Foreign dividend exemption – deductible dividends

(Clause 126(16))

Summary of proposed amendment

The Bill proposes a remedial amendment to the exemption for dividends received by companies. The amendment widens the definition of deductible foreign equity distribution to include dividends that are deductible to a person other than a company.

Application date

Date of introduction of the Bill, to prevent people taking advantage of the identified deficiency before it is remedied.

Key features

The proposed definition of deductible foreign equity distribution is widened to include payments received by a company that give rise to a deduction for foreign tax of any person, whether a company or not.

Previously, the definition was limited to amounts that were deductible to the company making the distribution, and to companies in the same group of companies as the distributing company.

Detailed analysis

All references are to the Income Tax Act 2007 unless stated.

Background

Most foreign dividends received by companies are exempt income (section CW 9). However, deductible foreign equity distributions are not exempt income. This limitation is intended to prevent double non-taxation of income (deductible in the foreign country, not taxable in New Zealand).

A deductible foreign equity distribution is defined to be, in the simplest case, a distribution that is deductible to the company making the distribution, or to another company in the same group of companies. There is also a further provision to deal with amounts sourced indirectly from amounts that may have been doubly non-taxed at an earlier stage.

We are aware of structures that have been contemplated by taxpayers and that can achieve effective double non-taxation of income without triggering the definition of deductible foreign equity distribution.

In particular, there are cases where New Zealand does not consider an entity to be a company, but the foreign country does and allows it a deduction that is attributable, directly or indirectly, to a dividend received by a New Zealand company.

Remedial change

Definition of deductible foreign equity distribution in section YA 1

The Bill proposes widening the definition of deductible foreign equity distribution to include payments that generate a deduction, for foreign tax purposes, for any person. This applies regardless of whether the person is an incorporated body or not (the Interpretation Act 1999 explicitly includes “an unincorporated body” in the definition of a person).