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Income Tax Act 2007

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

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

You could also call this:

“No double tax deductions for expenses from overseas entities”

This law applies to you if you’re a New Zealand resident and you’re connected to a hybrid entity or have a deducting branch outside of New Zealand. It’s about making sure you don’t get tax deductions twice for the same expense.

If the foreign country’s tax law allows the hybrid entity or deducting branch to use its expenses to reduce someone else’s income, and that other person’s income isn’t taxed in New Zealand, you can’t claim a deduction for those expenses in New Zealand.

Any deduction you’re not allowed to claim is called a “mismatch amount”. You might be able to use this mismatch amount later under section FH 12 if you have extra taxable income.

If you become subject to this rule after a period when it didn’t apply to you, and the foreign country lets the hybrid entity or branch use its past expenses against future income that isn’t taxed in New Zealand, you’ll have to pay tax on an amount equal to the losses from that earlier period.

This extra taxable income is also a mismatch amount that you might be able to use later under section FH 12 if you have extra taxable income.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS65833.

Topics:
Money and consumer rights > Taxes
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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”

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FH 9: Expenditure or loss of hybrid entity, or non-resident through deducting branch, producing double deduction without double income, or

“Preventing double tax deductions for certain overseas companies operating in New Zealand”

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

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

  1. This section applies for a New Zealand resident and an income year when the New Zealand resident is related to a hybrid entity existing under the law of a country or territory outside New Zealand, or has a deducting branch in such a country or territory, and—

  2. the taxation law of the country or territory allows expenditure or loss of the hybrid entity, or of the New Zealand resident attributed to the deducting branch, in the income year to be set off against income of another person or entity; and
    1. the income of the other person or entity, other than from a source in New Zealand, is not assessable income.

      1. The New Zealand resident is denied a deduction for the amount of expenditure or loss incurred for the income year that—

      2. is attributed to the hybrid entity or deducting branch; and
        1. would, in the absence of this section and sections FH 9 and FH 10, be allowed as a deduction in the income year corresponding to the tax year.

          1. A deduction denied under subsection (2) is a mismatch amount from a mismatch situation until the mismatch amount is set off under section FH 12 against surplus assessable income under that section from the mismatch situation.

          2. Subsection (5) applies to a person who is a New Zealand resident and becomes liable to be denied deductions under subsection (1) at a time (the transition time) when—

          3. in a period ending with the transition time (the unaffected period), the person is related to a hybrid entity, or has a deducting branch, that exists under the law of a country or territory outside New Zealand but the person is not liable to be denied deductions under subsections (1) and (2); and
            1. the taxation law of the country or territory allows expenditure or loss of the hybrid entity, or of the New Zealand resident attributed to the deducting branch, during the unaffected period to be set off against income that is not assessable income and arises at or after the transition time.

              1. The person derives, at the transition time, assessable income equal to the amount of net loss, calculated for the person and the hybrid entity or deducting branch and the unaffected period as if the person’s income from the hybrid entity or deducting branch were schedular income.

              2. An amount that is treated as assessable income under subsection (5) for a person and a tax year is a mismatch amount of the person 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.

              Notes
              • Section FH 8: 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).