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Income Tax Act 2007

General collection rules - Withholding tax on non-resident passive income (NRWT)

RF 2B: Non-resident financial arrangement income: outline and concepts

You could also call this:

“Rules for taxing interest on loans to related parties in New Zealand”

When you lend money to someone in New Zealand who is related to you, and they can claim tax deductions for the interest they pay, there are special rules about how the interest you receive is taxed. These rules are called ‘non-resident financial arrangement income’ rules.

The main idea is to make sure that the tax you pay on the interest you receive matches up with the tax deductions the borrower gets for the interest they pay.

Here’s what you need to know:

Non-resident financial arrangement income is like interest that you, as a lender, receive. It happens when you lend money to someone in New Zealand who is connected to you, like a family member or business partner.

If you’re lending money from overseas to someone you know in New Zealand, and they’re not paying you interest right away but still claiming tax deductions, you might have to pay tax on the interest even if you haven’t received it yet.

The amount of income you’re taxed on is based on how much the borrower in New Zealand can claim as a tax deduction for the interest they’re paying you.

In the first year this applies to you, you might have to pay tax on more than just the interest you received. This is to make up for any delays in interest payments.

The tax you need to pay is called Non-Resident Withholding Tax (NRWT), and it’s taken out of the interest payments before you receive them.

Remember, these rules only apply if you’re lending quite a bit of money - small loans don’t count.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM7226967.

Topics:
Money and consumer rights > Taxes
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RF 2: Non-resident passive income, or

“Income from NZ sources for non-residents, including dividends, royalties, and interest”

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RF 2C: Meaning of non-resident financial arrangement income, or

“What counts as income from borrowing money from overseas lenders”

Part R General collection rules
Withholding tax on non-resident passive income (NRWT)

RF 2BNon-resident financial arrangement income: outline and concepts

  1. This section applies for the purposes of sections RF 2C and RF 12D to RF 12J to provide an outline of the provisions relating to the taxation of non-resident financial arrangement income and to describe the key terms used in the provisions. This section—

  2. operates only as an aid to understanding; and
    1. does not override the definition of any term used in this Act; and
      1. does not prevail in any case where a conflict arises between this section and another provision of this Act.

        1. The purpose of the rules for non-resident financial arrangement income is to ensure that the payment of NRWT on interest derived by a related-party lender is aligned with deductions for expenditure that a borrower has under the financial arrangements rules.

        2. The following are the key concepts:

        3. non-resident financial arrangement income, which is the equivalent of interest derived by a lender, see section RF 2C:
          1. related-party debt which is a financial arrangement between associated persons, or persons who are regarded as associated, that provides funds to a borrower who is allowed a deduction for expenditure under the arrangement, see section RF 12H (Meaning of related-party debt):
            1. indirect associated funding which is an arrangement involving some form of back-to-back lending, see section RF 12I (Concepts used for definition of related-party debt).

              1. An offshore lender will derive non-resident financial arrangement income when—

              2. they are associated with or related to a borrower who is resident in New Zealand; and
                1. the funding is provided through a financial arrangement that is a related-party debt; and
                  1. interest payments on the arrangement are deferred when compared to interest deductions by the borrower; and
                    1. the borrower’s expenditure on related-party debt is more than a de minimis amount.

                      1. The non-resident financial arrangement income of a lender is aligned with the amount of the expenditure incurred by the borrower on related-party debt, see section RF 12D.

                      2. An adjustment is made for the first year in which a lender derives non-resident financial arrangement income. The lender is treated as having derived an additional amount that is sufficient to reverse the deferral described in subsection (4)(c), see section RF 12F.

                      3. The lender’s income is non-resident passive income from which NRWT must be withheld, see section RF 2.

                      Notes
                      • Section RF 2B: inserted, on , by section 274 (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                      • Section RF 2B(1): amended, on (with effect on 30 March 2017), by section 230 of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                      • Section RF 2B list of defined terms approved issuer: repealed, on , by section 261 of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).