QUESTION ONE – What are the most common structures used when international clients want to form a company in your jurisdiction? Any examples?
Offshore clients looking to establish a New Zealand (NZ) presence, most often arrive on our doorstep with the pre-conceived notion that a standard NZ company is the best trading structure for them to use to undertake their business activity.
However, before formalising the plan to incorporate, it is imperative to fully understand the exact nature of the proposed NZ activity, how the offshore person has structured themselves (company, trust, individual for example), and what are they actually trying to achieve by using an NZ company.
We have experienced numerous cases for example, where the offshore client was simply looking to get their product into the NZ market by being the “importer of record” for NZ Customs purposes, and their understanding was that the only way they could facilitate this scenario, was via the use of an NZ company.
Establishment of an NZ company would now potentially establish an NZ permanent establishment (PE), with NZ then obtaining a right to tax any profits attributable to that PE. This scenario could, in fact, have been avoided, via a simple written request to the NZ Companies Office, for a letter of exemption which could then be provided to NZ Customs, alleviating the need to form an NZ entity in order to obtain the necessary client code.
Should the off-shore client’s level of proposed NZ activity, however, dictate that an NZ trading structure is warranted, the desire to use an NZ company structure may ultimately lead to greater profit repatriation costs than the offshore client initially appreciated, due to a misunderstanding of NZ’s corporate income tax regime. In this regard, in NZ we have what is known as an imputation regime. The NZ company is assessed for income tax on its annual profit at a flat rate of 28 per cent, the tax paid then becoming an imputation credit which can then be attached to any dividend subsequently paid to the company’s shareholders.
For an NZ shareholder, the imputation system works well, as it ensures the shareholder is not taxed again on the dividend income to the extent the company has already been taxed on the amount. However most foreign taxing jurisdictions do not recognise an NZ imputation credit attached to a dividend payment as qualifying as a foreign tax credit, and consequently, the foreign shareholder is subjected to full taxation again on the dividend income they have received. The result often equating to a repatriation cost exceeding 50 per cent.
Where the offshore client has some flexibility with their NZ structuring therefore, they should explore alternative trading vehicles, such as an NZ limited partnership (NZLP). Commercially the NZLP retains the corporate veil of the company form, usually protecting the investor from the claims of creditors, however, it does not have the aforementioned imputation credit regime, often enabling, therefore, the off-shore client to obtain a direct tax credit in respect of any NZ income tax paid.
QUESTION TWO – Please detail some of the favourable and unfavourable legislation that businesses considering establishing a presence in your jurisdiction should be aware of? How can you help them to streamline the process?
The formation of an NZ company is usually a fairly simple and low-cost process, and we often receive comments in that regard, when attending to registrations on behalf of our offshore clients.
The governing code for NZ companies is the Companies Act 1993 (the Act). The Act contains all the rules which deal with the incorporation of the company (it’s birth), ongoing maintenance of the company (including director’s powers and duties, shareholders’ rights and obligations, record keeping requirements and reporting obligations) and the liquidation of the company (its death). In fact, the Act itself is suitable for the purpose of becoming a particular company’s rulebook, where the company decides it does not wish to adopt a separate constitution.
NZ companies only require a sole director and shareholder, which can be the same person, resulting in the commonly used term in NZ of ‘one-man-band’ companies. For offshore clients looking to establish an NZ company, at least one director must live in NZ (although an exception applies where the person lives in Australia and is an existing director of an Australian company).
The NZ Companies Office maintains the NZ company Register, a free, online searchable database of all NZ registered companies. To ensure the Register is kept up to date, all NZ companies are required to file an annual return, the due date usually dictated by the month during which the company was originally incorporated.
Whether an NZ company is also required to provide a copy of its annual financial statements to the NZ Companies Office, is now determined by the size of the company – whether it is considered to be large or where it has more than 10 shareholders (unless the shareholders opt out of the requirement). In regard to being large, where a company has for the previous two reporting periods, total assets exceeding NZD60 million (NZD20 million for subsidiaries of overseas companies) or total revenues exceeding NZD20 million (NZD10 million for subsidiaries of overseas companies), then its annual financial statements must be filed with the NZ Companies Office within five months of the company’s balance date.
An NZ company does not have a mandatory audit requirement in respect of its annual financial statements either, the rules which determine the company’s reporting obligations to the NZ Companies Office, usually also determining the audit requirements.
Finally, the NZ Commerce Commission and the Financial Markets Authority, are essentially watchdogs to ensure NZ companies behave appropriately within the NZ environment.
QUESTION THREE – What due diligence is required to be undertaken by company formations agents under anti-money laundering laws in your jurisdiction?
In recent years, NZ has seen the introduction of more stringent AML/CFT rules, the legislative reach bringing accounting firms under the compliance obligation umbrella effective 1st October 2018.
When onboarding any new client now, which includes the incorporation of a NZ company for an off-shore client, we have to complete certain due diligence requirements, which will include requesting various certified identification documents from those persons behind the company (shareholders/directors), to enable us to verify they are who they say they are.
However, it should be recognised that all NZ banks have greatly increased their customer due diligence processes, as has the NZ Inland Revenue before it will be prepared to issue the new NZ company with the requisite tax file number.
