Broadly, look through company is a company for corporate law purposes but it’s only transparent for income tax purposes. This means look through company’s profits or losses are flow through to its shareholder(s) in proportion to their shareholding on an annual basis.
Look Through Company
Minimise tax & increase net worth
Key features of a Look Through Company in NZ
Some key features of a look through company includes:
- Transparency only applies to income tax purposes. The limited liability protection is still preserved under corporate law. Further, the look through company is treated as separate from its owners for various withholding regimes and other tax types.
- Look through company’s profit and losses are flow through to owners in proportion to their shareholding. On 1 April 2019 the loss ring-fencing rules for property investors came into effect. Under these rules, losses from residential rental property cannot be offset against other forms of income, although they can potentially be offset against future rental profits within the same portfolio.
- Owners who sell their shares in the look through company are treated as disposing of their share of the look through company’s property. This means that if the look through company owns revenue account property there may be a taxable gain on movement of the shares. Further, if the look through company owns depreciable property, there may be depreciation recovery upon disposal. That said, there are exemptions and de minimis thresholds.
- Owners are subject to income tax on deemed disposal of the look through company’s property, unless an exclusion applies.
- Originally there was complex loss limitation rules in place that sought to limit the amount of tax loss a shareholder of a look through company could claim to the extent of their investment in the look through company. Broadly, the principle was to ensure losses claimed is limited to the quantum of the owner’s investment in the look through company. In 2017, IRD relaxed these rules due to the complexity of the complicated formula to work out what the shareholder’s owner’s basis was.
Requirements to become a look through company
To become a look through company, various criteria needs to be met including the following.
- Look through company must have five or less look-through counted owners. The ownership interests of relatives are combined.
- Only the following person can hold shares in a look through company
- Natural person;
- Trustees; or
- Another look through company.
- All owners must make an election for the look through company rules to apply.
- Look through company cannot be regarded as a foreign company. This means the company has to be a tax resident of New Zealand under New Zealand domestic tax law and the relevant double tax agreement.
Is a look through company for you?
In summary, the look through company rules are quite complex but offer a useful tax structure for a wide range of potential uses including holding loss-making investments (other than residential property), carrying out joint venture business activities between two or five business partners, cross border investment where an ordinary company structure might give rise to two layers of taxation (i.e. once at company level and once at shareholder level).
You can read more about asset planning here.
Need assistance with forming or managing a look through company in NZ?
Get in touch with our team, who can assist with formation and ongoing compliance for the look through company.
Please refer to our people for more information on who we are, our experience and how we can help.
We offer a no obligation free consultation where we can discuss:
- what are the investment vehicles available to you, including look through company;
- highlight tax issues and opportunities; and
- how we can add value and assist.