New Zealand: Changes to tax treatment of nonresidents investing in PIEs under discussion

The New Zealand tax authorities have issued a discussion paper seeking comments on ways to prevent the over-taxation of nonresidents on investments in New Zealand portfolio investment entities (PIEs – which are collective investment vehicles meeting certain requirements).

Under existing law, a nonresident investing in foreign assets through a PIE is taxed as if it were a New Zealand resident; such a nonresident is taxed both on its New Zealand-source income and income from offshore activities. Since the government is exploring the potential for New Zealand to establish itself as an exporter of back-office services for funds management firms, two high level options are proposed for exempting foreign-source income derived by a nonresident through a PIE:

- Allow resident and nonresidents to invest in a PIE that only derives foreign-source income, with some allowance for a minimum threshold of investment in New Zealand equity and debt. In this case, the nonresident investors would have a 0% prescribed investor rate for all income, while resident investors would be subject to standard prescribed investor rates.

- A look-through global investment option that would allow a PIE to have both resident and nonresident investors and New Zealand and foreign-source income. There would be no restriction on the New Zealand-source income, but the PIE would be required to track all sources of income, allocate each stream of income and expenditure and apply a different prescribed investor rate to different types of income derived by nonresident investors. It is also proposed to extend the benefits of the approved issuer levy regime to investments in New Zealand debt instruments and tax them at 2% rather than at full withholding tax rates.

Industry views are sought on the above issues with submissions closing on 4 June 2010.