Controlled foreign companies are companies based overseas but controlled by New Zealand residents. They must not be a tax resident in New Zealand or must be treated as foreign under a double tax agreement. A company may be a tax resident in New Zealand if it is incorporated in New Zealand or has a head office, centre of management or controlling directors in New Zealand.
Controlled foreign companies must be controlled by New Zealanders
Most commonly, ‘control’ means total ownership of the non-resident company by a New Zealand resident.
However, control can also exist where:
- 5 or fewer New Zealand residents have a controlling interest of more than 50%
- 5 or fewer New Zealand residents control the shareholder decision rights
- a single New Zealand resident has a controlling interest of 40% or more, and no non-associated non-resident owns a larger controlling interest.
Controlling interests include:
- voting right
- any shareholding
- any shareholding decision-making rights
- the right to receive income from the company
- the right to receive distributions from the company’s new assets.
We use the highest percentage of any one control interest type to determine if there is control.
How controlled foreign company income is taxed
Generally, income is taxed under the CFC rules when you have income interests of 10% or more in controlled foreign companies. This income is handled differently depending on whether the business is active or non-active.
In active businesses you are not taxed on controlled foreign company income or losses. You may be taxed on providing some personal services.
In non-active businesses you are taxed on your proportional share of passive income and losses.
Disclosing your interest in a controlled foreign company
In most situations you must disclose your interest in a CFC. This may be done in a Foreign investment fund / controlled foreign company disclosure - IR458.