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Income Tax Act 2007

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

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

You could also call this:

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

This section explains what non-resident financial arrangement income means. It applies when you borrow money from someone who doesn’t live in New Zealand, and you need to pay them interest.

You need to think about this if you live in New Zealand or if you’re from another country but do business here. It matters when you borrow money from someone overseas who isn’t doing business in New Zealand.

Non-resident financial arrangement income is money that comes from New Zealand and is paid to the overseas lender. This happens when:

The lender got this kind of income from you before, or
You owe a lot of money to related overseas lenders (more than $40,000 in total), and you haven’t paid most of the interest you owe (less than 90%).

There’s a special way to figure out if you’ve paid enough interest. You need to look at how much you’ve paid compared to how much you owe. Sometimes, you might not have to pay tax on all the interest right away.

If you want to know exactly when you need to pay the tax, it’s usually due two months after your tax year ends.

When you’re working out how much interest you’ve paid or owe, you need to use the same money type (like dollars or euros) that you used when you borrowed the money.

You can choose not to use these rules if you want, but you’ll need to tell the tax department. You can find out more about this in section RF 12G.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM7226969.

Topics:

Money and consumer rights > Taxes

Money and consumer rights > Banking and loans

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

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

RF 3: Obligation to withhold amounts of tax for non-resident passive income, or

“You must deduct tax when paying overseas residents for certain types of income”

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

RF 2CMeaning of non-resident financial arrangement income

This section, and sections RF 12D to RF 12J, apply for the purposes of the NRWT rules when—
a person (the borrower) is—
1. resident in New Zealand; or
2. a non-resident carrying on a business in New Zealand through a fixed establishment in New Zealand; and
the borrower is party to a financial arrangement with a non-resident (the lender) through which funding is provided to the borrower, other than funding provided by the lender through a fixed establishment in New Zealand; and
the financial arrangement—
1. gives rise to non-resident passive income under section RF 2(1)(a)(iv); or
2. would give rise to income referred to in subparagraph (i) in the absence of section RF 2(2B)(c).

Non-resident financial arrangement income, for a financial arrangement and an income year, means an amount having a source in New Zealand that is accrued on a related-party debt and derived by a lender in the income year when—
non-resident financial arrangement income was derived in relation to the arrangement by a lender in an earlier income year; or
the following requirements are met for the income year:
1. the total expenditure incurred by the borrower on related-party debt is more than the de minimis set out in subsection (3); and
2. in relation to the financial arrangement, the deferral calculation set out in subsection (4) is less than 90%.

The de minimis applies when the total expenditure on all related-party debt incurred in the previous income year under the financial arrangements rules by the borrower, and all companies that are in the same group of companies as the borrower, is $40,000 or less.
Subject to subsection (6), the deferral calculation referred to in subsection (2)(b)(ii) is the percentage calculated using the formula—
$accumulated payments ÷ (accumulated accruals − hybrid deductions).$

Where:
In the formula,—
accumulated payments for the income year is the total interest paid in relation to the financial arrangement by the borrower for the period that—
1. starts on the day on which the financial arrangement first meets the requirements for a related-party debt; and
2. ends on the NRFAI due date for the borrower’s income year:
accumulated accruals is an amount equal to the total expenditure that the borrower incurs under the arrangement when the arrangement is a related-party debt for the period that—
1. starts on the day on which the financial arrangement first meets the requirements for a related-party debt; and
2. ends on the last day of the income year before the income year referred to in paragraph (a)(ii):
hybrid deductions is an amount equal to the part of the expenditure that the borrower incurs under the arrangement in the period given by paragraph (b) that has been denied as a deduction under subpart FH (Hybrid and branch mismatches of deductions and income from multi-jurisdictional arrangements) when the expenditure is incurred and is not allowed as a deduction under the subpart in that period, on the date referred to in paragraph (b)(ii).

For the purposes of the calculation in subsection (4), the result of the formula is treated as more than 90% if—
the item accumulated accruals is equal to the item hybrid deductions:
the date in subsection (5)(b)(ii) occurs before the date in subsection (5)(b)(i).

The NRFAI due date, for a financial arrangement, is the due date for the payment of NRWT for the period that ends on the last day of the second month following the end of an income year.
For the purposes of subsections (4) and (5), the calculation of total interest and total expenditure must be made in the currency of the financial arrangement.
See section RF 12G for elections to disregard the related-party de minimis and the deferral calculation.

Notes

Section RF 2C: inserted, on 30 March 2017, 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 2C(1)(c)(i): amended (with effect on 30 August 2022), on 31 March 2023, by section 109 of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
Section RF 2C(4) formula: amended, on 1 July 2018, by section 46(1) (and see section 46(4) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
Section RF 2C(5)(c): inserted, on 1 July 2018, by section 46(2) (and see section 46(4) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
Section RF 2C(6)(a): replaced (with effect on 1 July 2018), on 30 March 2021, by section 133(1) (and see section 133(2) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
Section RF 2C list of defined terms approved issuer: repealed, on 18 March 2019, by section 262 of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
Section RF 2C list of defined terms arrangement: inserted, on 1 July 2018, by section 46(3) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
Section RF 2C list of defined terms ring-fenced tax loss: inserted, on 1 July 2018, by section 46(3) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).