New Zealand’s Controlled Foreign Company (CFC) rules are designed to prevent the shifting of passive income, such as interest, royalties, and rents offshore by NZ residents. The rules require CFC income to be attributed back to the NZ tax resident.
A company is classified as a CFC if a group of five or fewer NZ residents holds over 50% of control interests, or a single NZ resident holds 40% of control interest or more in a foreign company. These control interests aggregate direct and indirect holdings across four categories, including shareholding and entitlement to income.
Watch our video on CFC rules here:
Following the 2009 reforms, the rules fundamentally changed the taxation of offshore income by focusing on exempting active offshore income to boost global competitiveness. Attribution is generally required only if the CFC is not a Non-Attributing Active CFC or a Non-Attributing Australian CFC. A CFC qualifies as a non-attributing active CFC if its passive (attributable) income is less than 5% of its total income. This test can be conducted using either tax or approved accounting measures. A CFC qualifies as a non-attributing Australian CFC if the foreign company is an Australian tax resident and treated as Australian tax resident by all Australian double tax agreement. The CFC must also be subject to income tax in Australia without the benefit of any exemption for business profits derived from outside Australia or for offshore banking units.
However, income derived from personal services is an important exception and is always attributed, irrespective of any CFC exemption.
CFC disclosure is required whether the income is attributable or not. The disclosure can be made electronically using the IR458 form.
If you own a foreign company and would like to know whether the CFC rules apply to you, feel free to reach out or book a free consultation. We offer free consultation to new clients to advise how we can assist and add value. Visit our International & Cross-Border Tax, Tax Planning and Foreign Shares pages for more detailed resources and guidance.
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