We summarise some of the key recommendations below, but also highlight one area where the FEC may have missed an opportunity to avoid complications for foreign investors with leasehold interests in New Zealand.
Allowing investors to make additional incremental investments without consent
A frequent pain point for overseas investors under the current regime is the need to apply for consent for relatively minor increases in shareholdings. Various exemptions have been introduced to address this issue, but they do not work in all circumstances.
The FEC has recognised this issue, and recommends removing consent requirements for investors making additional, incremental investments that do not result in a material change in ownership or control. A material change in ownership or control would be a change that results in an investor's ownership or control interest meeting or exceeding 25%, 50%, 75% or 100%.
This will reduce the burden of the regime on overseas investors and will be a welcome change.
Avoiding over-application of the national interest test
There is also some light on the horizon for passive foreign government investors, such as pension funds, looking to invest in New Zealand.
Currently, the national interest test captures passive foreign government investors acquiring as little as 10% in a New Zealand business, even where such investors do not pose any risk to New Zealand's national interest. This leads to increased costs and delays in the consent application process. To avoid this, the FEC recommends:
- increasing the threshold from 10% to 25% (although aggregating all foreign government entities from the same country), and
- exempting passive foreign government investors, with the criteria for such exemptions to be set by regulations.
The Minister of Finance would still have discretion to apply the national interest test in appropriate circumstances.
While it is not clear at this stage what the criteria for such exemptions would be, it is encouraging to see the FEC acknowledging that passive foreign government investors, and those with ownership interests well below a controlling level, are not the intended target of the national interest test. Implementing this recommendation will simplify the consent process for such investors, and ultimately make investing in New Zealand a more attractive option.
Minimising barriers to productive development in farmland
Bell Gully submitted to the FEC that the more stringent benefit test for investments in farmland, particularly the focus on business skills, export receipts and processing of primary products, is inappropriate in the context of non-productive farmland. We are pleased to see the FEC's recommendation that the relevant Ministers should not apply the more stringent benefit test where an overseas investor is acquiring non-productive farm land for commercial, industrial or large residential developments.
The FEC has also noted, consistent with our submission, that the proposed requirement for vendors to advertise farmland before entering into an agreement to sell the land to an overseas person is unnecessary for non-productive farmland. To avoid deterring vendors from selling non-productive farmland to overseas persons because of costly and time consuming advertising requirements that would have to be met prior to entering an agreement to sell the land, the FEC recommends that the relevant Ministers be permitted to consider the nature of the land itself when granting advertising exemptions. This would allow the relevant Ministers to exempt non-productive farmland from the farmland advertising requirements, while still ensuring genuine farmland is available for purchase by New Zealand farmers.
Both of these recommendations are good news for overseas investors looking to develop non-productive farmland, and will create a more streamlined negotiation and consent process.
Clarifying the definition of “overseas persons"
The FEC recommends adding criteria to determine which limited partnerships are overseas persons. This is aimed at addressing the current uncertainty around limited partnerships and avoiding the potential for unintentional non-compliance. These criteria are, in essence, based on whether the overseas persons have more than 25% ownership or control in the limited partnership and so are consistent with criteria for other entities.
Managed investment schemes
The FEC also recommends a standing consent for managed investment schemes that are New Zealand listed issuers (as that is defined in the legislation). This will avoid the need for New Zealand listed managed investment schemes (which are fundamentally New Zealand entities) to apply for consent to buy sensitive New Zealand assets.
While the majority of the amendments recommended by the FEC are positive, we continue to have concerns about the effect of some changes in the Bill, which have not been addressed by the FEC. Most significantly, the Bill changes the minimum term of a lease that can be (non-residential) sensitive land from three to 10 years. While the increase in minimum term is a positive move, it introduces a “total term" concept that means lease extensions over sensitive land that take the total term above 10 years (even if for a short period – e.g. two years) will require consent.
It is disappointing that the FEC has not addressed this fundamental issue given the submissions that were made on it.
If you have any questions about the matters raised in this article please get in touch with the contacts listed or your usual Bell Gully adviser.