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Controlled foreign company

I have set up a company in the Cayman Islands which sells products over the Internet to customers from all over the world. I do not intend to repatriate any of the profits to New Zealand. Does this company have a New Zealand tax liability? ANSWER

Wednesday, July 18th 2001, 11:46AM

Answer
On the basis that the Cayman Islands company is "controlled" by a New Zealand tax resident, it will be subject to New Zealand tax on its worldwide income. The comprehensive international tax rules provide that the company's income is attributed to its New Zealand shareholders and is subject to tax in New Zealand if the New Zealand resident has an income interest of 10% or more in the company. This regime is known as the controlled foreign company (CFC) regime. If the income interest is less than 10% the foreign investment fund rules will apply.

There are exceptions from these regimes for entities which are resident in certain jurisdictions such as Canada and the United States. If the CFC rules do not apply, for example if the company is moved to the United States (ie, a grey list country), transactions with New Zealand customers are likely to have a source in New Zealand and the resulting profits would be caught in the New Zealand tax net. See s OE 4(1)(a), (q).

It appears that your company will be subject to the CFC regime.

Income Tax Act 1994, ss CG 4(1), OE 4(1)(a), (q).
2001 New Zealand Master Tax Guide, 26-040.

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ANZ 6.24 5.10 5.59 5.59
ANZ Special - 4.89 4.99 -
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BankDirect 6.50 ▼5.05 ▼5.25 ▼5.35
BankDirect Special - ▼4.69 ▼4.89 ▼4.99
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BNZ - Special - - ▼4.69 -
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BNZ - TotalMoney 5.99 - - -
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Credit Union Auckland 6.70 - - -
Credit Union Baywide 6.45 5.75 5.75 -
Credit Union North 6.45 - - -
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Finance Direct 6.10 6.45 6.69 7.10
First Credit Union 6.45 - - -
HBS Bank 6.14 5.39 5.39 5.39
HBS Special - 4.99 4.99 4.99
Heartland 6.70 7.00 7.25 7.85
Heretaunga Building Society 6.45 5.10 5.40 -
Housing NZ Corp 6.49 5.19 5.49 5.59
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HSBC Premier 6.60 4.89 4.89 ▼4.99
HSBC Premier LVR > 80% - - - -
HSBC Special - ▼4.49 ▼4.49 ▼4.49
ICBC 6.75 5.99 6.39 -
Kiwibank 6.15 5.39 5.49 5.69
Kiwibank - Capped - - - -
Kiwibank - Offset 6.40 - - -
Kiwibank Special - 5.09 4.99 5.39
Liberty - - - -
Napier Building Society 6.50 5.80 6.70 -
Nelson Building Society 6.70 5.65 5.95 -
Lender Flt 1yr 2yr 3yr
NZ Home Loans 6.60 5.39 5.49 6.29
Perpetual Trust 7.70 - - -
Resimac 5.84 5.60 5.65 5.79
SBS Bank 6.14 5.39 5.39 5.39
SBS Bank Special - 4.99 4.99 4.99
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Sovereign Special - ▼4.69 ▼4.89 ▼4.99
The Co-operative Bank 6.20 4.89 4.99 5.20
TSB Bank ▼6.24 5.45 5.49 ▼5.40
TSB Special - - 4.99 5.40
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Westpac ▼6.15 5.39 5.39 5.59
Westpac - Capped rates - ▼6.15 ▼6.15 -
Westpac - Offset ▼6.15 - - -
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Median 6.45 5.19 5.39 5.39

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