Proposed changes to the thin capitalisation for loans: Draft Legislation has been introduced to limit the use of debt financing as a means to shift profits out of New Zealand as part of the Government’s wider BEPS tax reform package
The new legislation will apply New Zealand entities who have overseas loans (existing and new). The new rules once enacted will be effective for income years beginning on or after the 1 July 2018. Majority of these changes will affect loans over NZ$10 million. However, some changes to thin capitalisation calculations for loans less than NZ$10 million are also proposed in this legislation.
The proposed changes to the thin capitalisation for loans look at interest-bearing debt over total assets less non-debt liabilities currently it is interest-bearing debt over total assets. So current loans which previously did not need to look at thin capitalisation may need to look at these rules to see if thin capitalisation adjustment is required.
What should be done before these new laws come into effect:
- Look at your current loans and how will these changes affect these loans.
- Should loans be refinanced and new documentation done.
- Are loan documentation up to date and are they relevant and compliant with transfer pricing rules.
- If any new loans to be taken out after the 1 July 2018 can the documentation be done to make a favourable outcome of these rules and still comply with transfer pricing rules.