Dual resident companies get some relief under proposed tax changes but watch out! There may also be tax to pay!
Tax Alert - September 2022
By Kirstie Anderson & Annamaria Maclean
New Zealand companies managed or controlled from Australia should now be familiar with the risk of dual residency, which has been elevated in recent years by developments in the corporate residency landscape in Australia (refer to our prior article on this if you need a recap).
Australian rules aside, there is still a real risk that New Zealand companies can find themselves tax resident in another jurisdiction depending on the tests of residency employed by other countries they are operating in. Similarly, our domestic rules on tax residency can treat offshore companies as tax resident here where they are managed or controlled from New Zealand, or if they have their head office here.
Under current rules, the consequences of being dual resident can lead to a number of headaches for New Zealand companies that find themselves resident in another country – notably including forfeiture of imputation credits, inability to offset losses to group companies and the inability to be part of a consolidated group.
Changes have been proposed in the Taxation (Annual Rates for 2022-23, Platform Economy and Remedial Matters) Bill (“the Bill”) to ease the burden on companies that find themselves dual resident, in response to the wider net that the ATO has cast which is currently capturing many New Zealand businesses.
But watch out because Inland Revenue has also proposed integrity measures for companies whose residence tie-breaks to another country which could result in additional tax to pay.
So what’s changing?
1. Relief for dual resident companies
Although in many instances there will still be plenty of reasons to avoid becoming dual resident, New Zealand companies that do find themselves in that position may benefit from some of the proposed changes in the Bill. Under the proposed changes, companies which are dual resident will be able to:
o Offset tax losses with other group companies, subject to the usual continuity and commonality rules; and
o Continue as part of, or join a consolidated tax group.
Dual resident companies are currently excluded from the loss offset and consolidation regimes to prevent “double dipping” of expenditure. However, this integrity issue is now addressed by the hybrid and branch mismatch rules.
A further proposed change will allow (and in fact require) New Zealand companies that are also tax resident in Australia to maintain an imputation credit account. No election will be required (as is currently the case to maintain a trans-Tasman imputation credit account), and imputation credit balances existing at the time a New Zealand company becomes tax resident in Australia will be able to be retained and such entities would be eligible to be part of an imputation group.
With these changes set to be effective from 15 March 2017 (being the effective date of the ATO Ruling TR 2018/5), this will be of particular benefit to companies whose dual residency risk was caused by the Australian central management and control (“CMAC”) test.
2. Dual resident company integrity measures
Companies that are dual resident under the domestic rules of two jurisdictions need to look to the relevant double tax agreement (DTA) for the “tie-breaker”, to then determine how the DTA applies and whether relief is available.
The current Bill also proposes changes aimed at addressing integrity issues involving New Zealand companies whose tax residence tie-breaks to another country under a DTA (that is, they are treated as tax resident outside New Zealand under the relevant DTA), referred to as “DTA non-residents”.
While the first set of changes above provides relief for dual resident companies, these proposed integrity measures are targeted at restricting unintended benefits currently enjoyed by DTA non-residents. In particular, the proposed changes would:
Remove the exemption which applies to dividends paid within wholly-owned New Zealand groups for certain dividends paid to DTA non-resident companies. This may require NRWT to be withheld on certain dividends paid within wholly-owned New Zealand groups.
Extend the corporate migration rules to certain New Zealand companies whose residence tie-breaks to another country under a DTA, treating the company as migrating its residence to that other country in certain circumstances. This could essentially result in a deemed liquidation, disposal of assets and distribution to shareholders for tax purposes, giving rise to an income tax and/or NRWT liability for the company.
These changes are proposed to take effect from 30 August 2022 (the date of original introduction of the Bill), and in some instances, there will be a two-year grace period to allow the DTA non-resident to become a resident in New Zealand.
The implications of the integrity measures for DTA non-resident companies could have significant tax implications and therefore it is important that tax residency of New Zealand companies continues to be closely managed.
While most of these changes are favourable for New Zealand companies at risk of dual residency, there will be a few things to work through to determine how the rules will apply. This can include careful consideration of loss continuity periods depending on when a loss-making company generated its tax losses and when it became dual resident. In addition, the implications of the integrity measures for DTA non-resident companies could have significant tax implications and therefore tax residency should continue to be closely managed.
Perhaps the moral of the story, is that tax residency is something which should be actively managed, preferably to avoid dual-residence in the first place, but also to ensure that any issues are swiftly identified and dealt with within the two-year grace period (and before any other triggering events occur).
If you would like to learn more about these changes or discuss how they could affect your company please reach out to your Deloitte tax advisor.
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