Late breaking changes to the NRWT rules – a new 0% rate for dividends

Graham Murray, Senior Associate | Friday 4 December 2009

Significant changes to the non-resident withholding tax (NRWT) treatment of dividends were introduced in a supplementary order paper to the Taxation (Consequential Rate Alignment and Remedial Matters) Bill on 24 November. The Bill was passed two days later on 26 November with very little scope for public comment on the changes contained in the supplementary order paper.

The amendments introduce a 0% rate of NRWT on dividends paid to certain non-residents with effect from 1 February 2010.

Current treatment of dividends (before 1 February 2010)

Dividends paid to non-residents currently attract NRWT at the rate of 15% to the extent the dividend is fully imputed. Although a 15% withholding applies, the foreign shareholder is relieved from the monetary effect of New Zealand NRWT on the dividend through the foreign investor tax credit (or FITC) regime.

Under the FITC regime, a New Zealand company paying a fully imputed dividend receives a tax credit (the FITC) which indirectly funds a "supplementary dividend" paid by the company to the foreign shareholder. The supplementary dividend is equal to the NRWT on the main and supplementary dividend with the result that the foreign shareholder is economically relieved from NRWT on the main dividend. The IRD is not out of pocket because it recovers the FITC given to the dividend paying company as NRWT deductions.

NRWT at 0% (from 1 February 2010)

The new rules introduced by the supplementary order paper achieve the same outcome as the FITC regime for certain foreign shareholders by allowing NRWT to be withheld at 0% from fully imputed dividends paid from New Zealand.

In cases where the 0% rate of NRWT cannot be applied, the FITC regime described above continues to apply.

Non-portfolio interests

The 0% rate will apply to dividends paid to foreign shareholders with non-portfolio interests. A foreign shareholder will have a non-portfolio interest if it holds a 10% or greater direct voting interest in the New Zealand company paying the dividend. The new 0% rate will therefore clearly apply to dividends paid by New Zealand subsidiaries to their offshore parent companies.

DTA rate less than 15%

The 0% NRWT rate will also apply to a foreign shareholder with a portfolio interest in a New Zealand company in circumstances where the rate of tax which can be imposed on the dividend in New Zealand is less than 15% under the terms of a Double Taxation Agreement (DTA) to which the foreign shareholder is entitled to benefit. This basis for applying the 0% rate will be less significant because none of New Zealand's current DTAs reduce the rate of NRWT on dividends below 15%.

While maximum rates of tax of less than 15% are contemplated under the revised U.S. /New Zealand DTA, the new Australia/New Zealand DTA and the new Singapore/New Zealand DTA (none of which are yet in force), the general position is that those lower rates only apply where the non-resident shareholder has a 10% or greater voting interest (i.e., they would benefit from the 0% rate of NRWT in any event).

Full imputation required

The 0% NRWT rate will only be available to the extent that the dividend is fully imputed with imputation credits. To the extent not fully imputed, NRWT will be required to be withheld at 30% (reduced to 15% under most DTAs between New Zealand and other jurisdictions).

Changes to the FITC rules

To complement the 0% rate of NRWT, a number of changes to the FITC regime have been introduced.

From 1 February 2010, a New Zealand company that pays a dividend which is subject to the new 0% NRWT rate will not generate a FITC.

The FITC rules relating to holding companies (the old section LE 3 holding company rules) have been repealed with effect from 1 April 2013 for standard balance date taxpayers. This is unlikely to have a significant impact for foreign investors holding the interests through a New Zealand holding company because dividends paid by the holding company should be subject to the new 0% rate of NRWT.

Credits for New Zealand NRWT in foreign jurisdictions

The 0% rate of NRWT achieves the same result as the FITC regime but through much simpler means – the non-resident investor does not suffer the burden on NRWT to the extent that the dividend is fully imputed.

However, the two approaches may give rise to very different results in the foreign investor's home jurisdiction. As a result of the FITC regime, a foreign investor may be able to obtain a credit in its home jurisdiction for the New Zealand NRWT withheld from the main and supplementary dividends irrespective of the fact that the supplementary dividend (from which NRWT is also withheld) is funded from a New Zealand tax credit. By contrast, no credit for NRWT will be available where the 0% NRWT rate applies as no NRWT is withheld. This is likely to disadvantage some foreign investors into New Zealand in their home jurisdiction.

 

Independent recognition for Bell Gully tax team Bell Gully has been named New Zealand Tax Firm of the Year at the International Tax Review Asia Tax Awards in Singapore. It is the fourth consecutive year the firm's tax practice has been recognised at the awards. As well as winning the Tax Firm of the Year title, the firm was also shortlisted in the two other New Zealand categories – Indirect Tax Firm of the Year and Tax Controversy Firm of the Year. Bell Gully's tax team has also received a top ranking in a global guide to leaders in tax law across Europe, Asia Pacific and the United States. The firm has retained its top tier ranking in the Tax Directors Handbook 2010 and for the second year running, tax practice leader Niels Campbell also features as one of only four New Zealand tax lawyers in the publication's list of the world's top 250 tax lawyers as recommended by clients. The ranking reflects the work of the tax practice in the last year, including acting on the NZ$868m amalgamation of a number of property funds into the DNZ Property Fund, advising Danone on its sale of Frucor, and providing advice on Origin Energy Resources' Kupe oil and gas development. The team has also had success in the newly released Asia Pacific Legal 500 2009/2010 guide, with the practice being ranked in the top tier and partners Niels Campbell and David Simcock rated as leading lawyers in the field. Bell Gully is the only New Zealand firm ranked as top tier in all eight practice areas covered by the guide. It is the first time in the publication's 14-year history that a New Zealand law firm has secured top tier rankings across all practice areas in a single edition.

 

For further information, please contact your usual Bell Gully adviser or:

Niels Campbell
Partner

Mathew McKay
Partner

Willy Sussman
Partner

John Bassett
Senior Associate

Jarrod Walker
Senior Associate

David Simcock
Consultant

Campbell Pentney
Senior Solicitor

Ogy Kabzamalov
Solicitor

Graham Murray
Solicitor