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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