) should all get personal tax advice on what it means to own shares in the new group structure. New Zealand investors should bear in mind that although they now own shares in a United States-incorporated entity, it may still be New Zealand tax resident. This means it is not a FIF or a CFC. This would change if the company ceased to be a New Zealand resident.

If your company’s growth in the United States leads to changes in the way the group is managed and controlled, so that US Holdco ceases to be New Zealand tax resident, you’ll need to re-evaluate how the tax rules apply in both countries. Emigrating from New Zealand can trigger a tax liability for a New Zealand tax resident company, so you should keep a close eye on this and make sure nothing happens without you planning for it.

Flipping the ownership of your business to the United States is not something you should do without detailed planning and consideration of all the opportunities and risks that can arise. Where the rewards are big enough to fund the solutions for any complications, the decision to go ahead might be pretty straightforward. But don’t forget to manage the tax and regulatory issues that inevitably follow.

As with all new ventures in business, if you know more about how to manage the process, you’ll feel more confident in taking the next step. Get in touch with the authors or your usual Deloitte advisor if you’d like to consider this further.