Appendix B: Overview of other jurisdictions

1. A number of jurisdictions have introduced rules to allow investors (including foreign funds) to establish discretionary management advisory businesses in their jurisdictions without creating a taxable presence there. These rules are referred to generically in this Appendix as investment manager regimes (IMRs). This note reviews IMRs in the United Kingdom, Hong Kong, Singapore and the United States. Recent proposed IMR reforms in New Zealand are also summarised.
2. The introduction of IMRs in a number of jurisdictions has largely responded to competitive pressures between jurisdictions seeking to attract this highly mobile business by simplifying the taxation arrangements applying to offshore funds, and by restricting their source rules. The IMRs generally allow non-resident investors to appoint or establish investment managers within a jurisdiction without creating a taxable presence in that jurisdiction.
3. Most jurisdictions have also exempted the gains made by foreign residents from the disposal of a wide range of securities, as well as in some cases the income from holding these securities. The nature of the transactions which are provided with exemption is generally limited to traditional financial assets, and generally excludes contracts dealing with interests in real property.
4. A variety of approaches to eligibility rules have been established to deal with resident investors. The broad trend is that resident investors in an offshore fund should not affect the fund's eligibility under IMR arrangements, but other measures (such as attribution rules and general resident taxation provisions) are used to ensure the taxation policies for residents are maintained.
5. A more detailed overview of the approaches taken in other jurisdictions follows.

Scope of other IMRs - Key feature comparison The following discussion of overseas regimes is organised along these lines: Objectives and background; Scope; How is a foreign fund defined? What investment activities are permitted? How is the fund taxed? How is the intermediary taxed? 'Round tripping': What happens to resident investors? Where in the law? Comments.

United Kingdom

Objectives and background

6. The Investment Manager Exemption (IME) was introduced to encourage non-resident investors to conduct investment business through financial institutions based in the UK without the risk of being taxed as though they were carrying on a trade in the UK through an agent - the investment manager. That is, the regime operates to prevent a UK investment manager from being treated for tax purposes as the UK representative of a non-resident trading in the UK. The amounts of tax assessable on the income of the non-resident are limited to amounts deducted at source. Any fees earned by the UK investment manager for services performed for the non-resident remain fully subject to UK tax.
7. Historically, the UK has tried to attract overseas investors to utilise local investment managers, thereby encouraging investment managers to establish themselves in the UK. However, there has always been the risk that the profits of the overseas clients carrying out trading activities in the UK might be subject to tax there, where conducted by local investment managers, because of the operation of income source and permanent establishment rules. In this context, the IME legislation was introduced to exempt those profits from UK tax in specified circumstances.
8. The trading safe harbour was introduced in 1995 and the UK was one of the first jurisdictions to have such an exemption. It was received as a positive measure by the industry as an incentive over other countries.

Scope

9. Five conditions must be met before the IME can apply:
   • The investment manager must be carrying on the business of providing investment management services;
   • The transaction must be carried out by the investment manager in the ordinary course of that business;
   • The investment manager must act in relation to the transaction on behalf of the non-resident in an independent capacity (the 'independence test');
   • The investment manager, together with any connected persons, must not be beneficially entitled to more than 20 per cent of the non-resident's taxable profits arising from transactions carried out through the investment manager (the '20 per cent rule').
   • The remuneration that the investment manager receives in respect of the transaction is at least the 'customary' amount for that class of business (the 'customary remuneration test').
10. Transactions that do not meet the criteria will be subject to UK income tax or corporate tax, as the case may be, unless otherwise exempted.

How is a foreign fund defined?

11. The UK regime applies to non-residents generally, where they engage a UK investment manager which meets the five conditions.

What investment activities are permitted?

12. The IME applies to 'investment transactions' carried out by a UK investment manager for a non-resident. The definition of 'investment transactions' is now provided for under Statutory Instrument 2009/May (The Investment Manager (Specified Transactions) Regulations 2009). In summary, qualifying investment transactions would specifically include:
    • any transaction in stocks or shares;
    • any transaction in a 'relevant contract' which covers a wide range of derivatives such as options, futures and contract for differences;
    • any transaction resulting in a non-resident person becoming party to a 'loan relationship' or a 'related transaction' in respect of such;
    • any transaction in units in a 'collective investment scheme';
    • any transaction in "securities" other than shares, debts and collective investment schemes as provided for above;
    • any transaction consisting in buying or selling foreign currency; and
    • any transaction in defined carbon emission trading products.
13. A major change in 2008 was to remove a 'cliff-edge' provision from the legislation. As originally framed, the protection of the IME could be lost entirely if there was just one non-qualifying transaction (for example, a commodity trade). Now, the result in that situation would be that the offending transaction would be fully exposed to tax, but the qualifying transactions would still be protected. This does not apply, however, if the qualifying transactions are integral to a non-qualifying trade carried on in the UK.

How is the intermediary taxed?

14. The income derived by the UK investment manager from the provision of services remains taxable. Further, to be eligible for the regime the UK investment manager must receive remuneration at a rate that is not less than customary for the services. 'Customary rate' is not defined in the legislation, but left to the discretion of the UK tax authority (Her Majesty's Revenue and Customs (HMRC)).
15. HMRC is guided by the OECD Transfer Pricing Guidelines in determining whether the level of remuneration received by the UK investment manager is customary. Managers that have adequate documentation in place and apply an acceptable methodology for achieving an arm's length reward will not jeopardise the exemption, even if transfer pricing adjustments to the managers' returns are subsequently found to be warranted.

'Round tripping': What happens to resident investors?

16. With the exception of rules which apply to the UK investment manager, the tax position of a foreign fund is not affected by the participation of UK investors.
17. The five qualifying conditions which must be met by UK investment managers (set out at paragraph 9) do impose certain restrictions which prevent UK residents from inappropriately benefiting from the IME.
18. The '20 per cent rule' must be met to ensure that the investment manager and persons connected with it do not have more than a 20 per cent interest in the offshore fund - that is, they must not be entitled to more than 20 per cent of the non-resident's chargeable profit arising from transactions carried out through the investment manager.
19. Where the only reason that the IME criteria are not met in relation to an investment transaction is that the 20 per cent rule is breached, the part of the income that the investment manager and connected persons are beneficially entitled to will remain subject to UK tax.
20. It is important to note that the 20 per cent test is one of intention, and can be deemed to be met throughout a reference period not exceeding five years, provided the UK manager's average entitlement (including that of any persons connected with the manager) to the fund's taxable income over the reference period arising from investment transactions carried out by the manager, meets the 20 per cent test.
21. The 20 per cent test is also treated as satisfied if the manager intended to meet the condition but failed to do so for reasons outside his control, as long as it can be proven that reasonable steps were taken in order to attempt to meet the condition. Therefore, the investment manager should make every effort to satisfy the 20 per cent test within a chosen reference period, but need not do this at all costs if there are valid commercial reasons why satisfying the test has not been possible.
22. The 'independence test' also operates as an integrity measure by ensuring the investment manager is independent from the non-resident investor. It will be satisfied if the non-resident is a widely held vehicle or, if it is not, the provision of services by the investment manager to the non-resident is not a 'substantial part' (that is, no more than 70 per cent) of its overall business within 18 months of start up. Alternatively, the independence test will be met where HMRC is satisfied that the relationship between the investment manager and the non-resident is at arm's length, having regard to the overall circumstances of the relationship and HMRC are happy to advise on particular circumstances.
23. The UK legal system also includes anti-deferral rules in the form of an offshore funds regime by which profits or gains made in offshore investment funds are taxed on a realisation basis, but at income tax rates, rather than concessionary capital gains tax rates. The Offshore Funds (Tax) Regulations 2009 aims to prevent UK taxpayers from accumulating untaxed income offshore by investing in offshore roll-up funds and only paying tax on any chargeable gain realised on a later disposal of their investment. The attraction of such practice is in the disparity between the income tax and capital gains tax rates (top rate of 50 per cent and flat rate of 28 per cent respectively). Under the offshore funds regime, where a taxpayer invests in an offshore fund that rolls up income, the rules seek to tax the UK investor to income tax on any gain realised on a subsequent disposal of their investment unless the fund has reporting fund status.

Where in the law?

24. The UK IME is largely contained in Schedule 26 to the Finance Act 2003, parts of which are re-written in ITA 2007. The exemption interacts with a number of provisions in legislation, as well as statutory instruments, and is supplemented by an extensive statement of practice from HMRC (SP 1/01).
25. The UK tax law uses the permanent establishment concept as the jurisdictional connection for corporations. The law operates in relation to specified transactions, to set guidelines on the circumstances in which fund managers may be treated as a permanent establishment. Managers acting within the guidelines are independent agents (not permanent establishments) thus precluding a corporation tax charge and limiting UK taxation to fee income only. The relevant legislation works as follows:
    • For corporation tax purposes, s 149(1) of the Finance Act 2003 limits UK taxation of non-resident companies to trade carried on through permanent establishments.
    • Agents of independent status acting in the ordinary course of business are not permanent establishments of non-residents (s 148(3)).
    • Schedule 26 to the Finance Act (which broadly describes the IME) sets out the circumstances of whether in relation to specified transactions the investment manager is regarded as an independent agent. Statement of Practice SP 1/01 amplifies the concept.

Comments

26. UK industry representatives have indicated that a key component of the UK IME is the accommodating approach taken by HMRC - that is, a focus on ensuring the objectives of the IME are achieved, rather than a black letter approach to the law. The importance of HMRC's approach is emphasised by reliance on joint development of the Statement of Practice and a highly responsive advance clearances regime to provide certainty as to the law's application, and substantial discretion to deal favourably with technical non-compliance with the rules.

Hong Kong

Objectives and background

27. In 2006, Hong Kong responded to existing measures in other financial centres to exempt offshore funds from taxation. It was thought to be vital for Hong Kong to provide a profits tax exemption to offshore funds to prevent asset management businesses being relocated to Singapore.
28. Prior to the IMR (contained in section 20AC of the Inland Revenue Ordinance), a person (including a non-resident) was liable to pay tax where the person derived profits from trading of securities listed in Hong Kong or other Hong Kong sourced income of revenue nature through a trade or business carried on directly by the person or indirectly by its agent. This apparently resulted in a significant movement of funds to Singapore.

Scope

29. Under Section 20AC of the Inland Revenue Ordinance, a non-resident entity is exempt from tax in respect of profits derived from 'specified transactions' carried out through 'specified persons' ('exempt transactions') and transactions incidental to the carrying out of those transactions. In order for the exemption to apply, the non-resident entity must not carry on any other trade, profession or business in Hong Kong that involves any transaction other than the exempt and incidental transactions.

How is foreign fund defined?

30. 'Offshore funds' include non-resident entities which can be individuals, partnerships, trustees of trust estates or corporations administrating a fund. Offshore funds include closely held funds.

What investments and activities are permitted?

31. The Hong Kong IMR exempts profits derived from 'specified transactions' carried out through 'specified persons' (exempt transactions), as well as transactions incidental to the carrying out of those exempt transactions provided that these do not exceed 5 per cent of the total trading receipts from both exempt and incidental transactions.
32. The Hong Kong regime does not distinguish between portfolio interests and non-portfolio interests. Instead, a non-resident is precluded from benefiting from the IMR if it carries on any other trade, profession or business in Hong Kong at all (that is, any activity or transaction other than the exempt and incidental transactions).
33. 'Specific transactions' in the Hong Kong IMR are listed in Schedule 16 to the Inland Revenue Ordinance and include six categories of transactions:
    • Transactions in securities;
    • Transactions in futures contracts;
    • Transactions in foreign exchange contracts;
    • Transactions consisting in the making of deposits other than by way of a money-lending business;
    • Transactions in foreign currencies; and
    • Transactions in exchange-traded commodities.
34. The specified transactions must be carried out through 'specified persons', being any persons licensed by the Hong Kong Securities and Futures Commission (SFC) and authorised institutions registered with the SFC (other persons are specified in Section 20AC in relation to prior transactions), a corporation licensed under Part V of the Securities and Futures Ordinance (Cap 571) or an authorised financial institution regulated under that Part for carrying on a business in any regulated activity within the meaning of Part 1 of Schedule 5 to that Ordinance.

How is the fund taxed?

35. 35. Non-resident funds are exempt from tax on qualifying transactions. No application for exemption is required. As mentioned above, the offshore fund is restricted from carrying on any other business in Hong Kong other than the specified transactions (or transaction incidental to those specified transactions).

How is the fund manager taxed?

36. There is no tax incentive or concessions to fund managers in Hong Kong.

'Round tripping': What happens to resident investors?

37. Hong Kong has enacted specific provisions to maintain taxation on certain residents who invest in offshore funds which access IMR exemptions.
38. Under the HK IME, a Hong Kong resident investor who (i) alone or jointly with its / his associates holds 30 per cent or more of the beneficial interests in a Section 20AC Exempted Offshore Fund, or (ii) holds any percentage of the beneficial interest in a Section 20AC Exempted Offshore Fund which is an associate of the Hong Kong resident investor, would be deemed to have derived otherwise taxable profits of the exempt offshore fund but for the exemption. The deeming provision would not apply where the Fund is bona fide widely held.
39. The disclosure requirements in the Hong Kong tax returns for incorporated and unincorporated entities and individuals specifically require the disclosure of any deemed assessable profits. However, the "deeming provisions" will not be invoked if the offshore fund is a 'bona fide widely held' fund (that is, a fund that has at least 50 investors holding all of the units or shares in the entity and at least 21 investors retaining beneficial ownership of 75 per cent of the income and assets of the entity). The Hong Kong system requires the relevant resident beneficial owner who is caught by the "deeming provisions" to report the deemed assessable profits to the Inland Revenue Department.

Where in the law?

40. The Hong Kong IMR rules are set out in Section 20 AC Inland Revenue Ordinance.

Comments

41. Hong Kong has a territorial based tax system. Generally, a person is only subject to a profits tax in Hong Kong on profits arising in or deriving from a trade, profession or business in Hong Kong, regardless of the residence of the person. Importantly, mutual funds authorised under Section 104 of the Securities and Futures Ordinance, unit trusts and similar widely held investment schemes set up in jurisdictions with Recognised Supervisory Regime have always been exempt from profits tax. In addition, Hong Kong has a number of exemptions, for example no tax is levied on capital gains, interest or dividends.

Singapore

Objectives and background

42. The Singapore IMR (Singapore Fund Tax Incentives) was introduced to implement a series of policy objectives including:
    • the encouragement of world-class fund management services in Singapore;
    • the encouragement of further development of the equity capital market in Singapore; and
    • simpler administrative procedures and more flexible qualifying criteria for tax exemption.

Scope

43. The Singapore IMR exempts a qualifying fund (individuals, companies and trusts) from tax on 'specified income' from 'designated investments' (as defined in the tax regulations).

How is the foreign fund defined?

44. The exemption applies to non-resident individuals, companies and trusts. For companies and trusts, there are rules to exclude those with business activities in Singapore and to require at least some level of foreign beneficial ownership, that is, that the foreign investor is not 100 per cent owned by Singaporean persons.
45. A non-qualifying investor in the qualifying fund will have to pay a financial penalty. A qualifying investor is defined as:
    • An individual investor;
    • A bona fide non-individual investor that:
      • Does not have a permanent establishment in Singapore (other than a fund manager) and does not carry on a business in Singapore, or
      • Has a permanent establishment in Singapore but does not use funds from its operations in Singapore to invest in the qualifying fund;
    • Certain specified Singapore government entities; or
    • Any other investor that owns not more than 30per cent (or 50 per cent if the fund has 10 or more investors) of the qualifying fund.

What investment activities are permitted?

46. Tax exemption is only provided to certain income from designated investments.
47. Designated investments cover a range of transactions, including foreign exchange financial arrangements, shares (including unlisted shares), securities, certain derivatives, foreign real property, certain loans, physical commodities incidental to trading in commodity derivatives and certificates of deposits.
48. However, where the qualifying fund carries on business in Singapore (including through a permanent establishment other than the Singapore fund manager), the fund will be liable to tax in Singapore on profits attributable to the permanent establishment.

How is the fund taxed?

49. Subject to meeting eligibility requirements, income of the fund and the investor is exempt from Singapore taxation.

'Round tripping': What happens to resident investors?

50. Singaporean qualifying investors (for example, resident individual investors and non-individuals owning not more than 30 per cent / 50per cent) are not subject to the financial penalty where they invest into a qualifying fund eligible for the Singapore IMR.
51. However, as mentioned above, the Singapore IMR imposes a penalty on 'non-qualifying investors' who invest into the qualifying fund. The penalty has to be declared in the income tax return of the 'non-qualifying investors' for the relevant year of assessment.
52. A Singapore resident non-individual (other than the specified Singapore government entities) investor becomes a 'non-qualifying investor' when its interest in the non-resident fund exceeds more than a 'prescribed percentage' being:
    • where the fund has less than 10 owners or beneficiaries: 30 per cent; and
    • where the fund has 10 or more owners or beneficiaries: 50 per cent.
53. Fund managers are required to make an annual declaration of information on non-qualifying investors to the Inland Revenue Authority of Singapore (IRAS). This allows the IRAS to assess residents on their earnings from the funds in question and ensure the integrity of the exemption. This information is used to assess any liability for penalties which has been incurred by owners or beneficiaries as a result of exceeding the prescribed percentage.

Enhanced Tier Fund Tax Incentive Scheme

54. The Enhanced Tier Fund Tax Incentive Scheme (ET Scheme) is available for application from 1 April 2009 to 31 March 2014. It was introduced to provide certain concessions (as discussed below) for funds with a minimum size of S$50 million at the point of application (among other conditions). The purpose of the scheme is to open up the existing exemption to local investors if certain conditions are met.
55. Under the ET Scheme, there are no restrictions imposed on the residence status of the funds or the investors. In addition, the 30 per cent (or 50 per cent) investment limit imposed on resident non-individual investors has been lifted for funds within the ET Scheme. There is no limit on the amount of investments that Singapore investors can place in an ET fund.
56. A fund that is approved under this scheme enjoys a tax exemption on specified income derived from designated investments for the entire life of the ET fund.
57. In order to be approved for the ET Scheme, the fund must meet a number of conditions evidencing a greater connection with the Singaporean jurisdiction, for instance display a minimum size, being managed or advised directly by a an eligible fund management company in Singapore, incur a minimum local business spending and not change its investment strategy after being approved for the ET Scheme.

Where in the law?

58. The Singapore Fund Tax Incentives are contained in the Income Tax Act under sections 13C, 13CA, 13Q, 13R, 13X and 13Y. This legislation is supplemented by the Arrangement of Regulations S640/03, S 6/2010, S 7/2010, S 8/2010 and S 414/2010. The Monetary Authority of Singapore has also issued these Circulars FDD Cir 04/2007, 03/2009 and 05/2010 on the matter.
59. The offshore fund rules in Singapore are complex. Singapore has many wealth management and asset management related tax rules. Many have evolved over time to what they are today and in some cases the old provisions remain (leaving behind several schemes for almost the same ultimate goal). The above discussion has focused on sections 13CA and 13X which are two of the more recent rules.

Comments

60. Singapore operates a quasi-territorial basis of taxation - that is, generally income sourced in Singapore is liable to tax, and income having a source outside Singapore is liable to tax where it is received in Singapore. Certain types of foreign-sourced income are exempt from tax where conditions are satisfied. No tax is levied on capital gains.
61. For non-resident persons without a permanent establishment in Singapore, tax is only levied on income sourced in Singapore.

United States

Objectives and background

62. Since 1936 the US has introduced a number of trading 'safe harbours' which provide certainty that foreign persons who merely trade stocks and securities would not be subject to the net income tax regime. These measures were intended over time to encourage foreign investors to trade in US capital markets.
63. The US law relating to trading on behalf of non-residents has had a number of iterations over time, and there is no 'IMR' as such. Further, these developments are often contextual to the broader US tax framework that existed at the time, and as such the policy objectives of the current rules are not as easily discernable as those in the UK or other jurisdictions.
64. The US law provides a 'safe harbour' that exempts non-resident investors from federal income tax on non-real estate related capital gains and other investment income, unless that non-resident is engaged in the conduct of a trade or business within the US. A foreign entity may be engaged in a US trade or business when an agent conducts activities on its behalf in the US. Where the foreign entity has a high degree of control over the agent, the (dependent) agent's activities will be imputed to be those of the foreign entity. In such cases, the fund will be subject to tax on a net income basis on the income that is 'effectively connected' with the conduct of the trade or business, at the corporate tax rate.

Scope

How is foreign fund defined?

65. The concept of residence as used by the US is based on the place of incorporation. Corporations are considered to be domestic corporations if they are organized under the laws of one of the US states or the District of Columbia, and are considered foreign corporations if they are organized under the laws of a foreign jurisdiction.
66. Unincorporated entities such as partnerships and limited liability companies (LLCs) may make a voluntary election under the Treasury Department's 'check-the-box' regulations to be taxed as corporations or as pass-through (transparent) entities.

What investments/activities are included?

67. A foreign fund without a permanent establishment in the US is exempt from tax on profits or gains from listed shares, bonds and money market or other financial instruments and derivatives.
68. Furthermore, foreign funds will not be subject to tax on profits or gains resulting from trading in stocks, securities, or commodities in the US for the taxpayer's own account, even if the transactions are consummated directly by the taxpayer or by an agent with full discretionary authority to make decisions. This protection applies (except for dealers) whether or not the trading is carried out through an office of the taxpayer in the US.

How is the fund taxed?

69. A foreign fund without a permanent establishment in the United States will not be liable to US tax on profits or gains from listed shares, bonds and money market or other financial instruments and derivatives. Dealing in these instruments is not regarded as constituting an active business for US tax purposes and is treated as a 'passive investment activity'. Interest and dividend withholding taxes are still payable.

How is the fund manager taxed?

70. US fund managers are taxed on their arm's length income.

'Round tripping': What happens to resident investors?

71. The US has specific rules to tax the offshore investment income of their residents on an accruals basis.

Where in the law?

72. Section 864 if the Internal Revenue Code provides that the phrase 'trade or business within the United States' generally includes the performance of personal services within the US at any time during the taxable year but, under certain circumstances, does not include trading in stocks, securities, or commodities through an independent agent, or for the taxpayer's own account (the 'trading safe harbours').
73. Regulations 1.864-2 defines several contingent terms regarding trade or business within the United States, and exempt transactions.

Comments

74. The US has the common exemption found in treaties, namely that trading in stocks via an independent agent in the US is not a US trade or business, provided that the non-resident does not have any other fixed place of business in the US.
75. A non-resident's income that is subject to US income tax is generally divided into two categories:
    • Income that is 'effectively connected' with a trade or business in the US; and
    • US source income that is Fixed, Determinable, Annual, or Periodical (FDAP).
76. Effectively Connected Income, after allowable deductions, is taxed at the same rates that apply to US citizens and residents. FDAP income generally consists of passive investment income and is taxed at a flat 30 per cent (or lower treaty rate) and no deductions are allowed against such income.

New Zealand

77. The New Zealand Government has recently considered recommendations on how to enhance New Zealand as an international financial services centre. These recommendations were contained in a report by the International Funds Services Development Group (IFSDG)26 which, in New Zealand, fulfils a similar function to the Australian Financial Centre Forum.
78. The IFSDG recommended that establishing New Zealand as a financial services centre would require clarification of existing tax policy as it relates to Portfolio Investment Entities (PIEs).

Objective

79. The objective of the proposed reforms is to make New Zealand a 'funds domicile' or the legal 'home' of a managed fund. The IFSDG report notes that New Zealand should focus its efforts in attracting funds administrators / servicers rather than fund managers and distributors. The IFSDG report sees New Zealand as complementing rather than competing with Australia, Hong Kong and Singapore, jurisdictions that they see as focussing primarily on attracting fund managers.
80. The report from the IFSDG suggests that New Zealand could develop into a viable funds domicile in the medium to longer term and that the full realisation of the domicile opportunity would generate revenue in New Zealand of approximately NZ$0.5 billion to NZ$1.3 billion per year, tax revenue of between NZ$150 million and NZ$360 million per year, and 2,000 and 5,000 high-quality jobs by 2020/2030.

Strategy

81. The IFSDG proposes a two-staged approach as the most appropriate strategy for establishing New Zealand as a funds domicile. In stage one, to be completed by the end of 2012, the focus will be on establishing the conditions for a funds domicile. Stage two would capitalise on the implementation of the changes in stage one and will be focussed on attracting domicile activities to New Zealand.
82. As part of stage one, three key activities are proposed: (a) tax reform; (b) regulatory reform and (c) high-level government support in leading the required reforms and complementary initiatives, such as jurisdiction relationship building and developing New Zealand's labour market capability.

Regulatory reform

83. Regarding regulatory reform, the aim is to replicate or improve upon existing investor protection global standards, with rules equivalent or better than the European Union's UCITS regime. A two-tiered opt-in system is proposed with the export industry being required to conform to the higher standard of regulation and the domestic industry being subject to a less rigorous system. Individual players in the domestic market would be able to opt-in to the more stringent export regulatory standard.

Tax reform

84. 84. Tax reform comprises changes to the tax treatment of non-residents investing in foreign assets through a New Zealand portfolio investment entity (PIE). The New Zealand Government has noted that these changes are intended to remove a barrier to non-residents investing into New Zealand and are a clarification of existing tax policy.
85. 85. On 5 April 2011, the New Zealand Minister for Revenue, the Hon Peter Dunne, announced the new tax rules which will allow foreign investors to pay a zero percent tax rate on their foreign-sourced PIE income. Mr Dunne said that the rules were designed to be as simple as possible for PIEs to administer, while still providing that non-residents pay the right amount of tax on their investments.
86. 86. The new rules introduce two new categories of PIEs:
    • The first new category of PIE, which entities could elect into, will have both resident and non-resident investors and only foreign-sourced income, subject to a 5 per cent minimum threshold for New Zealand-sourced interest income and a 1 per cent minimum threshold for New Zealand-sourced income from equities. Non-residents in these PIEs will be taxed at zero percent.
    • The second category of PIE, which entities could elect into, will have both resident and non-resident investors, and both foreign-sourced income and New Zealand-sourced income, with variable rates applying to non-resident investors reflecting the rates that would apply if the investment was direct:
      1. (i) 0 per cent on foreign-sourced income;
      2. (ii) 0 per cent on dividends derived from New Zealand companies that are fully-imputed;
      3. (iii) 15 per cent on dividends derived from New Zealand companies that are unimputed where the investor is from a country with which New Zealand has a double tax agreement (DTA);
      4. (iv) 30 per cent on dividends derived from New Zealand companies that are unimputed when the investor is from a country with which New Zealand does not have a DTA;
      5. (v) 1.44 per cent on New Zealand-sourced financial arrangement income (being the deductible approved issuer levy (AIL) rate); and
      6. (vi) 28 per cent on other New Zealand-sourced income.
    • The application date for the first category is the date the Taxation (Tax Administration and Remedial Matters) Bill 2010 receives Royal assent. The application date for the second category is 1 April 2012.
87. 87. The above two new categories of PIEs were canvassed initially as options in a discussion paper issued jointly by the New Zealand Inland Revenue and The Treasury27. Commenting on these options, the IFSDG noted that it would like to subsequently expand upon the recommended changes to ensure that the tax environment was clearly understood by non-residents and does not depend on the structure of the investment entity.
88. 88. The IFSDG also noted in its February 2011 report that a zero percent tax rate for foreign sourced income benefitting non-residents was a prerequisite to funds incorporating in New Zealand. It also noted that in order to allow the establishment of a funds domicile in New Zealand the PIE tax changes need to:
    • be managed by the Government, providing confidence that the changes are enduring;
    • ensure that multi-layer 'fund of funds' or 'master feeder' structures that are common globally are eligible to participate in the zero per cent PIE regime;
    • apply to all sources of foreign income with absolute certainty in statute as to the definition of what constitutes foreign-sourced income for all security types (including shares, money market placements, interest-bearing securities, derivatives and private equity style investments);
    • extend to the full range of investment vehicles commonly used by fund managers internationally, including unit trusts, limited liability partnerships (LLPs), companies (including open ended investment companies) and other vehicles such as SICAVs28, SICAFs29 and FCPs30 commonly used in Luxembourg;
    • not unduly disadvantage New Zealand financial solutions providers where they provide services to domicile participants, which is classified as New Zealand income (the need for a minimum threshold);
      • be readily understood and recognised by international fund managers; and
      • for LLPs, not treating foreign income as New Zealand source income if an LLP obtains New Zealand-based management or administration services.