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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 14: Irrevocable election by owner of hybrid entity

You could also call this:

“Owner can permanently choose to treat their foreign hybrid entity as a company for tax purposes”

You can choose to make your hybrid entity a company for tax purposes if you own all of it. This applies if you’re a New Zealand resident and the hybrid entity is considered a resident in another country. You must have owned the hybrid entity when the Taxation Bill was introduced.

If you make this choice, the hybrid entity becomes a company right after it’s treated as being sold. Some special tax rules won’t apply to money the hybrid entity spends or earns from this sale.

You need to tell the tax office about your choice before you file your tax return for the first year the new hybrid mismatch rules apply to you. Once you make this choice, it lasts for that first year and all the years after that.

When you make this choice, it’s like the hybrid entity sells everything it owns at the start of the period. Then, it’s treated as if a new company in the other country bought everything. When the hybrid entity gives you money after this, it’s treated as if a company is giving you money.

The new company is considered to have a certain amount of capital. This amount is the difference between what its assets are worth and what its debts are worth.

Once you make this choice, you can’t change your mind later.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS65846.

Topics:
Money and consumer rights > Taxes
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Part F Recharacterisation of certain transactions
Hybrid and branch mismatches of deductions and income from multi-jurisdictional arrangements

FH 14Irrevocable election by owner of hybrid entity

  1. A New Zealand resident (the owner) who has, or is a member of a wholly-owned group that has, all the ownership interests in a hybrid entity may make an election under this section if the hybrid entity—

  2. is treated by the taxation law of a country or territory outside New Zealand (the foreign jurisdiction) as being resident in the foreign jurisdiction; and
    1. is wholly owned by the owner or the owner’s wholly-owned group on the date on which the Taxation (Neutralising Base Erosion and Profit Shifting) Bill is introduced.

      1. The result of an election by the owner is that the hybrid entity is, for all purposes of the Act for the owner, a company immediately after the sale referred to in subsection (5)(a)(i) and sections FH 3 to FH 11 do not apply to expenditure incurred, or income derived, by the hybrid entity from the deemed sale.

      2. The owner must notify the Commissioner of the election before the due date for the return of income for the first income year in which the hybrid mismatch legislation applies to the owner.

      3. The election is effective for the period consisting of the first income year in which the hybrid mismatch legislation applies to an owner and later income years.

      4. For the period for which the election is effective, the hybrid entity is treated as—

      5. at the beginning of the period,—
        1. selling the undertaking of the hybrid entity, as a hybrid entity, at market value; and
          1. buying the undertaking as a company (the new subsidiary), in which the owner has ownership interests, that is resident in the foreign jurisdiction; and
          2. during the period, making as a company each distribution to the owner.

            1. The total available subscribed capital of the new subsidiary is the amount by which the market value of the assets acquired by the new subsidiary exceeds the market value of the liabilities assumed by the new subsidiary.

            2. An election under this section for a hybrid entity is irrevocable.

            Notes
            • Section FH 14: 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 14(2): amended (with effect on 1 July 2018), on , by section 125(1) (and see section 125(3) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
            • Section FH 14(5)(a)(i): amended (with effect on 1 July 2018), on , by section 125(2) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).