New Zealand Tax: New rules for paying dividends to nonresidents now in force
New rules that impact the payment of dividends to nonresident investors commenced on 1 February 2010. Broadly, these changes affect to whom a supplementary dividend (also known as a foreign investor tax credit or "FITC" dividend) can be paid, as well as the rate of nonresident withholding tax (NRWT) payable on certain types of dividends. The rules apply to dividends paid by New Zealand companies to nonresidents regardless of where the recipient is resident.
New Zealand's supplementary dividend rules allow a company paying a dividend to a nonresident to pay a supplementary or additional dividend to effectively eliminate the cost of the nonresident withholding tax 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.
As from 1 February 2010, supplementary dividends may be paid only to nonresident shareholders that hold less than 10% of the direct voting interests where the post-tax treaty tax rate is 15% or more. Nonresident shareholders who hold 10% or more of the direct voting interests will be eligible for an exemption from nonresident withholding tax (NRWT) to the extent the dividend is fully imputed. In this case, therefore, there is no need to resort to a tax treaty for a tax relief.
If the dividends paid to a nonresident are "unimputed," they will be subject to a nonresident withholding tax rate of 30%, which may then be eligible for reduction under the relevant treaty. Currently, most tax treaties drop this tax rate to 15%, although the recently concluded (but not yet in force) treaties with Australia and the U.S. contain articles that will further reduce the withholding tax on dividends to 5% or 0% where certain criteria are met. Depending on certain circumstances, these new rules may provide opportunities to return tax free unimputed reserves or capital gain amounts returned on a liquidation.
Companies whose shareholders comprise a mixture of portfolio and non-portfolio investors will have to consider the impact of these changes when paying a dividend given the different rules that apply for each type of holding. Template dividend documentation used in the past to pay regular dividends should be reviewed to determine whether it needs to be updated to accommodate the changes.