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Income Tax Act 2007

Timing and quantifying rules - Controlled foreign company and foreign investment fund rules - Calculation of person’s control interest

EX 6: Direct control interests include options and similar rights

You could also call this:

“Options and potential future ownership count when determining company control”

When figuring out how much control someone has over a company, you need to consider more than just what they own right now. You also need to think about things they might be able to own or control in the future.

If you have the right to get something or get rid of something, it counts as if you already have it. This right can be definite or it might depend on something else happening first. You might have this right because of rules in a company’s constitution, or because you have an option to buy something, or because you have a special kind of loan that can be turned into ownership. It could even come from some other kind of agreement that’s similar to these, or in any other way.

However, there’s an exception to this rule. If you have the right to get something because of a security arrangement (which is a kind of financial agreement), and you got this arrangement in a fair deal, and the arrangement follows normal business practices, then it doesn’t count as if you already own that thing.

Also, when you’re working out if a foreign company is a CFC (which is a special kind of company for tax purposes), you can only count each percentage of ownership once, even if someone has the right to own it in more than one way.

Remember, all of this is related to section EX 5, which talks about how to calculate how much control someone has over a company.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515422.

Topics:
Money and consumer rights > Taxes
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EX 5: Direct control interests, or

“Ownership or control of shares, decisions, income, or assets in a foreign company”

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EX 7: Indirect control interests, or

“How ownership in a foreign company is calculated through a controlled foreign company”

Part E Timing and quantifying rules
Controlled foreign company and foreign investment fund rules: Calculation of person’s control interest

EX 6Direct control interests include options and similar rights

  1. For the purposes of section EX 5, a person is treated as holding something if they are entitled to acquire it or extinguish it.

  2. A person is entitled to acquire or extinguish something if the entitlement is absolute or contingent and whether the entitlement—

  3. arises under a company’s constitution; or
    1. arises under the terms of an option; or
      1. arises under the terms of a convertible note; or
        1. arises under the terms of any arrangement substantially similar to any of those described in paragraphs (a) to (c); or
          1. arises in some other way.

            1. Despite subsections (1) and (2), a person is not treated as being entitled to acquire something if—

            2. the entitlement arises under a security arrangement; and
              1. the person acquired the security arrangement in a transaction entered into on an arm’s length basis; and
                1. the security arrangement’s terms conform to generally accepted commercial practice.

                  1. Despite subsections (1) and (2), for the purpose of determining whether a foreign company is a CFC, each of the percentage holdings described in section EX 5 may be counted only once.

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