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New Zealand Supreme Court Dismisses Appeal of Decision that Resident May Not Claim Tax Sparing Credit for China CFC

A judgment of the New Zealand Supreme Court has been issued that dismisses an application for leave to appeal a decision of the Court of Appeal that a resident of New Zealand may not claim a tax sparing credit in respect of tax concessions granted in China to that resident's controlled foreign corporations (CFCs). That decision had overturned an earlier decision of the High Court that a tax sparring credit could be claimed (previous coverage).

In the judgment, the Supreme Court highlighted two developments as strong indications that the arguments that the applicant wished to pursue were not points of sufficient importance to justify the grant of leave for a further appeal. As provided in the judgment:

The first of these is the change made by Parliament to the CFC regime in 2009. The effect of this was that, from that time, the CFC regime required the attribution to a New Zealand shareholder of a CFC of the passive income of the CFC, but not the active income. (The applicant’s tax liability in the present case predates 2009.) As tax sparing incentives are designed to promote active business, this means that it is unlikely that a CFC will ever benefit from a tax sparing provision in relation to income attributed to it in New Zealand.

The second is that a new double tax agreement is currently being negotiated between New Zealand and China. The respondent referred to New Zealand’s long-standing policy of not agreeing to tax sparing provisions and to recent double tax agreements signed by China, the majority of which have not included tax sparing provisions. It is anticipated that even if the new double tax agreement allows for tax sparing provisions, it will make clear one way or the other what credit should be available to a New Zealand tax resident.

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