Where a New Zealand tax resident pays interest to an offshore lender there is a requirement to deduct non resident withholding tax or NRWT from the interest.
The default NRWT rate on interest is 15%, but this can be reduced if the double tax agreement between New Zealand and the country of the lender says so.
NRWT is therefore a significant issue as in most cases it is the borrower that has to bear the cost. Whilst the tax is designed to be a New Zealand tax levied on the lender, there are not many lenders who will accept interest payments 15% below what is required. Why? Because part of it is being withheld and remitted to the New Zealand IRD here.
Following this, exceptions to NRWT are important and there are a number of exceptions that you should be aware of.
First, if you qualify for the transitional resident rules then during the 48 month period in which you have the exemption from accounting for offshore income you also have an exemption from having to account for NRWT
Second, interest payments to certain Australian based banks are not subject to NRWT where the bank is operating through New Zealand in a branch. The logic behind this rule is if you have a bank such as Westpac and you are making payment to Westpac Australia you are effectively making payments to the same company that operates in New Zealand (as Westpac New Zealand is a branch of Westpac Australia).
Next there is an exemption where the interest payments relate to a fixed establishment outside of New Zealand. This can be supplemented under certain double tax agreements whereby there is an exemption if the borrowing relates to a permanent establishment offshore.
Finally, if there is no exemption applicable, it is possible to apply for what is known as ‘approved issuer status’ which means that the interest payments are not subject to NRWT but are subject to a 2% approved issuer levy.
If all of this sounds confusing or involved, we understand. As New Zealand Accountants We specialise in helping clients all around the world to minimise their tax (legally) when dealing with their affairs in New Zealand.