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Income Tax Act 2007

Timing and quantifying rules - Controlled foreign company and foreign investment fund rules - Attributable CFC amount and net attributable CFC income or loss

EX 20D: Adjustment of cost fraction for excessively debt funded CFC

You could also call this:

“Adjusting calculations when a foreign company has too much debt”

This section explains how to adjust the cost fraction for a controlled foreign company (CFC) that has too much debt. You need to do this if:

  1. The CFC’s debt is more than 75% of its assets, and
  2. The CFC’s debt level is more than 110% of what it should be.

To work out if a CFC has too much debt, you need to look at its debts and assets. This includes things like loans, shares, and other financial arrangements.

If a CFC does have too much debt, you need to calculate a new cost fraction. This is done by dividing the value of assets used to earn attributable income by the total value of all the CFC’s assets.

The law provides detailed formulas and definitions for calculating these ratios and values. It also explains what counts as debt and assets for this purpose.

This adjustment helps to make sure that companies can’t use excessive debt to reduce their tax unfairly.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM2547223.

Topics:
Money and consumer rights > Taxes
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EX 20C: Net attributable CFC income or loss, or

“How to calculate income or loss from a foreign company you control”

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EX 20E: Relative debt-asset ratio for CFC, or

“How to compare a CFC's debt-asset ratio with its group's ratio”

Part E Timing and quantifying rules
Controlled foreign company and foreign investment fund rules: Attributable CFC amount and net attributable CFC income or loss

EX 20DAdjustment of cost fraction for excessively debt funded CFC

  1. This section applies for the purposes of the item (the CFC's cost fraction) in section EX 20C(11) to a CFC that is excessively debt funded under subsection (2) in relation to a person (the interest holder) with an income interest in the CFC.

  2. A CFC is excessively debt funded under this section if—

  3. the amount (the CFC's debt-asset ratio) calculated using the formula in subsection (4) is more than 0.75; and
    1. the amount (the CFC's relative debt-asset ratio) given by section EX 20E is more than 1.10.

      1. For the purposes of subsections (4) to (8), the debts and assets of the CFC are determined under sections FE 8 to FE 11 (which contain rules for determining the apportionment of interest) as if the CFC were—

      2. an excess debt outbound company; and
        1. the only member of the CFC's New Zealand group.

          1. The formula for the CFC's debt-asset ratio referred to in subsection (2)(a) is—

            (total CFC’s debts − group funding) ÷ (total CFC’s assets − total CFC’s non-debt liabilities − group funding).

            Where:

            • The items in the formula in subsection (4) are defined in subsections (6) to (8B).

            • Total CFC's debts is the total amount for the CFC and the accounting period, determined under generally accepted accounting practice, of the outstanding balances of—

            • financial arrangements entered by the CFC, each of which—
              1. provides funds to the CFC; and
                1. gives rise to an amount for which the CFC would have a deduction:
                2. fixed-rate foreign equity that is issued by the CFC and held by a company that is a New Zealand resident, a CFC, or a FIF for which the interest holder uses the attributable FIF income method:
                  1. shares issued by the CFC in relation to which the CFC makes deductible foreign equity distributions to a company that is a New Zealand resident, a CFC, or a FIF for which the interest holder uses the attributable FIF income method.

                    1. Group funding is—

                    2. if paragraph (b) does not apply, zero; or
                      1. if the interest holder chooses to rely on this paragraph and the item total CFC's assets is greater than the item total CFC's debts, the lesser of the item total CFC's debts and the total of amounts, each of which is the outstanding balance for a financial arrangement, a fixed-rate foreign equity, or a share giving a right to a deductible foreign equity distribution,—
                        1. under which the CFC provides funds to another CFC associated with the CFC under section YB 2 (Two companies) or to a FIF for which the interest holder uses the attributable FIF income method and that is associated with the CFC under section YB 2; and
                          1. that produces for the CFC an amount that is included in the item arrangement under section EX 20B(4) or is a deductible foreign equity distribution or a distribution for fixed-rate foreign equity.

                          2. Total CFC's assets is the total value of the CFC's assets determined under generally accepted accounting practice.

                          3. Total CFC’s non-debt liabilities is the total value of the CFC’s non-debt liabilities determined under generally accepted accounting practice.

                          4. For a CFC that is excessively debt funded, the item cost fraction for the purposes of this section is the amount calculated using the formula in subsection (10) and determining the debts and assets of a CFC under sections FE 8 to FE 11 as if the CFC were—

                          5. an excess debt outbound company; and
                            1. the only member of the CFC's New Zealand group.

                              1. The formula for the CFC's cost fraction is—

                                attributable foreign company assets ÷ total foreign company assets.

                                Where:

                                • The items in the formula in subsection (10) are defined in subsections (12) and (13).

                                • Attributable foreign company assets is the total value of assets, consolidated under generally accepted accounting practice for the accounting period, of all the interest holder's CFCs and of all the FIFs for which the interest holder uses the attributable FIF income method, to the extent to which each asset is—

                                • used for the purpose of deriving an attributable CFC amount or an amount that is included in net attributable FIF income or loss; and
                                  1. not used for the purpose of deriving an amount other than an amount referred to in paragraph (a).

                                    1. Total foreign company assets is the total value of assets, consolidated under generally accepted accounting practice for the accounting period, of all the interest holder's CFCs and of all the FIFs for which the interest holder uses the attributable FIF income method.

                                    Notes
                                    • Section EX 20D: inserted (with effect on 30 June 2009), on , by section 156(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                    • Section EX 20D heading: amended (with effect on 30 June 2009), on , by section 43(1) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                    • Section EX 20D(1): amended (with effect on 30 June 2009), on , by section 43(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                    • Section EX 20D(4) formula: amended, on , by section 12(1) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                    • Section EX 20D(5): amended, on , by section 12(2) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                    • Section EX 20D(6)(b): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 21(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                    • Section EX 20D(6)(c): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 21(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                    • Section EX 20D(7)(b): replaced (with effect on 30 June 2009 and applying for income years beginning on or after 1 July 2009), on , by section 88(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                    • Section EX 20D(8B) heading: inserted, on , by section 12(3) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                    • Section EX 20D(8B): inserted, on , by section 12(3) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                    • Section EX 20D(9) heading: amended (with effect on 30 June 2009), on , by section 43(3) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                    • Section EX 20D(9): amended (with effect on 30 June 2009), on , by section 43(4) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                    • Section EX 20D(10) heading: amended (with effect on 30 June 2009), on , by section 43(5) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                    • Section EX 20D(10): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 43(7) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                    • Section EX 20D(10): amended (with effect on 30 June 2009), on , by section 43(6) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                    • Section EX 20D(12) heading: replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 21(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                    • Section EX 20D(12): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 21(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                    • Section EX 20D(13) heading: replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 21(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                    • Section EX 20D(13): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 21(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                    • Section EX 20D list of defined terms attributable FIF income method: inserted (with effect on 1 July 2011), on , by section 21(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                    • Section EX 20D list of defined terms generally accepted accounting practice: inserted, on , by section 12(4) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                    • Section EX 20D list of defined terms loss: inserted (with effect on 1 July 2011), on , by section 21(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                    • Section EX 20D list of defined terms net attributable FIF income: inserted (with effect on 1 July 2011), on , by section 21(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).