How the US NZ Tax Treaty Affects Your Taxes

The United States and New Zealand maintain a tax treaty to address the complexities of cross-border taxation. The agreement mitigates instances where both nations might tax the same income by establishing a framework for determining which country has the primary right to tax. It sets rules to allocate taxing rights, sometimes granting exclusive rights to one country or allowing the source country to tax income at a reduced rate. The treaty also provides mechanisms like foreign tax credits to ensure a predictable tax framework.

Determining Tax Residency Under the Treaty

The benefits of the U.S.-New Zealand tax treaty are available to individuals who qualify as a “resident” of one or both countries. In the United States, an individual is a tax resident if they meet the “Green Card test” or the “Substantial Presence Test,” which is based on days spent in the U.S. over three years. Each country uses its own domestic laws to determine tax residency.

New Zealand considers an individual a tax resident if they have a “permanent place of abode” in the country or are present for more than 183 days in any 12-month period. Because these definitions differ, a person can be a tax resident of both the U.S. and New Zealand simultaneously under their respective laws. This creates a situation of dual residency that the treaty must resolve.

When an individual is a resident of both countries, Article 4 of the treaty provides “tie-breaker” rules to assign residency to a single country for treaty purposes. The first test considers where the individual has a permanent home. If a home is available in both countries, the next test looks to the individual’s “center of vital interests,” which evaluates where their personal and economic ties are closer.

If the center of vital interests is unclear, the treaty considers the individual’s “habitual abode,” meaning the country where they spend more time. Should this test be inconclusive, the tie-breaker looks to the country of citizenship. If residency still cannot be determined, the tax authorities of both countries will settle the question by mutual agreement.

Taxation of Specific Income Types

The U.S.-New Zealand tax treaty establishes specific rules for various income categories, assigning taxing rights to either the country of residence or the country where the income originates.

Dividends

Under Article 10, dividends paid by a company in one country to a resident of the other may be taxed by both. The source country’s tax rate is capped at 15% for portfolio investors. For direct investors who own 10% or more of the voting shares, the withholding tax rate is reduced to 5%. A 0% rate applies to dividends paid to certain corporate shareholders that own 80% or more of the voting stock of the paying company, provided specific conditions are met.

Interest

Article 11 addresses interest income. Interest arising in one country and paid to a resident of the other may be taxed by the recipient’s country of residence. The source country is also permitted to tax the interest, but its tax is limited to 10% of the gross amount.

Pensions, Annuities, and Social Security

Article 18 provides that pensions and similar remuneration are taxable only in the recipient’s country of residence. This means a pension received by a resident of New Zealand from a U.S. source is subject to tax only in New Zealand. This provision specifically covers U.S. Social Security payments, so a New Zealand resident receiving these benefits would only be taxed by New Zealand.

Income from Real Property

The treaty stipulates in Article 6 that income from real property, including rental income, is taxable in the country where the property is located. This rule applies regardless of where the property owner resides. For example, rental income from a New Zealand property owned by a U.S. resident is subject to New Zealand tax.

Business Profits

Article 7 governs the taxation of business profits. The profits of an enterprise are taxable only in its country of residence unless the enterprise carries on business through a “permanent establishment” (PE) in the other country. A PE is a fixed place of business, such as an office or factory. If a PE exists, the source country may tax the profits attributable to that establishment.

Capital Gains

The taxation of capital gains is addressed in Article 13. Gains from the sale of property are taxable only in the seller’s country of residence. However, gains from the sale of real property may be taxed in the country where the property is located. Gains from the disposal of assets that are part of a permanent establishment may also be taxed in that country.

The Savings Clause and Relief from Double Taxation

A feature of U.S. tax treaties is the “Savings Clause,” found in Article 1 of this treaty. This clause allows the United States to tax its citizens as if the treaty did not exist. This means a U.S. citizen living in New Zealand remains subject to U.S. tax on their worldwide income, regardless of treaty provisions that might otherwise suggest income is taxable only in New Zealand.

The treaty provides specific exceptions to the Savings Clause, meaning their benefits remain available to U.S. citizens abroad. For example, the provisions in Article 18 concerning pensions and social security are not overridden by this clause. The rules in Article 22 for relief from double taxation are also excluded from the Savings Clause’s reach.

The primary mechanism for preventing double taxation is the Foreign Tax Credit (FTC). This is outlined in the “Relief from Double Taxation” article and obligates both countries to provide a way for their residents to avoid being taxed twice on the same income. A U.S. citizen reports their worldwide income on their U.S. tax return but can claim a credit for the income taxes paid to New Zealand on New Zealand-source income. The FTC directly reduces the U.S. tax liability by the amount of foreign taxes paid.

How to Claim Treaty Benefits

Claiming benefits under the U.S.-New Zealand tax treaty requires specific procedural steps, which differ depending on your residency and the benefit being claimed.

For NZ residents receiving US income

A resident of New Zealand receiving U.S. income like dividends or interest must provide the U.S. payer with Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting.” This form certifies that the individual is not a U.S. person and is a resident of a treaty country. Submitting a valid Form W-8BEN allows the New Zealand resident to claim the reduced withholding tax rates specified in the treaty.

For US citizens/residents needing to disclose a treaty position

U.S. citizens or residents who use a treaty provision to override a rule in the U.S. Internal Revenue Code must disclose this position to the IRS. This is done by filing Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).” Filing Form 8833 is required when a treaty position reduces the taxpayer’s U.S. tax liability.

For claiming the Foreign Tax Credit

The primary method for a U.S. person to claim relief from double taxation is the Foreign Tax Credit. This credit is calculated and claimed by filing IRS Form 1116, “Foreign Tax Credit (Individual, Estate, or Trust),” with the annual U.S. income tax return. This form is used to report foreign source income and the amount of foreign income taxes paid or accrued on that income.