A recent technical decision (TDS 24/20) from the New Zealand Tax Counsel Office (TCO) has provided important insights into the tax implications of an arrangement between a New Zealand company (NZ Co) and an overseas company (OS Co). The ruling addresses whether OS Co has a "permanent establishment" in New Zealand, whether OS Co could be considered a New Zealand tax resident, and whether any income derived from the arrangement would be subject to New Zealand tax. These issues are critical for determining the tax obligations of foreign companies engaging in business activities in New Zealand, as the presence of a permanent establishment or the classification of a company as a tax resident can significantly impact its tax liabilities. You can read more about this here.
While it is important to note that this ruling only applies to the specific parties involved in the arrangement and cannot be relied upon more broadly, it is useful guidance when considering international companies New Zealand tax obligations.
In this specific case, OS Co engaged NZ Co to provide certain services in New Zealand. As part of the arrangement, some employees of OS Co took leave from their employer, temporarily relocated to New Zealand, and were employed by NZ Co on fixed-term contracts. OS Co paid NZ Co a fee on a cost-plus basis for the work carried out. Despite the presence of OS Co’s employees in New Zealand, OS Co did not have a head office, a centre of management, or directors exercising control in New Zealand. Additionally, OS Co did not use NZ Co’s premises for its business activities.
The key findings were as follows:
No New Zealand Residency for OS Co: The TCO concluded that OS Co was not a New Zealand tax resident, as it did not meet any of the criteria for residency, such as having a head office, centre of management, or directors controlling the company in New Zealand.
No Permanent Establishment: The ruling determined that OS Co did not have a permanent establishment in New Zealand. Under New Zealand’s double tax agreement with OS Co's country of residence, the activities of NZ Co did not create a permanent establishment for OS Co in New Zealand, as NZ Co did not have the authority to act on behalf of OS Co or use its premises for business operations.
No New Zealand-Sourced Income: The TCO found that OS Co did not derive any income with a source in New Zealand. The payments OS Co made to NZ Co were for services performed in New Zealand, but OS Co did not earn income from New Zealand itself.
No Assessable Income: Since OS Co’s income was classified as foreign-sourced and not derived from New Zealand, it was not subject to New Zealand income tax as assessable income.
No Tax Avoidance: The TCO concluded that the arrangement did not have a tax avoidance purpose or effect. OS Co did not derive assessable income in New Zealand, and NZ Co was taxed on the income it earned for services provided.
This ruling offers valuable guidance for foreign companies engaging with New Zealand businesses. It confirms that merely subcontracting services to a local entity does not automatically create a permanent establishment or tax obligations in New Zealand, provided no income is sourced from New Zealand, and no tax avoidance arrangements are in place.
However, companies should be cautious and seek expert advice on their own unique facts. While this ruling provides clarity on the tax treatment of the specific arrangement between NZ Co and OS Co, it is important to remember that the decision is only binding on the specific parties involved and cannot be applied to other situations without considering the unique facts of each case.
Tax matters are highly fact-specific, and companies entering into similar arrangements should seek professional tax advice tailored to their specific circumstances. Given the complexity of New Zealand’s tax laws and the potential for different interpretations based on unique facts, businesses may want to consider applying for their own specific ruling to ensure they understand and comply with their New Zealand tax obligations.
This article is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax matters please contact us.
This article was accurate at the time of publishing.
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