Plain language law

New Zealand law explained for everyone

 Plain Language Law homepage
Back to
FH 14: Irrevocable election by owner of hybrid entity
or “Owner can permanently choose to treat their foreign hybrid entity as a company for tax purposes”
You could also call this:

“Explains important terms used in the Income Tax Act 2007 for 'Recharacterisation of certain transactions'”

This part of the law defines important terms used in the Income Tax Act 2007, specifically for the section about ‘Recharacterisation of certain transactions’. Here’s what the main terms mean:

‘Act together’ means when two people work as a team in controlling rights or interests in a company or other entity. This can happen in different ways, like if they’re related, if one usually does what the other wants, or if someone else controls their actions.

A ‘control group’ is a set of people or companies that are closely connected. This could be because they’re part of the same company group, they own a big part of each other, or they’re controlled by the same person or group.

A ‘hybrid entity’ is something that’s treated as a resident and taxed in one country, but not recognised or taxed in another country.

A ‘hybrid mismatch’ is when a country would not allow a tax deduction if they had rules like New Zealand’s.

‘Hybrid mismatch legislation’ refers to New Zealand’s rules about hybrid mismatches, or similar rules in other countries.

A ‘mismatch amount’ is money that can’t be deducted from tax or that increases taxable income because of these rules.

A ‘structured arrangement’ is a deal that’s set up to take advantage of hybrid mismatches in tax rules.

These definitions help explain how the tax rules work for complex international business arrangements.

This text is automatically generated. It might be out of date or be missing some parts. Find out more about how we do this.

Next up: FL 1: What this subpart does

or “This subpart explains tax implications when a New Zealand company moves overseas or changes status”
Next

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

FH 15Definitions

  1. In this Act,—

    act together, for 2 persons (the holders) that each have rights or interests (the rights and interests) in a person or other entity and for the ownership or control of the rights and interests, means—

    1. the holders are associated under section YB 4 (Two relatives):
      1. a holder typically acts in the way preferred by the other holder, because of the other holder’s preference:
        1. the holders have entered into an arrangement that has an effect on the value or control of the rights or interests that is more than incidental and does not arise from a restriction on the sale of the rights or interests:
          1. the actions of the holders relating to the interests are legally controlled, are typically controlled, or are expected to be controlled, by a third person or group of persons (the co-ordinator) that does not meet the requirements of subsection (2):
            1. the holders and a co-ordinator that does not meet the requirements of subsection (2) enter an arrangement affecting the ownership or control of the rights and interests and having an effect on the value or control of the rights and interests that is more than incidental:
              1. the holders agree with a co-ordinator that does not meet the requirements of subsection (2) that the co-ordinator can act on behalf of the holders in relation to the rights and interests

                branch mismatch report means the report OECD (2017), Neutralising the Effects of Branch Mismatch Arrangements, Action 2: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris

                  control group means a group of persons in which, for each member and each other member,—

                  1. the members are—
                    1. consolidated, or required to be consolidated, for accounting purposes:
                      1. members of a group of companies for which an applicable financial reporting standard requires the preparation of group financial statements for an accounting period:
                      2. the members are companies that are associated under section YB 2 (Two companies):
                        1. 1 of the members is a company and the other person has, or is a member of a group of persons acting together that has,—
                          1. a voting interest in the company of 50% or more, applying the general aggregation rule in section YB 3(3):
                            1. if a market value circumstance exists for the company, a market value interest in the company of 50% or more, applying the general aggregation rule in section YB 3(3):
                            2. the members are associated under section YB 4 (Two relatives):
                              1. the members are associated under sections YB 5 to YB 11 (which relate to a trustee or settlor of a trust):
                                1. 1 of the members is a partnership, or is a limited partnership, and the other member,—
                                  1. if the partnership is a limited partnership, is a general partner or is a limited partner that has a partnership share of more than 50% in a right, obligation, or other property, status, or thing of the limited partnership, applying the general aggregation rule in section YB 12(3) (Partnership and partner):
                                    1. if the partnership is not a limited partnership, is a partner that has a partnership share of more than 50% in a right, obligation, or other property, status, or thing of the partnership, applying the general aggregation rule in section YB 12(3):
                                    2. 1 of the members, or a group consisting of 1 of the members and persons that are related to or act together with that member, effectively controls the other member:
                                      1. a person or group of persons, together with persons who are related to or act together with the person or a person in the group, effectively controls each of the 2 members

                                        deducting branch, for a person, means a branch, permanent establishment, or other activity, of the person in a country or territory, such that expenditure or loss attributed by the person to the branch, permanent establishment, or activity is recognised by the tax law of the country or territory as giving rise to a deduction against income of the person or other tax relief

                                          entity means a person, or a relationship that is treated as a person by the tax law of a country or territory outside New Zealand

                                            financial instrument means—

                                            1. a financial arrangement:
                                              1. a share:
                                                1. an annuity:
                                                  1. a farm-out arrangement:
                                                    1. a share-lending arrangement:
                                                      1. a loan in New Zealand currency described in section EW 5(10) (What is an excepted financial arrangement?)

                                                        hybrid entity, for 2 countries or territories, means a person or other entity that is—

                                                        1. recognised in 1 of the countries or territories (the resident jurisdiction) as being a resident of the resident jurisdiction and subject to taxation under the taxation law of the resident jurisdiction; and
                                                          1. not recognised in the other country or territory (the overseas jurisdiction) as being a person, or other entity, subject to taxation under the taxation law of the overseas jurisdiction in relation to income with a source in the overseas jurisdiction

                                                            hybrid mismatch, for a payment in a tax year by a payer in a country or territory (the payer jurisdiction) means an amount of a deduction for the payment that would be denied by the payer jurisdiction if the payer jurisdiction had legislation having an effect corresponding to that of subpart FH

                                                              hybrid mismatch legislation means—

                                                              1. this subpart:
                                                                1. legislation of a country or territory outside New Zealand having an intended effect corresponding to the effect of this subpart or a provision in this subpart

                                                                  hybrid mismatch report means the publication OECD (2015), Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris

                                                                    mismatch amount means an amount, arising from a mismatch situation under a provision of this subpart, for which a deduction is denied or assessable income is increased under section FH 5, FH 6, FH 8, FH 9, or FH 10

                                                                      mismatch situation means a situation in which differences between the taxation law of New Zealand and the taxation law of another country or territory in the tax treatment of entities or deducting branches may give rise to adjustments to deductions or income under sections FH 5, FH 6, FH 8, FH 9, or FH 10

                                                                        related, for 2 persons, means a relationship under which—

                                                                        1. the 2 persons are companies—
                                                                          1. that are associated under section YB 2 (Two companies):
                                                                            1. for which a group of persons exists whose total voting interests in each company, determined under section YB 2, are 25% or more:
                                                                              1. if a market value circumstance exists for either company, for which a group of persons exists whose total market value interests in each company, determined under section YB 2, are 25% or more:
                                                                              2. 1 of the persons is a company and the other person is not a company and the 2 persons are associated under section YB 3 (Company and person other than company):
                                                                                1. the 2 persons are associated under section YB 4 (Two relatives):
                                                                                  1. the 2 persons are associated under sections YB 5 to YB 11 (which relate to a trustee or settlor of a trust):
                                                                                    1. 1 of the persons is a limited partnership and the other person is a general partner, or is a limited partner and the 2 persons are associated under section YB 12 (Partnership and partner):
                                                                                      1. 1 of the persons is a partnership and the other person is a partner and the 2 persons would be associated under section YB 12(2) if the partnership were a limited partnership and the partner were a limited partner:
                                                                                        1. 1 of the persons, or a group consisting of the person and persons who act together with the person, controls the other person:
                                                                                          1. a person or group of persons, together with persons who are related to or act together with the person or a person in the group, controls each of the persons

                                                                                            structured arrangement, for a person, means an arrangement to which the person or a member of the person’s control group is a party—

                                                                                            1. for which—
                                                                                              1. a transaction under or involving the arrangement has a price that assumes the existence of a hybrid mismatch:
                                                                                                1. the facts or circumstances indicate that the arrangement is intended to rely on or produce a hybrid mismatch; and
                                                                                                2. under which the person, or a member of the person’s control group, can reasonably be expected to be aware of—
                                                                                                  1. a tax benefit for the person that arises from the hybrid mismatch:
                                                                                                    1. the existence of the hybrid mismatch

                                                                                                    surplus assessable income means an amount, arising from a mismatch situation and determined under section FH 12, against which a mismatch amount from the mismatch situation may be set off under section FH 12.

                                                                                                    1. A co-ordinator meets the requirements of this subsection for rights or interests in a person or entity held separately by 2 holders if—

                                                                                                    2. the co-ordinator manages an investment fund through which 1 of the holders has the holder’s rights or interests in the person or entity; and
                                                                                                      1. the co-ordinator manages another investment fund through which the other holder has the holder’s rights or interests in the person or entity; and
                                                                                                        1. the 2 funds do not act together in relation to the rights and interests of the holders.

                                                                                                          Notes
                                                                                                          • Section FH 15: 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 15(1) hybrid mismatch: replaced (with effect on 1 July 2018), on , by section 106(1) (and see section 106(3) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                                                                          • Section FH 15(1) hybrid mismatch legislation paragraph (b): amended (with effect on 1 July 2018), on , by section 106(2) (and see section 106(3) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                                                                          • Section FH 15(1) mismatch amount: amended (with effect on 1 July 2018), on , by section 200(1) (and see section 200(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                                                                                          • Section FH 15(1) mismatch situation: amended (with effect on 1 July 2018), on , by section 200(2) (and see section 200(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).