Foreword by Andrew Chilvers
Despite these uncertain times, expanding overseas can be a key driver for future growth for an ambitious business. International expansion can breathe new life into a company, drive huge value and set it on a path of continued success.
Expanding a business overseas is a strategic opportunity that will help diversify revenue streams, revitalise product development and give high returns on investment. But expanding a business into different jurisdictions takes time – this is a long distance run, not a sudden sprint to the finish line. Furthermore, expanding operations into a new jurisdiction can be fraught with challenges and risks that need to be addressed long before the first boots are on the ground.
For any company turning up in a foreign country, a multitude of tax and legal issues need to be addressed. This can be a labyrinthine experience and not for the faint hearted – but then faint hearted businesspeople seldom set their sights on overseas expansion.
Tax and compliance have to be at the top of any board’s agenda, ensuring the correct steps are taken the moment the company representatives land in-country. It’s pivotal to learn these issues to avoid any costly mistakes from the start.
What are the main government incentives available in your jurisdiction to attract multi- nationals and FDI investment?
With International trade making up around 60% of New Zealand’s total economic activity, the New Zealand Government advocates free trade. Consequently, it is relatively easy for an MNE to establish a business presence in New Zealand.
In saying that, however, there are minimal Government targeted incentives for MNE’s, to encourage their investment into the New Zealand market. From a taxation perspective, for example, whether the MNE itself trades as a branch operation in New Zealand, or whether it establishes a wholly-owned New Zealand subsidiary company, the corporate tax rate applied to the MNE’s New Zealand profits is the same as that applicable to New Zealand-owned companies, a flat 28%.
Equally though, the MNE’s New Zealand business is usually entitled to claim tax incentives available to any other New Zealand business; for example, the Research & Development (R&D) tax credit, which can provide a 15% refundable tax credit to businesses undertaking R&D activities in New Zealand, provided the results and ownership of the R&D activity remains in New Zealand at all times.
Consequently, an MNE that undertakes regular R&D activities could see New Zealand as an attractive jurisdiction within which to undertake its R&D activity, due to the potential tax credit available.
New Zealand also does not have a capital gains tax regime presently. Consequently, a MNE can establish a New Zealand business, build incremental value within that business, and the subsequent disposal of the New Zealand business either by way of a share sale or via disposal of the business assets themselves, will in the main not be exposed to any New Zealand income tax imposition (certain components of a business asset sale may still trigger income tax consequences, such as the disposal values assigned to trading stock and depreciable assets).
What industries do you feel there are opportunities in for international investors/ businesses in your jurisdiction? What factors do you think contribute to inward investment?
New Zealand is well known for its tourism industry (pre-Covid obviously), primary related businesses of forestry, sheep and cattle farming, and dairy production (milk, cheese, butter) and viticulture.
In more recent years, New Zealand has also experienced a developing film industry (due to numerous breath-taking scenic location opportunities for international film makers), a growing computer gaming market, and the increasing recognition of having a talent pool of highly skilled information technology personnel.
Rich in potential diversified business investment opportunities, however, New Zealand’s primary downfall is a lack of available domestic investment capital to fund these industries. This capital shortfall creates an ever-increasing need for foreign investment.
To support the much needed in-flow of foreign investment capital, and what is likely to be attractive to the international investor, is the security sought by any investor looking for offshore opportunities of New Zealand’s relatively stable political environment. In addition, it’s robust banking environment (ease of flowing funds both in and out of New Zealand), the low level of corruption risk, and the availability of investor friendly trading structures such as a limited partnership.
In this regard, the latter provides the necessary structural freedom to offshore investors, to be able to have flexibility of choice of individual investment vehicles that will potentially provide the optimal outcomes for the investor in their home jurisdiction.
Finally, as mentioned previously, the lack of a capital gains tax in New Zealand provides the potential for the foreign investor to derive a greater return on their investment. This gives them a larger chunk of the disposal proceeds from an investment sale, being returned to the investor’s home jurisdiction pre-tax compared to similar investment returns they may get from investing in a jurisdiction that does have a capital gains tax regime.
Why is it important to hire a local firm to support international expansion? How can you help smooth the process for your clients and overcome common pitfalls?
Any investment into a foreign jurisdiction is not without its risks, and particularly in respect of a country like New Zealand, which is seen to be somewhat remote from the rest of the world.
Arguably, it does not need to be said that there is no better way to mitigate the risks of investment in the new jurisdiction than by having a trusted local advisor on the ground to guide the foreign investor appropriately with their international expansion plans.
Finding a suitably qualified local advisor is also key to getting robust inbound investment advice (clearly you want someone “who knows their stuff”). IR Global membership has certainly helped to smooth this process. At the outset of any engagement there is already a certain level of trust and confidence when reaching out to the local country member that your client will be well serviced and receive competent advice.
Using a local firm also ensures that the appropriate investment structure is selected to match the scenario at hand and, more importantly, that the offshore investor does not trigger any local compliance obligations unnecessarily, which are then difficult to reverse.
As an example of ensuring that the offshore client gets it right first time around, we are often approached by offshore advisors (or their client directly post an initial introduction from the advisor) to help with the set-up of a New Zealand company. Due to our experience in dealing with inbound investment, we have found that the request for this type of structure is often because of the “vanilla” approach – “I’ve heard that everyone else structures in your jurisdiction in this way, so I’d better do the same”. However, rather than simply proceeding to follow instruction, we will firstly ensure that we understand exactly why the client thinks they need to establish the structure.