Withholding tax reforms for branches
Tax Alert - April 2017
By Emma Marr
New rules recently enacted in New Zealand impose withholding tax on interest payments that have previously been paid free of any withholding tax, in particular where lending has been via an offshore or onshore branch of a New Zealand company. Interest payments that have previously been exempt will now in some circumstances be subject to either non-resident withholding tax (NRWT, generally at the rate of 10%) or approved issuer levy (AIL, at the rate of 2%). Some of the changes are deferred for existing arrangements for a period of up to 5 years, with other changes applying when the legislation recieved Royal Assent on 30 March 2017. As part of the same package of reforms, the Government has strengthened the rules to match timing of the liability to deduct withholding tax with the deduction taken for the payment of the interest. These rules were covered in the February 2017 Tax Alert.
Offshore branch exemption
The first change removes the offshore branch exemption that allows funds lent to New Zealand entities via an offshore branch of a New Zealand entity to escape any withholding tax on interest payments. As an example, a New Zealand resident bank with an offshore branch may borrow funds on the wholesale market, via the offshore branch, with the funds on-lent to non-resident or resident borrowers. Interest payments to the wholesale lender did not attract any New Zealand withholding tax under the previous rules as the interest payments related to a business carried on outside New Zealand.
Changes to the rules now treat any interest payment by the offshore branch to a foreign lender as having a New Zealand source, to the extent that the funds are lent to New Zealand residents. For example, if the offshore branch borrows $100 from a non-resident lender and on-lends $50 to New Zealand residents, 50% of the interest paid to the foreign lender is treated as New Zealand source income. It will be subject to either NRWT (generally paid on associated lending) or AIL (only available for non-associated party lending or lending to a New Zealand registered bank).
The rules apply immediately to new arrangements entered into after 30 March 2017, and after a period of five years for arrangements existing on that date.
Onshore branch exemption
Changes are also afoot for non-resident lenders operating in New Zealand via a branch. Currently, interest paid on a loan from a non-resident lender to a New Zealand resident is exempt from NRWT or AIL if the non-resident lender operates in New Zealand via a branch. This applies whether or not the interest is paid to the branch. The offshore branch exemption will be removed so that NRWT or AIL is payable on interest payments, unless the interest is derived by the New Zealand branch. The onshore branch exemption will remain available for banks (ie, if the lender’s New Zealand branch has a banking licence), if the lender is not associated with the borrower. If the lender is associated with the borrower, the interest payer would be able to pay AIL.
The rules will apply from 30 March 2017 for loans between associated parties, other than banks, and to all new arrangements entered into after 30 March 2017. There are some transitional periods for existing arrangements where either:
- A New Zealand resident borrower is borrowing from an unassociated non-resident with a New Zealand branch; or
- The borrower is a bank.
In these cases, the rules will apply after five years, recognising that existing arrangements will generally be at arms-length terms.
Onshore notional loans
To equalise the treatment of advances of funds from foreign banks to their New Zealand subsidiaries with advances to New Zealand branches, the new rules will treat amounts made available from a non-resident head office to its New Zealand branch as a notional loan. This means that the branch which is entitled to a deduction for any interest on that notional loan will also have to pay AIL on the loan. This puts them in the same position as subsidiaries. This new rule will apply immediately to new amounts made available after enactment date. A two year transitional rule applies to amounts that were made available up to enactment date.
April 2017 Tax Alert contents