Parliament has recently introduced new tax rules to attract foreign investors to invest in portfolio investment entities (PIEs) by removing old tax impediments.
Previously, foreign investors in PIEs were taxed at a flat rate of 28% on their returns, regardless of the nature and source of the PIE's income that is attributed to the foreign investors. The new rules create two additional types of PIE, a "foreign investment zero-rate PIE" and a "foreign investment variable-rate PIE". Concessionary tax treatments apply to eligible foreign investors in respect of these PIEs.
Foreign investment zero-rate
PIEA foreign investment zero-rate PIE must invest offshore. However, there are limited safe harbours for income from New Zealand investments, and look-through treatment may be available where the PIE invests in another PIE, which in turn invests offshore.
Eligible foreign investors in a foreign investment zero-rate PIE are able to receive free of tax all income attributed from the PIE.
Foreign investment variable-rate PIE
In contrast, a foreign investment variable-rate PIE may invest in both New Zealand and offshore. However, foreign investment variable-rate PIEs are not permitted to invest directly in land in New Zealand (although investing in land in New Zealand through a PIE or a New Zealand land investment company is allowed).
Eligible foreign investors in a foreign investment variable-rate PIE are not taxed on attributed foreign sourced income, but can be taxed on a range of tax rates on New Zealand sourced income depending on the nature of the income attributed to them. The applicable tax rates aim to mirror the tax rates which the foreign investors would otherwise be subject to had they invested in the assets held by the PIE directly. For example, a 1.44% tax rate applies to New Zealand sourced interest income, and a 15% rate applies to unimputed dividends from a New Zealand-resident company where the foreign investor is resident in a double tax agreement country.
The rules applicable to foreign investment zero-rate PIEs are now in effect, and those applicable to foreign investment variable-rate PIEs will apply from the start of the 2012/2013 tax year.