TAX NEWS - DECEMber 2009

New Zealand Tax: Supplementary dividend rules changed

Important changes have been made to the rules regarding tax credits for supplementary dividends paid to nonresidents in respect of non-portfolio interests (i.e. voting interests of 10% or more) in New Zealand.

The changes have become necessary as a result of the recently signed, but not yet in force, tax treaties with Australia and the U.S., which can reduce the domestic (30%) rate of nonresident withholding tax (NRWT) on non-portfolio dividends to 15%, 5% or zero, depending on the shareholder's stake in the company and whether certain other criteria are met. The issue is also relevant for New Zealand's new tax treaty with Singapore, although there is no zero rate under that treaty. It is likely that similar reductions in other treaties will be adopted over time – Canada and the U.K. are the next treaties on the list to be updated.

The reduced treaty rates for dividend withholding tax affect New Zealand's unique supplementary dividend rules that allow a company paying a dividend to a nonresident to pay a supplementary or additional dividend to effectively eliminate the cost of NRWT required to be deducted from the dividends. This supplementary dividend is funded by a tax credit that may be claimed by the company paying the dividend. The net effect of the regime is that the total New Zealand tax paid in respect of profits distributed to the nonresident does not exceed the 30% company tax rate. These rules are more commonly known the "foreign investor tax credit" rules or the FITC regime.

As from 1 February 2010, the supplementary dividend rules will no longer apply to dividends paid to non-portfolio investors.

The rules will only be able to be used for dividends paid to a nonresident that holds directly less than 10% of the voting rights in the company where the post-treaty rate is 15% or more. The provisions dealing with supplementary dividend holding companies are also to be repealed as from the 2014 income year.

To complement these changes, a domestic withholding tax exemption from NRWT for imputed non-portfolio dividends paid to nonresidents will be introduced as from 1 February 2010. Thus, dividends paid by a company to a nonresident with a 10% or more direct voting interest will have a zero rate of NRWT. The zero rate will apply only to the extent a dividend is fully imputed. It also will apply to interests of less than 10%, but where the post-treaty rate is less than 15%; this latter case will be relevant where the beneficial owner is a contracting state, political subdivision or local authority (including a government investment fund.)

For unimputed dividends, the domestic rate of NRWT is 30%, but a tax treaty could reduce the rate to 15%, 5% or zero depending on what criteria are met.

The following table summarizes how the new domestic tax rules and new tax treaties will broadly operate when a dividend is paid by a New Zealand company to a nonresident investor:



10% or more direct voting interests or less than                   - Supplementary dividend rules are not available
10% direct voting interest and post-treaty NRWT                     (i.e. no FITC)
rate is less than 15%                                                          - Fully imputed dividend – domestic NRWT rate is nil


Less than 10% direct voting interests and posttreaty             - Can pay a supplementary dividend to nonresident
NRWT rate is 15% or more                                                  (i.e. FITC applies)
                                                                                       - Fully imputed dividend – domestic NRWT rate is 15%