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New Zealand law explained for everyone

Income Tax Act 2007

Recharacterisation of certain transactions - Hybrid and branch mismatches of deductions and income from multi-jurisdictional arrangements

FH 6: Receipts from non-resident or foreign deducting branch producing deduction without income

You could also call this:

“Money received from overseas that creates a tax mismatch”

This law applies when a company or branch from another country pays money to someone in New Zealand. If the payer can get a tax break in their country for this payment, but the person in New Zealand doesn’t have to pay tax on it, this law steps in.

You might need to pay tax on this money even if you normally wouldn’t have to. This happens if the payment would be taxable income if the payer and you were separate people or if the payer’s tax status was different.

The law sets out specific conditions for when this applies. It includes situations where the payer and you are part of the same group of companies or when there’s a special arrangement in place.

If this law applies to you, you’ll need to include the payment as part of your taxable income. You’ll pay tax on the amount you would have if the payer was a separate person from you.

This extra taxable income is called a “mismatch amount”. You might be able to use it to offset other income in some cases, as explained in section FH 12.

The law also talks about what happens if the payer’s country brings in new rules about these kinds of payments. If that happens, you might not be able to carry forward any unused mismatch amounts.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS65829.

Topics:
Money and consumer rights > Taxes
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FH 5B: Exception: when payee group not allowed deductions for supplies as prerequisites for payer supplies, or

“Exceptions for tax deductions on prerequisite supplies in cross-border transactions”

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FH 7: Payments to person outside New Zealand producing deduction without income, or

“Overseas payments that reduce your tax but aren't taxed elsewhere”

Part F Recharacterisation of certain transactions
Hybrid and branch mismatches of deductions and income from multi-jurisdictional arrangements

FH 6Receipts from non-resident or foreign deducting branch producing deduction without income

  1. This section applies when a non-resident, or foreign deducting branch of a New Zealand resident, (the payer) is treated by the taxation law of a country or territory outside New Zealand (the payer jurisdiction) as making a payment in an income year to a person or other entity (the payee) in New Zealand and meeting the requirements of subsection (2), or incurring a charge in the income year meeting the requirements of subsection (3), and—

  2. the payment or charge would not give rise to assessable income of the payee in the income year in the absence of this section; and
    1. the payer jurisdiction allows the payer or other person or entity to deduct an amount of the payment or charge against income or allows an equivalent tax relief for the payment; and
      1. the payer jurisdiction does not have hybrid mismatch legislation corresponding to section FH 5 that applies to the payment or charge and to the payer at any time in the income year; and
        1. the payment or charge would give rise to assessable income of the payee in the income year if the payer and payee were persons and separate or if the tax status of the payer were different.

          1. Expenditure relating to a payment by a payer that is not a New Zealand resident, or is a foreign deducting branch of a New Zealand resident, to a payee meets the requirement of this subsection if—

          2. the payee is a New Zealand resident; and
            1. the payment is made under a structured arrangement or, when the expenditure is incurred, the payer is in a control group with the payee or is the same person as the payee.

              1. For the purposes of subsection (1), the amount of a charge treated by the payer jurisdiction as being required by a New Zealand resident from a foreign deducting branch of the New Zealand resident is equal to the amount that—

              2. represents amounts, relating to the activities of the New Zealand resident in New Zealand, allocated to the deducting branch; and
                1. is not determined by reference to the amount of a payment by the New Zealand resident, or a member of the same control group as the New Zealand resident, to a person other than the New Zealand resident and the members of the control group; and
                  1. exceeds expenditure or loss incurred by the New Zealand resident, or a member of the same control group as the New Zealand resident, that—
                    1. belongs to a category of expenditure or loss equivalent to the category to which the charge belongs; and
                      1. is the reference by which the amount of the charge is determined.

                      2. The payee derives assessable income from the payment or charge equal to the greater of zero and the amount that would be assessable income of the payee, if the payer and payee were persons and separate or if the tax status of the payer were different.

                      3. The assessable income under subsection (4) is allocated to the income year in which the payment would be derived if the payer and payee were persons and separate or if the tax status of the payer were different.

                      4. An amount that is treated as assessable income under subsection (4) for a payee and a tax year is a mismatch amount of the payee for the tax year and the mismatch situation until the mismatch amount is set off under section FH 12 against surplus assessable income under that section from the mismatch situation.

                      5. A mismatch amount under subsection (6) is not available to be carried forward beyond a time (the transition time) if the payer jurisdiction introduces from the transition time hybrid mismatch legislation corresponding to section FH 5 and applying to expenditure of the hybrid entity or foreign resident to which this section applies.

                      Notes
                      • Section FH 6: inserted, on , by section 35(1) (and see section 35(2) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).