Key staff can cause New Zealand tax headaches for international companies
Are you a director or a key staff member of an offshore business? Did you know that your presence in New Zealand might cause your company to be subject to tax in New Zealand? A company is deemed to be New Zealand tax resident if any of the following apply:
- it is incorporated in New Zealand;
- has its head office in New Zealand;
- has its centre of management in New Zealand; or
- the control of the company by the directors is exercised in New Zealand.
The first three tests are reasonably obvious, but the fourth test can lead to a number of unsuspecting companies being caught in the New Zealand tax system. Imagine the relatively common scenario of someone entering New Zealand on an Investor Category visa. They often have a business, or business interests in their home country. If they remain a director of an overseas company, and continue to act as a director and fulfil their director duties while in New Zealand, then this can mean the company becomes considered a New Zealand tax resident. A New Zealand resident company is subject to tax in New Zealand on its world-wide income.
Inland Revenue is always keen to find these companies and ensure they pay their fair share of tax in New Zealand. In most cases, had the migrant known that what they were doing would create a taxing presence in New Zealand for their foreign business, they would have structured things differently. It is vital to seek tax advice up front to ensure there are no hidden tax consequences. There are often multiple ways to structure things from a commercial perspective but the tax consequences of each may be different.
In addition to domestic law, New Zealand has a wide network of double tax agreements which can provide relief against double taxation in certain circumstances. Each of our double tax agreements has a set of rules to determine whether a company has a “permanent establishment” in a country. When a company is considered to have a permanent establishment it will be liable to pay tax relating to the profit attributable to the permanent establishment in that country. A permanent establishment is generally a place of management, a branch, an office, a factory or a workshop. Each double tax agreement is different, so there are other circumstances in which a permanent establishment can arise. A staff member in New Zealand with the ability to conclude contracts on behalf of the foreign company can lead to the foreign company having a permanent establishment in New Zealand. In some cases, a building or construction site can constitute a permanent establishment if it lasts more than twelve months. Substantial equipment located in a country for over a certain period (for example 12 months) can also create a permanent establishment.
I have seen cases where a key staff member of a foreign company operating in New Zealand has a New Zealand phone number and business card with New Zealand details on it. The staff member had an office within a New Zealand business and an access card for that building. These were all relevant when considering if that employee’s foreign employer had a permanent establishment in New Zealand. While there are obviously effects for the company, this can also lead to different taxing outcomes for the employee. If a company has a permanent establishment in New Zealand, then all employees are subject to PAYE in New Zealand. Where a company is not New Zealand resident and does not have a permanent establishment in New Zealand, non-tax resident employees working in New Zealand for short periods of time will not be subject to tax in New Zealand.
Tax advice is always very fact specific, and the full nature of the business and the connections with New Zealand should be considered by an international tax expert in order to ensure there are no adverse consequences when migrants continue to act as directors or work for an overseas company. I work closely with our immigration team, but also other immigration advisors, lawyers, bankers, investment advisors, accountants and other professionals to ensure migrants and their companies or employers (where necessary) are fully informed and set up correctly from the time they enter New Zealand, to ensure there are no nasty surprises when IRD starts digging.
For personalised advice on all tax issues please contact Julia Johnston at Saunders & Co.