An officials' paper has just been released which proposes a zero percent tax rate for non-residents investing in a PIE in respect of foreign-sourced income. To view the paper, click here.

We've been awaiting the paper since a meeting of representatives of the funds management industry (including this firm) raised this non-resident issue with IRD officials.

The non-resident issue, as the paper explains, is that "non-residents investing in foreign assets through a portfolio investment entity (PIE) are currently taxed on income from the PIE as if they were residents. This treatment is inconsistent with how those investors would be taxed if they invested directly in those foreign assets and so is conceptually inconsistent with New Zealand's source-based taxation system."

Two high-level options have been identified for exempting foreign-sourced income derived by a non-resident through a PIE:

  • A PIE with resident and non-resident investors and only foreign-sourced income (with some allowance for a minimum threshold of investment in New Zealand equity and debt). The non-resident investors would have a zero percent portfolio investor rate (PIR) for all income. Resident investors would have standard PIRs.
  • A look-through global investment option that would allow a PIE to have both resident and non-resident investors and New Zealand and foreign-sourced income. The PIE would apply a different tax rate to different types of income derived by non-resident investors and it would therefore be necessary to track income from different sources, apportion expenditure to that income and allocate it to investors as if each stream were the only income derived by the PIE.

The first option is more flexible and is relatively simple. The second option is more appealing for existing funds, and does not require monitoring of minimum thresholds. However, it is significantly more complex in terms of administration.

The proposals outlined in the paper, if carried out, will provide significant benefits to the New Zealand financial services industry.

Officials are interested in your feedback and have invited submissions. Submissions are required to be made by 4 June 2010.

As always, we are available to assist you in determining what effect the proposals outlined in the paper would have on your business if they were adopted.

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