Article
New DTA with Canada in Force
Tax Alert - August 2015
On 2 July 2015, New Zealand's Minister of Revenue, Todd McClay, announced that the New Zealand-Canada double tax agreement (DTA) entered into force on 26 June 2015. The new DTA was signed on 3 May 2012 and the accompanying protocol on 12 September 2014. The new DTA replaces the 1980 treaty.
The DTA is effective for withholding taxes from 1 August 2015; and for other provisions, the agreement is effective for income years beginning on or after 1 April 2016 for New Zealand and 1 January 2016 for Canada.
Key changes include reduced withholding taxes on dividends, interest and royalties and amendments to the permanent establishment (PE) article. This article outlines those key issues.
Withholding tax rates
One of the key features of the updated DTA is reduced withholding tax rates on dividends, interest and royalties. These reductions will help New Zealand businesses compete in Canada and encourage Canadian investment in New Zealand. A summary of these changes are as follows:
Income |
1980 Treaty |
New DTA |
Dividends - beneficial ownership < 10% |
15% |
15% |
Dividends – beneficial ownership ≥ 10% |
15% |
5% |
Interest |
15% |
10% |
Royalties (generally) |
15% |
10% |
Royalties (relating to copyright or production of artistic work but excluding royalties relating to film or television broadcasting work) |
15% |
5% |
Dividends
The standard withholding tax rate on dividends remains at 15%, but it will reduce to 5% where the beneficial owner is a company that holds directly at least 10% of the voting power of the company paying the dividends.
Interest
The withholding tax rate on interest is reduced from 15% to 10%. However, where interest is derived by a financial institution that is unrelated to and dealing independently with a payer, the interest may not be taxed in the state in which the interest arises.
Consistent with New Zealand’s DTAs with Australia and the US, the interest article contains an approved issuer levy (AIL) clause, which provides that interest arising in New Zealand will be charged at 10% (as opposed to 0%) if the payer of the interest has not paid the AIL.
Royalties
The general withholding tax rate for royalties is reduced from 15% to 10%; however, a 5% rate will apply to the following types of royalties:
- Copyright royalties and other like payments in respect of the production or reproduction of a literary, dramatic, musical or other artistic work (excluding royalties in respect of motion picture films and royalties in respect of works on film, videotape or other means of reproduction for use in connection with television broadcasting); and
- Royalties for the use of, or the right to use, computer software or a patent or for information concerning industrial, commercial or scientific experience (but not including any such royalty provided in connection with a rental or franchise agreement).
Permanent establishment
The new DTA makes the following changes to the PE article:
- A PE will arise only if a building site, construction, installation or assembly project lasts more than 12 months (six months under the 1980 DTA).
- An enterprise will be deemed to have a PE in a contracting state if the enterprise carries on activities in connection with the exploration or exploitation of natural resources, including standing timber, for more than 183 days in a 12-month period; or if it operates substantial equipment in the other state.
- Consistent with New Zealand’s other recent DTAs, a new section provides that, subject to certain exceptions, an enterprise will be deemed to be carrying on a PE in the other contracting state if it performs services in the other contracting state:
- Through an individual who is present in the other state for more than 183 days in a 12- month period and more than 50% of the gross revenue attributable to active business activities of the enterprise during this period are derived from the services performed in that other state by the individual; or
- For a period or periods exceeding 183 days in a 12-month period, and the services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in that other state.
For more information about this DTA, please contact your usual tax advisor