Where an overseas company performs contract services in New Zealand (not through a New Zealand subsidiary), the question to be answered is how it will be taxed on the payments it receives from its New Zealand customer.
1. Business profits that are sourced in NZ by reason of performing contract services for more than 92 days in NZ will only be exempt from NZ income tax if overseas contractor (“OC”) does not have, nor is deemed to have a permanent establishment (“pe”) in NZ as determined under the relevant Double Tax Agreement with NZ i.e. the country of its residence.
2. A pe is usually defined under Article 5 of a DTA as including a fixed place of business through which the business of OC is carried on in NZ. It is not necessary that OC has a separate business location or office in NZ (place) but it is sufficient for OC to be deemed to have a fixed place within NZ customer at which it can be identified and located, especially over a contract period greater than 6 months.
3. Where the 4 employees provide services that reflect the business activities of OC, such services will generally not be “preparatory or auxiliary” services that are exempted from a deemed pe under the relevant paragraph of Article 5.
4. Showed OC be deemed to have a permanent establishment in NZ it will be liable for NZ income tax (currently 28%) on the net income after related expenses have been deducted. Initially NZ customer as the payer will be obliged to deduct “non-resident contractors withholding tax” (NRCWT) from the gross “contract payments” made to OC for services performed in NZ, that are neither “royalty payments” for the use of the software license (through customization) or expense reimbursements.
5. NRCWT is an initial but not a final tax and is neither a minimum or maximum tax. It is a withholding tax but set at the high rate of 15% of the gross contract payment, increasing to 20% if the payee (OC) does not have a NZ IRD registration number. An application for an exemption certificate may be filed where: (a) OC does not have a pe, or (b) OC posts a bond equal to 15% tax, or (c) OC has 24 months prior good tax behavior in NZ.
6. Alternatively OC may apply for a lower tax rate certificate based on a forecast of contract receipts and expenses i.e. a proforma tax return
7. A final income tax return needs to be filed. An application to the IRD for approval of the company’s balance date may be made, in lieu of 31 March (the standard NZ tax year end).
8. GST registration will generally be required where the contract period exceeds 12 months so that will be required. The return period will be 2 months (standard) and aligned with the income tax year end. The return can be made on payments based where annual taxable supplies (invoices) are less than $2,000,000; otherwise on invoice basis.
9. Registration of Place of Business with NZ Companies Office is required and currently audited financial statements of the NZ “branch” and the company itself must be filed annually within 5 months and 20 working days of year end. However legislation is currently being processed through Parliament to remove this filing requirement for “non-large companies” with turnover of less than $20 million.