A more investment friendly tax regime for the domestic bond market is anticipated in proposals released last week by the Inland Revenue Department. The IRD is calling for submissions by 30 October 2009 on the discussion document.
This Brief Counsel canvasses the changes the IRD is proposing. If adopted, they will make New Zealand corporate bonds a more attractive investment option for overseas investors.
We urge you to take full advantage of this opportunity for tax reform and will be pleased to assist with submission preparation.
The broad proposal is to reduce the Approved Issuer Levy (AIL) to 0% on certain widely held bonds. This means that no New Zealand taxes will be payable in respect of interest earned by non-resident investors in these bonds.
The changes in detail are:
AIL would apply at a rate of zero for interest paid on qualifying bonds
A “qualifying bond” would be a debt security that belonged to a group of identical debt securities that satisfied either:
the widely held test, or
the stock exchange test.
The widely held test would require:
the debt securities to be held by at least 100 investors (who are not associated or who could not reasonably be expected by the issuer to be associated)
no person (or group of persons that the issuer could reasonably expect to be associated) holds more than 10% of the debt securities (disregarding an underwriter for the first year), and
the issuer would be required to apply the test annually to check that the thresholds were still satisfied.
The stock exchange test would require the debt securities to be listed on a recognised stock exchange.
A debt security would not be a qualifying bond if:
it has been issued through a private placement that is limited to a select group of investors
it has not been openly advertised to the target market during the book-build process, or
it is an asset-backed security – that is, any security where the interest payments are financed by cashflows from a pool of financial assets.
IRD has requested feedback on:
the extent to which these changes would affect the way businesses issue bonds (including the use of offshore branches to raise funds overseas),and
the proposed criteria for qualifying bonds.
If you raise funds in the domestic bond market or would contemplate doing so with a 0% AIL regime we strongly recommend that you take this opportunity to review the proposals and make a submission.