Is it the end of carrying on business in NZ as a Branch?

The choice of trading through a branch or a subsidiary company in NZ for a non-resident company is an important one.  It is a choice which has largely been tax neutral for foreign companies wishing to do business in NZ.  However one recent change which requires a non-resident to open a NZ bank account before getting and IRD number may well have changed that landscape.

As a net importer of capital and with a hunger to attract foreign investment NZ tax policy has been geared towards achieving neutrality.  Unlike some countries NZ does not impose an additional branch profits tax or have a differential tax rate between a branch and a subsidiary.  Both pay tax at the rate of 28% on their taxable income.

Similarly when funds are to be repatriated a branch could have had an advantage over the subsidiary as there is no withholding tax imposed on the repatriation of branch profits.  However the foreign investor tax credit regime and the zero percent withholding tax on fully imputed dividends resolved any potential distortion for subsidiary companies. 

The objective seems clear “tax” should not be a factor which as an influence over legitimate business decisions such as how to carry on business in New Zealand.  It’s a policy objective consistent with the broad based low rate mantra that drives our generic tax policy process and arguably a contributor to NZ’s regularly high ranking among countries on the “ease of doing business” surveys.

The recent requirement for a non-resident to open a bank account in NZ, before being able to get registered with the Inland Revenue for income tax and GST purposes may have inadvertently changed that landscape. 

The requirement was introduced with effect from 1 October 2015 as part of a suite of measures aimed at taking the heat out of the residential property market.  It appears at least at first blush to be a smart move. 

It sets a platform for the proposed non-resident withholding tax on land, makes it harder for overseas owners to purchase property, and subjects the non-resident to the rigorous anti-money laundering (AML) procedures and compliance processes of the NZ Banks.

Those Banks rightly wish to get a return on their investment.  They incur costs in putting applications through the AML process.  They assume obligations and risks and retain the right to refuse to open an account for a non-resident - not necessarily be because they cannot satisfy the AML procedures; but because the customers banking needs may not provide a sufficient return to the bank for the risks and obligations they assume. 

Clearly AML procedures are an important tenet of our regulatory environment and are welcomed.  However the requirement to open a bank account as a condition of applying for an IRD number makes it too hard to carry on in business as a branch and may slow down legitimate foreign investment. 

The alternative to buy an “off-the-shelf” NZ incorporated company which has been registered with an IRD and GST number may seem an easy low cost solution but it simply highlights the flaw in the policy.  A carve out exemption for legitimate businesses not purchasing residential property should be considered.