Financial hub law change

​PIE investment products will be available to foreign investors on a tax-effective basis under a Supplementary Order Paper (SOP) introduced by the Government yesterday (5 April 2011).

The legislation will apply from enactment to some products (which could be as early as June or July 2011) and will be fully applicable from the beginning of the 2012-13 year.

This Brief Counsel summarises the change, which is both detailed and complex.  We urge industry players to consider the SOP carefully as it may contain some fish-hooks.


The SOP is to be welcomed, as the latest step in a process to facilitate the development of New Zealand as a financial hub. The legislation has been widely consulted on, and accordingly should be fit for purpose in most respects.  However, it almost certainly contains difficulties which will only be discovered on close examination.  It is therefore important that it be subjected to expert scrutiny to ensure that the legislation that is enacted will achieve its purpose. 

New tax rates for PIE income attributable to foreign investors

The key job of the legislation is to fix the current anomaly, where all PIE income attributable to foreign investors is taxed at 28%.  PIE income attributable to foreign investors will be taxed at 0% if the income is:

  • foreign source income
  • a fully imputed dividend from a New Zealand company (this is already the case)
  • New Zealand source interest or dividend income derived by a PIE which:
      • has less than 5% of its assets invested in New Zealand debt
      • has less than 1% of its assets invested in New Zealand shares
      • derives no other types of New Zealand source income.

For PIEs which don’t meet these requirements, New Zealand source financial arrangement income (including both interest and income from derivatives) will be taxed at 1.44%, and New Zealand source dividends will be taxed at either:

  • 0% (if fully imputed)
  • 15% (if unimputed and the investor is resident of a country with which New Zealand has a tax treaty)
  • 30% otherwise (which is higher than the current 28% rate). 

The legislation appears to have been drafted on the basis that PIEs which qualify for the 0% rate on all income can apply that rate from the date that the legislation becomes law.  PIEs which have to apply the different rates can only do so from the beginning of the 2012-13 year.

New rates calculated on gross income with no credits

While the different rates applying to New Zealand source financial arrangement income, New Zealand source dividend income, and foreign income, will create some complexity, there is at least no need for the PIE to apportion expenses or tax credits between the different types of income.  All of the taxes are imposed on a gross basis, just as they would be if the income were derived directly.

Optional rule for unimputed dividends

The legislation does allow the PIE to pay the tax on unimputed dividends as NRWT in certain circumstances, in order to allow foreign investors to claim credits for these taxes.

Only “foreign investment PIEs” apply the new rates

These rates are available only to PIEs which:

  • choose to be treated as “foreign investment PIEs”, and
  • meet certain asset qualifications.  Essentially, these are either that:
      • the PIE has no interests in New Zealand land or in a land investment company (broadly, a company whose assets consist of land to 90% or more), or
      • the PIE has less than 5% of its assets invested in New Zealand debt and less than 1% of its assets invested in New Zealand equity (investment in other PIEs is permitted, so long as those PIEs derive only foreign source income or interest income from de minimis New Zealand debt).

The name “foreign investment PIE” is perhaps unfortunate, since it is perfectly possible for a foreign investment PIE to have no foreign investments at all.

PIEs which don’t choose to be treated as foreign investment PIEs will continue to apply the 28% rate, in respect to their foreign investors.

Evidence required of foreign investor’s identity

In order for a PIE to apply these different rates to an investor’s income, the investor must be a “notified foreign investor”.  This requires them to provide the PIE with their:

  • full name
  • date of birth (if applicable)
  • home address in the country where they are tax resident, and
  • tax file number in the country where they reside, and in New Zealand if they have one.

PIEs may also wish to confirm that the investor is not a Controlled Foreign Company (CFC) or a trustee of a trust subject to New Zealand tax on its income, as these persons are not entitled to be notified foreign investors.


Chapman Tripp supports this change and has long argued for it.  

The new rates will make PIEs more attractive investment vehicles for foreign investors.  They will also encourage Kiwis with Kiwisaver accounts to leave their money in their Kiwisaver account when they leave New Zealand to work overseas.  If the Kiwisaver provider has elected into the new regime, their money will generate income subject to a much lower rate of New Zealand tax than is currently the case.  It is also encouraging that the rules can be implemented in large part from the date of enactment.

However, there are a number of aspects where the legislation may require amendment, preferably before enactment.  For example, the treatment of derivative contracts entered into with New Zealand counterparties does not seem to have been properly thought through.  Nor is there any reason why a foreign investment PIE could not hold interests in a company whose assets are 90% or more of land.


Although submissions have already been heard on the Bill to which the SOP is attached, we hope the Finance and Expenditure Committee will call for submissions on the SOP also.  This would provide a structured opportunity for feedback and amendment.  If that is not the case, it may be necessary to discuss concerns directly with officials. 

For further information, please contact the lawyers featured.

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Related topics: Tax; PIEs


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