Withholding tax payments accelerated on related party loans with retrospective effect

Thursday 27 April 2017

Author: Graham Murray

​​A recent law change targeting related party loans will accelerate the payment of non-resident withholding tax (NRWT) for some New Zealand borrowers. Significantly, the new rules will have retrospective effect for some existing related party loans.

Which loans are affected?

The changes will impact cross-border "related party debts" which give the New Zealand borrower tax deductions for accruing interest, but which provide for payment of the interest in cash – and therefore payment of NRWT  on a deferred basis. For this purpose, related party debt include loans between associates (e.g. parent and New Zealand subsidiary), whether direct or indirect, and loans from non-resident people/entities acting together to a New Zealand borrower.   

Deferral calculation

The linchpin of the new rules is an annual "deferral calculation" which identifies whether cash payments of interest are lagging behind accruing interest deductions. If, for a particular year, the relevant accumulated interest payments are less than 90 per cent of the relevant accumulated interest deductions, then the New Zealand borrower will make a deemed interest payment equal to its interest deductions for that period. The New Zealand borrower will need to pay NRWT on that deemed interest payment at the relevant rate - usually 10 or 15 per cent. 

Once the 90 per cent threshold is breached for a year, the new rules will apply to the loan going forward until it matures or ceases to be related party debt. The New Zealand borrower will be treated as making an annual deemed payment of interest for NRWT purposes reflecting the interest deductions claimed under that loan. 

Retrospective effect on existing loans

Significantly, the new rules will have retrospective effect for existing related party debt. If the 90 per cent deferral threshold is breached at any time going forward, then the New Zealand borrower will be treated as making an additional payment of interest which "catches up" historic NRWT deferrals on the loan – including deferrals that arose before the new rules came into effect on 30 March 2017

New Zealand borrowers could therefore face significant NRWT liabilities sooner than expected if the 90 per cent deferral threshold is breached and will need to manage cash flow accordingly.

Existing loan agreements need to be reviewed

These new rules will directly impact related party loan agreements that calculate interest "as if" accruing interest was capitalised while deferring cash payment. If you have loan agreements which adopt this approach then we recommend that the terms of the agreement be reconsidered in light of the new rules.

Please contact your usual Bell Gully adviser if you have any queries on the changes or would like assistance in revising an existing loan agreement. 


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Graham Murray

    Partner Auckland
  • Mathew McKay

    Partner Auckland
  • Jarrod Walker

    Partner Auckland
  • David McPherson

    Partner Auckland
Related areas of expertise
  • Tax
  • Banking and finance