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Income Tax Act 2007

Treatment of tax losses - Attributed controlled foreign company net losses and foreign investment fund net losses

IQ 2B: Effect of attributed CFC net loss and FIF net loss from before first affected year

You could also call this:

“Handling overseas tax losses from before a specific year”

This section explains how to handle certain tax losses from before a specific year. These losses are called “available BE losses” and come from controlled foreign companies (CFCs) or foreign investment funds (FIFs) in other countries.

You can choose not to carry these losses forward if you want. If you do carry them forward, the law explains how to convert them into a new type of loss called an “equivalent CFC loss”.

The way you convert the loss depends on your situation. There are different rules for:

  • People who aren’t part of a group
  • People who are part of a wholly-owned group of companies

The amount you can convert depends on things like:

  • Your income from the other country
  • The income of your group (if you’re part of one)
  • The ratio between different types of income

There are also some special rules about choosing to use a different income ratio and how to handle accounts in foreign currencies.

If you need to understand the exact calculations or definitions, you should look at the full text of the law or talk to a tax expert.

This text is automatically generated. It might be out of date or be missing some parts. Find out more about how we do this.

View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM2576515.

Topics:
Money and consumer rights > Taxes
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“Limits on using losses from foreign companies to reduce your income”

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IQ 2C: Effect of FIF net loss if attributed FIF income method not available, or

“How to use a specific overseas investment loss when certain income calculation methods aren't available”

Part I Treatment of tax losses
Attributed controlled foreign company net losses and foreign investment fund net losses

IQ 2BEffect of attributed CFC net loss and FIF net loss from before first affected year

  1. This section applies for a person and a country (the jurisdiction) when the person has an amount (the available BE loss) of attributed CFC net loss, or FIF net loss calculated using the branch equivalent method, that—

  2. relates to a tax year (the loss year) before the first tax year for which this section applies to the person; and
    1. relates to a CFC or FIF that is resident in the jurisdiction in the loss year; and
      1. is carried forward to a tax year (the conversion year) in which this section applies to the person or is made available to the person for the conversion year by another company in the same group.

        1. In this section, subsection (3) gives the person an option that available BE loss for a jurisdiction not be carried forward and subsections (4) to (7) give, for whichever of the 4 possible alternative situations is relevant for the person,—

        2. the amount of the available BE loss (the converted BE loss) for the jurisdiction that is—
          1. treated as being converted into an amount referred to in paragraph (b) in the conversion year; and
            1. not available to the person to be carried forward as available BE loss for the jurisdiction and a later tax year:
            2. the amount (the equivalent CFC loss) of attributed CFC net loss or FIF net loss for the jurisdiction that, for the purposes of the rest of this subpart, is treated as arising on the last day of the conversion year.

              1. A person may choose by giving a notice in a form and at a time acceptable to the Commissioner that the available BE loss for a jurisdiction not be carried forward under this section.

              2. For a person who is not a resident group member and has jurisdictional BE income for the conversion year that is greater than zero and greater than the person's jurisdictional attributed income for the conversion year,—

              3. the person's converted BE loss in the conversion year is the lesser of—
                1. the person's jurisdictional BE income for the conversion year:
                  1. the person's available BE loss for the conversion year:
                  2. the person's equivalent CFC loss is the lesser of—
                    1. the person's jurisdictional attributed income for the conversion year:
                      1. the amount calculated by dividing the person's available BE loss for the conversion year by the person's jurisdictional income ratio for the conversion year.

                      2. For a person who is not a resident group member and has jurisdictional attributed income for the conversion year that is greater than or equal to zero and greater than or equal to the person's jurisdictional BE income for the conversion year,—

                      3. the person's converted BE loss for the conversion year is the lesser of—
                        1. the person's available BE loss for the conversion year:
                          1. the person's jurisdictional attributed income for the conversion year:
                          2. the person's equivalent CFC loss is equal to the person's converted BE loss for the conversion year.

                            1. For a person who is a resident group member for a wholly-owned group of companies and has jurisdictional BE income for the conversion year that is greater than zero and greater than the person's jurisdictional attributed income for the conversion year,—

                            2. the person's converted BE loss for the conversion year is the lesser of—
                              1. the person's available BE loss for the conversion year:
                                1. the greater of the person's jurisdictional BE income for the conversion year and the amount calculated by multiplying the group's jurisdictional income ratio for the conversion year by the person's jurisdictional attributed income for the conversion year:
                                2. the person's equivalent CFC loss is the amount calculated by dividing the person's converted BE loss for the conversion year by the group's jurisdictional income ratio for the conversion year.

                                  1. For a person who is a resident group member and has jurisdictional attributed income for the conversion year that is greater than or equal to zero and greater than or equal to the person's jurisdictional BE income for the conversion year,—

                                  2. the person's converted BE loss for the conversion year is the lesser of—
                                    1. the person's available BE loss for the conversion year:
                                      1. the person's jurisdictional attributed income for the conversion year multiplied by the group's jurisdictional income ratio for the conversion year:
                                      2. the person's equivalent CFC loss is equal to the amount calculated by dividing the person's converted BE loss for the conversion year by the group's jurisdictional income ratio for the conversion year.

                                        1. A person or wholly-owned group may choose under this subsection by notice, in a form and at a time acceptable to the Commissioner, that the person or members of the group use a jurisdictional income ratio—

                                        2. equal to the average of the jurisdictional income ratios for the person or group, under paragraph (b) of the definition in subsection (9), for 2 consecutive tax years—
                                          1. corresponding to an income year beginning on or after 1 July 2011; and
                                            1. in each of which the person or group has jurisdictional BE income; and
                                            2. for all tax years after the 2 tax years referred to in paragraph (a).

                                              1. For a person or wholly-owned group and a tax year for which the person or members of the wholly-owned group have an income interest in a CFC that is resident in a country or territory (the jurisdiction),—

                                                jurisdictional attributed income means,—

                                                1. for a person and the tax year, the amount that is the greater of zero and the amount calculated by—
                                                  1. finding, for each CFC resident in the jurisdiction, the attributed CFC income or loss of the person from the CFC for the tax year:
                                                    1. finding, for each FIF resident in the jurisdiction for which the person uses the attributable FIF income method, the FIF income or loss of the person from the FIF for the tax year:
                                                      1. subtracting the total of loss amounts under subparagraphs (i) and (ii) from the total of income amounts under subparagraphs (i) and (ii):
                                                      2. for a wholly-owned group and the tax year, the amount that is the greater of zero and the attributed CFC income or loss and FIF income or loss, treating losses as negative, of members of the group who are New Zealand residents from CFCs and FIFs that are resident in the jurisdiction for the tax year, consolidated for the purposes of the financial statements of the group

                                                        jurisdictional BE income means,—

                                                        1. for a person and the tax year, the amount that is the greater of zero and the amount calculated by—
                                                          1. multiplying, for each CFC resident in the jurisdiction, the person's income interest in the CFC for the tax year by the branch equivalent income or loss of the CFC for the tax year or, if the person chooses, by the amount given by subsection (10) for the CFC for the tax year:
                                                            1. finding, for each FIF resident in the jurisdiction for which the person uses the attributable FIF income method, the FIF income or loss calculated under the branch equivalent method of the person from the FIF for the tax year:
                                                              1. subtracting the total of loss amounts under subparagraphs (i) and (ii) from the total of income amounts under subparagraphs (i) and (ii):
                                                              2. for a wholly-owned group and the tax year, the amount that is the greater of zero and the amount calculated, treating losses as negative, by—
                                                                1. multiplying, for each CFC resident in the jurisdiction, the income interest in the CFC of members of the group who are New Zealand residents for the tax year by the branch equivalent income or loss of the CFC for the tax year or, if the group chooses, by the amount given by subsection (10) for the CFC for the tax year:
                                                                  1. consolidating the results for the purposes of the financial statements of the group

                                                                  jurisdictional income ratio,—

                                                                  1. for a person that has not made an election under subsection (8), means the greater of 1 and the amount calculated by dividing the person's jurisdictional BE income for the tax year by the person's jurisdictional attributed income for the tax year:
                                                                    1. for a wholly-owned group that has not made an election under subsection (8) for the tax year, means the greater of 1 and the amount calculated by dividing the group's jurisdictional BE income for the tax year by the group's jurisdictional attributed income for the tax year:
                                                                      1. for a person or wholly-owned group that has made an election under subsection (8) for the tax year, means the amount given by subsection (8) for the person or group and the tax year

                                                                        resident group member means a person who is a member of a wholly-owned group that has other New Zealand residents as members.

                                                                        1. In determining the jurisdictional BE income of a person or wholly-owned group, the person or group may choose to use, instead of the branch equivalent income or loss of a CFC, the profit or loss of the CFC before taxation given by accounts—

                                                                        2. complying with generally accepted accounting practice in New Zealand or an equivalent standard for the consistent and undistorted reporting of net profits in the country in which the accounts are prepared; and
                                                                          1. audited by an accountant who is—
                                                                            1. a chartered accountant or an accountant of equivalent professional standard in the country in which the accounts are prepared; and
                                                                              1. independent of the CFC and the person or wholly-owned group; and
                                                                              2. are given an unqualified opinion or an opinion of equivalent standard in the country in which the accounts are prepared.

                                                                                1. If a person or wholly-owned group chooses under subsection (10) to use the profit or loss before taxation of a CFC given by accounts expressed in a currency other than New Zealand currency, the person or group must convert the profit or loss into New Zealand currency—

                                                                                2. by applying the close of trading spot exchange rate on the last day of the accounting period for the accounts; or
                                                                                  1. applying the average of the close of trading spot exchange rates for the 15th day of each complete month that falls in the accounting period.

                                                                                    Notes
                                                                                    • Section IQ 2B: inserted (with effect on 30 June 2009), on , by section 303(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                                    • Section IQ 2B heading: substituted (with effect on 30 June 2009), on , by section 95(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
                                                                                    • Section IQ 2B(1): replaced (with effect on 1 July 2009 and applying for income years beginning on or after that date), on , by section 77(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                                                    • Section IQ 2B(2): replaced (with effect on 1 July 2009 and applying for income years beginning on or after that date), on , by section 77(2) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                                                    • Section IQ 2B(8)(a)(i): replaced (with effect on 1 July 2009 and applying for income years beginning on or after that date), on , by section 77(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                                                    • Section IQ 2B(9) jurisdictional attributed income paragraph (a)(ii): amended (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 77(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                                                    • Section IQ 2B(9) jurisdictional BE income paragraph (a)(ii): amended (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 77(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                                                    • Section IQ 2B(11) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on , by section 77(6) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                                                    • Section IQ 2B(11): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on , by section 77(6) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                                                    • Section IQ 2B list of defined terms accounting period: inserted (with effect on 1 July 2009), on , by section 77(7) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                                                    • Section IQ 2B list of defined terms attributable FIF income method: inserted (with effect on 1 July 2011), on , by section 77(8) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                                                    • Section IQ 2B list of defined terms close of trading spot exchange rate: inserted (with effect on 1 July 2009), on , by section 77(7) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                                                    • Section IQ 2B list of defined terms company: inserted (with effect on 30 June 2009), on , by section 95(4) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
                                                                                    • Section IQ 2B list of defined terms FIF net loss: inserted (with effect on 30 June 2009), on , by section 95(4) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
                                                                                    • Section IQ 2B list of defined terms notice: inserted, on , by section 74 of the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016 (2016 No 27).
                                                                                    • Section IQ 2B list of defined terms tax loss: repealed (with effect on 1 April 2008), on , by section 126 of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).