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FE 1: What this subpart does
or “This subpart explains how interest deductions are limited for certain New Zealand taxpayers”
You could also call this:

“When interest apportionment rules apply to people and businesses with foreign connections”

This section explains when the interest apportionment rules may apply to different types of people or entities. These rules can affect:

  • Non-resident individuals and companies
  • New Zealand companies partly owned or controlled by non-residents
  • New Zealand companies with interests in certain foreign entities
  • Trusts with non-resident settlors or trustees
  • New Zealand residents with interests in certain foreign entities

The rules may apply at any time during an income year if the person or entity meets specific ownership or control criteria. For example:

  • A non-resident company where no New Zealand resident has more than 50% ownership
  • A New Zealand company where a non-resident has 50% or more ownership or control
  • A trust where 50% or more of settlements are from non-residents

The section also clarifies how ownership interests are determined and how certain terms are defined for the purposes of these rules.

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Next up: FE 3: Interest apportionment for individuals

or “How interest is divided for individuals and trustees in certain tax situations”
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Part F Recharacterisation of certain transactions
Interest apportionment on thin capitalisation

FE 2When this subpart applies

  1. The interest apportionment rules in sections FE 6 and FE 7 may apply to the following persons if, at a time in an income year, they are:

  2. a non-resident who is not a company:
    1. a non-resident company unless the company is 1 in which—
      1. a person resident in New Zealand has a direct ownership interest of 50% or more; and
        1. no non-resident has a direct ownership interest of 50% or more, when added to any direct ownership interests of all persons associated with them:
        2. a company that is resident in New Zealand if a non-resident has—
          1. an ownership interest in the company of 50% or more:
            1. control of the company by any other means:
            2. a company that is resident in New Zealand if the company has members who make up a non-resident owning body for the company—
              1. holding total ownership interests in the company of 50% or more, after adjustment to the extent necessary to avoid multiple counting if ownership interests in the company would otherwise be counted more than once:
                1. having control of the company by any other means:
                2. a company that is resident in New Zealand if a trustee who meets the requirements of paragraph (d) or (db)—
                  1. holds total ownership interests in the company of 50% or more:
                    1. has control of the company by any other means:
                    2. the trustee of a trust on which a non-resident makes a settlement in or before the income year and for which 50% or more of the value of settlements made on the trust in or before the income year is from settlements made by the non-resident or by a person who is associated with the non-resident in the income year:
                      1. the trustee of a trust if 50% or more of the value of settlements made on the trust is from settlements made by—
                          1. a person who is described in paragraphs (a) to (cc) or would be described by this paragraph or paragraph (db) if settlements made by the trustee and powers of appointment or removal held by the trustee were ignored:
                            1. a group of persons who act in concert, each of whom is described in paragraphs (a) to (cc) or would be described by this paragraph or paragraph (db) if settlements made by the trustee and powers of appointment or removal held by the trustee were ignored:
                            2. the trustee of a trust if a person described in paragraphs (a) to (cc), or would be described by this paragraph or paragraph (d) if settlements made by the trustee and powers of appointment or removal held by the trustee were ignored, has the power to appoint or remove a trustee of the trust other than for the purpose of protecting a security interest:
                              1. a company that is resident in New Zealand and has—
                                1. an income interest in a CFC:
                                  1. an interest in a FIF that satisfies the requirements of section EX 35 (Exemption for interest in FIF resident in Australia):
                                    1. an interest in a FIF for which the person uses the attributable FIF income method:
                                    2. a company that is resident in New Zealand and has—
                                      1. an ownership interest in a company described in paragraph (e) of 50% or more:
                                        1. control of a company described in paragraph (e) by any other means:
                                        2. a natural person, or a trustee of a trust settled by a New Zealand resident, if the natural person or trustee is resident in New Zealand and has—
                                          1. an income interest in a CFC:
                                            1. an interest in a FIF that satisfies the requirements of section EX 35:
                                              1. an interest in a FIF for which the person uses the attributable FIF income method:
                                                1. an ownership interest in a company described in paragraph (e) or (f) of 50% or more:
                                                  1. control of a company described in paragraph (e) or (f) by any other means.

                                                  2. For the purposes of this subpart and the definition of non-resident owning body,—

                                                  3. a non-resident includes a person who meets the requirements of section FE 2(1)(cc), (d), or (db):
                                                    1. in determining the relationship between the amount of a company’s debt relating to a member and the level of ownership interests in the company relating to the member, the level of each type of ownership interest in the company is considered, despite section FE 39.

                                                      1. Ownership interests in a company are determined under sections FE 38 to FE 41.

                                                      2. For the purposes of this section, a company resident in New Zealand is treated as being a non-resident company if it is treated under a double tax agreement as not being resident in New Zealand.

                                                      3. A resident of New Zealand and a relative who is a non-resident are not associated persons—

                                                      4. in relation to a company for the purposes of subsection (1)(b)(ii), if the non-resident does not have a direct or indirect ownership interest in the company.

                                                          1. If the members of the New Zealand banking group of a registered bank are given by section FE 36B, the interests held by a member of the group for the purposes of subsection (1)(e) and (f) do not include interests held by an associated person who is not a member of the group.

                                                          Compare
                                                          Notes
                                                          • Section FE 2(1)(cb): inserted, on (applying for the 2015–16 and later income years), by section 106(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                                          • Section FE 2(1)(cb)(i): replaced (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 171(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                                          • Section FE 2(1)(cc): inserted, on (applying for the 2015–16 and later income years), by section 106(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                                          • Section FE 2(1)(cd): inserted (with effect on 1 April 2015), on , by section 63(1) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                          • Section FE 2(1)(d): replaced, on (applying for the 2015–16 and later income years), by section 106(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                                          • Section FE 2(1)(d)(i): repealed (with effect on 1 April 2015), on , by section 63(2) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                          • Section FE 2(1)(db): inserted, on (applying for the 2015–16 and later income years), by section 106(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                                          • Section FE 2(1)(e): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 51(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                          • Section FE 2(1)(f): added (with effect on 30 June 2009), on , by section 207(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                          • Section FE 2(1)(g): added (with effect on 30 June 2009), on , by section 207(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                          • Section FE 2(1)(g)(ib): inserted (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 51(2) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                          • Section FE 2(1)(g)(ic): inserted (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 51(2) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                          • Section FE 2(1B) heading: inserted, on , by section 101(1) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                                          • Section FE 2(1B): inserted, on , by section 101(1) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                                          • Section FE 2(1B)(a): amended, on (with effect on 30 March 2017), by section 97 of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                                          • Section FE 2(4) heading: replaced (with effect on 1 April 2015), on , by section 63(3) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                          • Section FE 2(4): replaced, on (applying for the 2015–16 and later income years), by section 106(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                                          • Section FE 2(4)(b): repealed (with effect on 1 April 2015), on , by section 63(4) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                          • Section FE 2(5) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on , by section 51(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                          • Section FE 2(5): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on , by section 51(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                          • Section FE 2 list of defined terms attributable FIF income method: inserted (with effect on 1 July 2011), on , by section 51(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                          • Section FE 2 list of defined terms CFC: inserted (with effect on 30 June 2009), on , by section 207(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                          • Section FE 2 list of defined terms control: repealed, on , by section 594 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                          • Section FE 2 list of defined terms double tax agreement: inserted, on , by section 101(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                                          • Section FE 2 list of defined terms FIF: inserted (with effect on 1 July 2011), on , by section 51(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                          • Section FE 2 list of defined terms income interest: inserted (with effect on 30 June 2009), on , by section 207(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                          • Section FE 2 list of defined terms New Zealand banking group: inserted (with effect on 1 July 2009), on , by section 51(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                          • Section FE 2 list of defined terms non-resident owning body: inserted, on , by section 106(4) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                                          • Section FE 2 list of defined terms ownership interest: inserted, on , by section 106(4) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).