New Zealand anti-hybrid rules
New Zealand's anti-hybrid rules are already in force. For some Australian groups with New Zealand operations, action may be required now to address the impact of the rules.
New Zealand's legislation implementing the recommendations in OECD's BEPS Action 2 Report (Neutralising the Effects of Hybrid Mismatch Arrangements) has been in force since late June 2018. The New Zealand anti-hybrid rules (NZ Hybrid Rules) were included in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 which was enacted on 27 June 2018 and includes amendments to the thin capitalisation rules, transfer pricing rules, certain administrative and enforcement provisions as well as the NZ Hybrid Rules.
The NZ Hybrid Rules take effect for income years beginning on or after 1 July 2018. The rules therefore already apply to New Zealand taxpayers with a 30 June balance date, which will include many New Zealand subsidiaries of Australia-headquartered multinationals. Two aspects of the NZ Hybrid Rules are of particular relevance to trans-Tasman arrangements.
First, because Australia's anti-hybrid rules will not apply until a later date (expected to be 1 January 2019), secondary rules under the NZ Hybrid Rules may apply temporarily. Take for example a hybrid debt instrument (treated as debt for New Zealand tax purposes but equity for Australian tax purposes) issued by a New Zealand company (NZ Sub) to its Australian parent (Aus Parent). Prior to Australia's rules taking effect, NZ Sub would be denied a deduction in New Zealand if the coupon was treated by Australia as exempt income to Aus Parent. But upon Australia's rules taking effect, the payment would become taxable to Aus Parent in Australia, and (consequently) deductible to NZ Sub in New Zealand.
Second, the NZ Hybrid Rules do not generally alter the character of an amount for non-resident withholding tax (NRWT) purposes. So interest for which a deduction is denied under the rules would still be interest for withholding tax purposes. An election is available in certain circumstances to address this: NZ Sub in the example could elect to treat the instrument as a share for New Zealand income tax purposes. The effect would be that interest paid while the election is in force would be treated as dividends (allowing NZ Sub to impute the payment and/or rely on double tax agreement relief to reduce any NRWT liability – potentially to 0%).
When the election takes effect, NZ Sub would be treated as repaying the amount owing under the debt instrument. Any accrued interest would be deemed paid and so would trigger interest withholding tax. The deemed repayment, net of any NRWT, would then be deemed to be subscribed by Aus Parent for a share in NZ Sub. The election ceases to apply (and the instrument reverts to being a debt instrument) if the NZ Hybrid Rules cease to deny the interest deduction (e.g., because Australia's anti-hybrid rules take effect).
Such an election may not be made retrospectively. Consequently, any group that may be affected by the NZ Hybrid Rules should check now whether an election should be made.
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This update is co-authored by Brendan Brown and Tim Stewart, together with Julian Pinson and Andrew White of Australian law firm Greenwoods & Herbert Smith Freehills.
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