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

You could also call this:

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

This law is about money you pay to someone in another country. If you pay someone outside New Zealand, you might not be allowed to claim it as a business expense. This can happen if:

You’re connected to the person you’re paying, or it’s part of a special arrangement.

The person you pay doesn’t have to count the money as income in their country.

The money isn’t taxed as income anywhere else in the world.

If all these things are true, you can’t claim the payment as a business expense. This means you can’t use it to reduce your taxes.

Also, if you pay in a foreign currency, you can’t claim any extra costs from changes in the exchange rate.

This law helps make sure people don’t use payments to other countries to avoid paying taxes in New Zealand.

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 It might be out of date or be missing some parts.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=LMS65831.

Topics:
Money and consumer rights > Taxes
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FH 6: Receipts from non-resident or foreign deducting branch producing deduction without income, or

“Money received from overseas that creates a tax mismatch”

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FH 8: Expenditure or loss through hybrid entity or foreign deducting branch producing double deduction without double income, or

“No double tax deductions for expenses from overseas entities”

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

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

  1. This section applies when a person (the payer) incurs an amount of expenditure (the incurred amount) in an income year relating to an amount of a payment to a person (the payee) that exists under the law of a country or territory outside New Zealand (the payee jurisdiction) and—

  2. the incurred amount would be allowed as a deduction for the payer in the absence of this section and sections FH 8 to FH 11; and
    1. under the taxation law of the payee jurisdiction, the amount is treated as being—
      1. received by the payee in a country or territory outside the payee jurisdiction:
        1. income of a person who is not the payee; and
        2. if the amount does not meet the requirements of paragraph (b)(i) and meets the requirements of paragraph (b)(ii) by being treated as the income of a person who is not the payee, the person is in the same control group as the payer or the amount is a payment under a structured arrangement; and
          1. the payment is made under a structured arrangement or the payer is in the same control group as the payee when the expenditure is incurred; and
            1. under the taxation law of New Zealand and of the countries and territories outside New Zealand, the amount received by the payee is not subject to taxation as income and is not recognised as CFC attributed income, or the equivalent of attributed CFC income, of a person in the same control group as the payee; and
              1. if the amount meets the requirements of paragraph (b)(i), an equivalent payment by the payer would have been subject to taxation as income of the payee under the taxation law of the payee jurisdiction if the equivalent payment were treated as being received by the payee in the payee jurisdiction; and
                1. if the amount meets the requirements of paragraphs (b)(ii) and (bb), an equivalent payment by the payer would have been subject to taxation as income of the person who is treated as deriving the income under the taxation law of the payee jurisdiction if the equivalent payment were treated as being received by the person in the country or territory where that person is resident.

                  1. The payer is denied a deduction for the incurred amount and, if the payment is made under a financial instrument denominated in the currency of a country or territory other than New Zealand, for amounts arising from a fluctuation in the value of the currency in relation to New Zealand currency.

                  Notes
                  • Section FH 7: 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).
                  • Section FH 7(1)(b): replaced (with effect on 1 July 2018), on , by section 68(1) (and see section 68(3) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                  • Section FH 7(1)(bb): inserted (with effect on 1 July 2018), on , by section 68(1) (and see section 68(3) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                  • Section FH 7(1)(d): amended (with effect on 1 July 2018), on , by section 124(1) (and see section 124(2) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                  • Section FH 7(1)(e): replaced (with effect on 1 July 2018), on , by section 68(2) (and see section 68(3) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                  • Section FH 7(1)(f): inserted (with effect on 1 July 2018), on , by section 68(2) (and see section 68(3) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).