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Inland Revenue

Tax Policy

Announcements
PUBLISHED 11 February 2005

US, NZ agree on fiscally transparent entities

An agreement between US and NZ tax authorities has clarified that the benefits of the 1982 double tax agreement between the two countries apply to cross-border investments by limited liability companies and other fiscally transparent entities in both countries. For more information see Inland Revenue's media release and the text of the mutual agreement.

Update - 30 September 2015: This agreement was superseded by Article I of the Second protocol to the 1982 agreement. The second protocol was signed on 1 December 2008 and entered into force on 12 November 2010.


Inland Revenue Department

MEDIA RELEASE

US, NZ agree on tax treatment of fiscally transparent entities

United States and New Zealand tax authorities have agreed to allow fiscally transparent entities owned by US and NZ residents to benefit from the double tax agreement between the two countries.

"The move should help New Zealand to attract more United States investment, especially venture capital," says Robin Oliver, Inland Revenue's Deputy Commissioner, Policy.

"United States investors into New Zealand have raised concerns that a strict interpretation of our 1982 double tax agreement would exclude certain types of commercial entities that have become more common in the last ten years."

"The result is that fiscally transparent entities based in the US that invest into New Zealand might not be eligible for the reduced non-resident withholding tax rates that our double tax agreement gives other US investors," he says.

"The two tax authorities have therefore agreed to clarify matters by interpreting our double tax agreement so as to ensure that its benefits apply to cross-border investments of limited liability companies and other fiscally transparent entities in both countries," Robin Oliver says.

A fiscally transparent entity is an entity that is disregarded for tax purposes, with tax imposed directly on the owners or shareholders, as happens with general partnerships.

For further information contact
Inland Revenue
Corporate Communications
04 471 4930
021 444 178


Text of the mutual agreement, 8 February 2005 follows:

U.S. and New Zealand reach Mutual Agreement Regarding Treatment of Income Derived Through Certain Fiscally Transparent Entities

The Competent Authorities of the United States and New Zealand have entered into a mutual agreement to clarify the entitlement of members of certain fiscally transparent entities to benefits under the Convention between the United States of America and New Zealand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed on July 23, 1982, and as amended by Protocol signed on July 23, 1982, and as implemented in New Zealand by The Double Taxation Relief (United States of America) Order 1983 signed on July 23 1983.

It has come to the attention of the Competent Authorities that a resident of a Contracting State may derive income from the other Contracting State through an entity that is organized in, and treated as fiscally transparent by, the first Contracting State, but that is not treated as fiscally transparent by the other Contracting State.

Consistent with the approach taken in Article 4 (Residence) of the Convention, and pursuant to the authority of Article 24 (Mutual Agreement Procedure) of the Convention, the Competent Authorities agree that, in applying the Convention, income paid to and through such an entity is considered to be derived by a resident of the Contracting State to the extent of the share the resident has in the income.

For example, if a resident of the United States is a partner or member of an entity created or organized in the United States, under the law of the United States or any state of the United States, and the entity is treated for United States federal tax purposes as a partnership or is disregarded as an entity separate from its owner (e.g., a limited partnership; or a Limited Liability Company, including one owned by a single member), the resident of the United States would be afforded the benefits of the treaty on the income that the resident derives from New Zealand through the entity, even if under its domestic law New Zealand does not treat the entity as fiscally transparent. Consistent with Article 4 (1)(b) of the New Zealand/US treaty, the benefits extend to the income received by the fiscally transparent entity only to the extent of the resident’s share of that income.