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New Zealand law explained for everyone

Income Tax Act 2007

Timing and quantifying rules - Controlled foreign company and foreign investment fund rules - Calculation of FIF income or loss

EX 58: Additional FIF income or loss if CFC owns FIF

You could also call this:

“Extra tax on overseas investments owned through foreign companies”

This law applies when you have a significant interest in a Controlled Foreign Company (CFC) that owns a Foreign Investment Fund (FIF). Here’s what you need to know:

If you own 10% or more of a CFC, and that CFC owns a FIF, you might have to pay tax on the FIF’s income. This is true even if the CFC’s income from the FIF isn’t included in its regular tax calculations.

To figure out how much FIF income or loss you have, you use a simple math formula. You multiply your share of ownership in the CFC by the CFC’s income or loss from the FIF.

You get to choose how to calculate the CFC’s FIF income or loss, but you have to follow specific rules. These rules cover things like how to handle losses and how to deal with certain types of insurance companies.

This law applies even if the CFC is usually exempt from some tax rules because it’s very active in business or based in Australia.

There’s a special exception for CFCs that own less than 10% of a FIF, but only if they meet certain conditions set by the tax authorities.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515684.

Topics:

Money and consumer rights > Taxes

EX 57: Conversion of foreign currency amounts: most methods, or

“Changing foreign money to NZ dollars for overseas investments”

EX 59: Codes: comparative value method, deemed rate of return method, fair dividend rate method, and cost method, or

“Rules for calculating income from foreign investments using specific methods”

Part E Timing and quantifying rules
Controlled foreign company and foreign investment fund rules: Calculation of FIF income or loss

EX 58Additional FIF income or loss if CFC owns FIF

This section applies when—
a person has an income interest of 10% or more in a CFC for an accounting period under sections EX 14 to EX 17; and
as a result of an income interest of the CFC in a FIF, the person has an indirect attributing interest in the FIF for the accounting period; and
FIF income and FIF loss is not taken into account in calculating the net attributable CFC income or loss of the CFC for the period for the person.

The person instead has FIF income or loss, for the income year in which the period ends, calculated using the formula—
$income interest × CFC’s FIF income or loss.$

Where:
In the formula,—
income interest is the person’s income interest in the CFC for the period under sections EX 8 to EX 13:
CFC's FIF income or loss is the CFC's FIF income or loss for the period, calculated under subsections (4) and (5), from FIFs in which the person has an indirect attributing interest.

The person must—
choose, under sections EX 44 to EX 48, the calculation method for calculating the CFC’s FIF income or loss; and
otherwise apply the calculation rules in sections EX 44 to EX 61 to the CFC and the CFC’s interest in the FIF, for the period when the person held the indirect attributing interest; and
apply the FIF loss ring-fencing rules in section DN 8 (Ring-fencing cap on deduction: attributable FIF income method) to the CFC and the CFC's interest in the FIF.

Despite subsection (4), the CFC's FIF income or loss does not include an amount actuarially determined to be attributable to policyholders in the CFC or another company as a result of applying section EX 21(25) and (26) to the CFC.
This section applies regardless of whether the CFC is a non-attributing active CFC under section EX 21B or a non-attributing Australian CFC under section EX 22 for the period.
The CFC's FIF income or loss does not include income from an income interest of less than 10% in a FIF if the CFC meets the requirements of a determination made by the Commissioner under section 91AAQ of the Tax Administration Act 1994.

Compare

2004 No 35 s EX 46

Notes

Section EX 58(1)(a): amended (with effect on 1 April 2008), on 6 October 2009, by section 180(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section EX 58(1)(ab): replaced (with effect on 1 April 2014 and applying for the 2014–15 and later income years), on 24 February 2016, by section 152(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
Section EX 58(1)(b): amended, on 24 February 2016, by section 152(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
Section EX 58(1)(b): amended (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 39(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
Section EX 58(3)(b): replaced (with effect on 1 April 2014 and applying for the 2014–15 and later income years), by section 97(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
Section EX 58(4)(b): replaced (with effect on 1 April 2014 and applying for the 2014–15 and later income years), on 24 February 2016, by section 152(4) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
Section EX 58(4)(b): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 24 February 2016, by section 152(3) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
Section EX 58(4)(c): replaced (with effect on 1 April 2014 and applying for the 2014–15 and later income years), by section 97(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
Section EX 58(5) heading: replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 39(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
Section EX 58(5): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 2 November 2012, by section 49(1) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
Section EX 58(6) heading: replaced, on 24 February 2016, by section 152(5) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
Section EX 58(6): substituted (with effect on 30 June 2009), on 6 October 2009, by section 180(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section EX 58(6): amended, on 24 February 2016, by section 152(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
Section EX 58(7) heading: added (with effect on 30 June 2009), on 29 August 2011 (applying for income years beginning on or after 1 July 2009), by section 42(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section EX 58(7): added (with effect on 30 June 2009), on 29 August 2011 (applying for income years beginning on or after 1 July 2009), by section 42(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section EX 58 list of defined terms branch equivalent income: repealed (with effect on 1 July 2009), on 7 May 2012, by section 39(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
Section EX 58 list of defined terms direct income interest: inserted (with effect on 1 April 2014), on 30 June 2014, by section 97(4) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
Section EX 58 list of defined terms indirect attributing interest: inserted (with effect on 1 April 2014), on 24 February 2016, by section 152(7) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).