New Zealand Look-Through Companies
General information about New Zealand Look-Through Company
Legislation passed in December 2010 creates a new tax entity known as the look-through company or LTC. LTCs coming into existence is very recent, just on or after 1 April 2011. The company regime was called Look Through because the company is looked-through for income tax purposes. In other words, an entity passes through income, expenses, gains and losses to its shareholders (owners). LTC is not taxed at a company level, all its income flows to its shareholders. In essence, fiscally it means the non-resident shareholders of a LTC are able to pay no tax in New Zealand as long as their income of the New Zealand look through is derived from offshore.
There are no restrictions on the business that a Look through company may carry out. Being a regular Limited Liability Company at the first instance, it is treated similarly, may trade, open bank account all over the world and in New Zealand, own assets, become a shareholder of another company etc. As the LTC must be a New Zealand Tax resident, it could also enjoy the benefits of the Double Taxation Treaties signed by New Zealand. And no limits on the amount of foreign income that may be earned! Thus, this structure can be used for trading as all profits are deemed to be distributed amongst the shareholders who file a tax return each year indicating no income is derived from New Zealand sources*.
It can be used sometimes as a loss-generating vehicle either, because not only income but expenditure and losses are also passed on to look-through owners. Owners are entitled to claim these losses against their other personal income and reduce a taxable amount. Although, claimed losses are limited to shareholders investment into the LTC. Look-through company must file tax returns annually with New Zealand Tax Department (Inland Revenue) and submit its financial statements before 07 June.
*please note that it is advisable to use a New Zealand resident director as a foreign director coming from a place with which New Zealand has a double taxation treaty may in certain circumstances be treated as changing the domicile in which case there may be a risk that the company loses its look through.
Characteristics of a New Zealand LTC
A Look Through Company is a regular New Zealand limited liability company where the shareholders have elected to enter the Look-through regime for tax purposes. Basically, LTC is rather a type of tax treatment then a type of New Zealand companies.
A company must have the following general requirements to being entitled to elect Look-through tax treatment:
1. Must not have more than five owners (shareholders). Related owners are treated as one.
2. Shareholders are non-resident physical persons, trustees or another LTCs;
3. It must be registered with the tax department of New Zealand as a Look through structure.
In order to not being taxed in New Zealand, a LTC should have the following requirements:
1. The shareholders are non-resident physical persons or trustees;
2. The shareholders receive their share of profit and loss from non New Zealand sources.
As a regular New Zealand LLC, Look-through companies provide the same benefits for legal purposes which includes limitation of liability and ability to change the owners by transferring shares.
Please note, a LTC must file basic annual AND tax returns each year!!!
Regulation and taxation of NZ LTCs
As a regular limited liability company, LTC is regulated on a corporate level by the companies Act 1993 and must comply with the same requirements of the Companies Law of New Zealand. More information is available here.
Look through companies must file tax returns for the purposes of New Zealands income tax annually. Returns indicate the total amount of income and deductions for the company for the income year, as well as the income for each owner, and a summary of owners deductions. LTCs must also submit to NZ Tax Department its financial statements in prescribed form after the end of each financial year but before 7 June. As the LTC is not taxed at a company level, the shareholders must make indication of their LTC incomes and losses on their own individual tax returns.
Any profit is taxed at the owners tax rate. But in terms of international tax implication, non-resident shareholders of NZ LTC are not liable in New Zealand for paying income tax, if LTCs income derived from non-New Zealand source. Each shareholder will declare LTCs income in his own income tax return or declaration in his country of residence. And each shareholder will be liable to pay their marginal or flat tax rate to their national tax authority.