US New Zealand Tax Treaty and Its Key Provisions

An agreement between the United States and New Zealand manages tax obligations for individuals and businesses with financial ties to both countries. Originally signed in 1982 and amended in 2008, the treaty has two main objectives. The first is to prevent double taxation, ensuring that income is not taxed by both nations.

The second is to prevent tax evasion through mutual cooperation and the exchange of information between the U.S. Internal Revenue Service (IRS) and New Zealand’s Inland Revenue Department (IRD). The agreement applies to federal income taxes in the U.S. and the national income tax in New Zealand.

Determining Tax Residency Under the Treaty

Access to treaty benefits depends on being a resident of the U.S., New Zealand, or both. A resident is any person liable to tax in one of the countries due to factors like domicile, residence, or citizenship. A conflict occurs if an individual qualifies as a resident of both countries under their domestic laws, creating a dual-resident status.

The treaty resolves this with a series of tie-breaker rules to assign residency to a single country, which determines the primary right to tax that person’s worldwide income.

The first tie-breaker test is the permanent home rule. An individual is considered a resident of the country where they have a permanent home. If a person has a permanent home available in both countries, this test is inconclusive and the next rule is applied.

The second test is the center of vital interests, which examines where a person’s personal and economic ties are closer. This assessment considers factors such as family, social connections, and business interests. For example, if an individual’s family and primary business are in New Zealand, their vital interests would likely be there, even with a home in the U.S.

If the center of vital interests is not clear, the third test is the habitual abode, which looks at where the individual spends more time. If residency cannot be determined by habitual abode, the final tie-breaker is citizenship. If a person is a citizen of only one country, they are a resident of that country. If they are a citizen of both or neither, the tax authorities of both nations must settle the issue by mutual agreement.

Taxation of Individual Income

Income from Employment

Income from employment is taxed in the country where the work is physically performed. An exception, known as the 183-day rule, allows the income to be taxed only in the individual’s country of residence if three conditions are met:

• The individual is present in the source country for no more than 183 days in any 12-month period.
• The employer paying the remuneration is not a resident of the source country.
• The remuneration is not paid by a permanent establishment or fixed base that the employer has in the source country.

If all three conditions are met, the income is taxable only in the home country.

Dividends

The treaty reduces the withholding tax that the source country can apply to dividends paid to a resident of the other country. The rate depends on the level of ownership. For portfolio investors who own less than 10% of the company, the withholding tax is limited to 15%.

For direct corporate investors owning at least 10% of the voting power of the paying company, the rate is reduced to 5%. Additionally, the withholding tax can be eliminated entirely for a corporate shareholder that owns 80% or more of the paying company and meets other specific criteria.

Interest and Royalties

The treaty also limits withholding taxes on interest. Interest that arises in one country and is paid to a resident of the other may be taxed by the source country, but the tax is limited to 10% of the gross amount.

Royalties, which include payments for the use of intellectual property like patents, trademarks, and copyrights, are also covered. The treaty caps the withholding tax on royalty payments at a maximum rate of 5%.

Capital Gains

Capital gains are generally taxable only in the country where the seller is a resident. For instance, if a New Zealand resident sells shares of a U.S. company, the gain is taxed only by New Zealand.

A primary exception to this rule is for gains from the sale of real property. The country where the real property is located is allowed to tax any gains from its sale. This rule also extends to gains from selling shares in a company whose assets consist mainly of real property in the other country.

Taxation of Business Profits

A country can only tax the business profits of an enterprise from the other country if the enterprise operates through a Permanent Establishment (PE) on its soil. If no PE exists, the profits are taxable only in the enterprise’s country of residence. A PE is a fixed place of business through which an enterprise’s operations are carried on.

Examples of a PE include:

• A place of management
• A branch or office
• A factory or workshop
• A location where an agent habitually concludes contracts on behalf of the enterprise

If a PE exists, the host country can tax the profits attributable to it. The treaty requires that profits are allocated to the PE as if it were a distinct and separate enterprise operating independently from the head office. This ensures taxation only occurs when there is a substantial economic presence.

Activities like using facilities for storage or maintaining a location solely for purchasing goods do not, by themselves, create a PE.

Treatment of Pensions and Social Security

The treaty provides distinct rules for different types of retirement income, allocating taxing rights for Social Security, private pensions, and government pensions.

Payments made under the social security laws of one country to a resident of the other are taxable only in the country making the payment. This means U.S. Social Security benefits paid to a New Zealand resident are taxable only in the U.S., and New Zealand Superannuation paid to a U.S. resident is taxable only in New Zealand.

Private pensions and annuities for past employment are generally taxable only in the recipient’s country of residence. For instance, distributions from a U.S. 401(k) plan to a U.S. citizen who retires in New Zealand would be subject to tax only in New Zealand.

Pensions for services rendered to a government entity are treated differently. These pensions are generally taxed by the country that paid for the services. For example, a pension for a former U.S. federal employee living in New Zealand would be taxed by the U.S. An exception exists if the recipient is a resident and citizen of the other country, in which case the pension is taxable only in their country of residence.

The Savings Clause and Relief from Double Taxation

A feature of U.S. tax treaties is the “Savings Clause,” which allows the United States to tax its citizens and residents as if the treaty did not exist. This provision preserves the U.S. system of citizenship-based taxation. Even if a treaty rule gives New Zealand the sole right to tax certain income, the U.S. can still tax that income if the recipient is a U.S. citizen or resident.

The Savings Clause can override many treaty benefits, potentially leading to double taxation. For instance, while the treaty gives New Zealand the right to tax the private pension of a U.S. citizen living there, the Savings Clause allows the U.S. to tax it as well.

However, the treaty provides specific exceptions to this clause. Provisions for Social Security payments, for example, are protected from the Savings Clause, ensuring they are taxed only as the treaty dictates.

The primary solution to double taxation is the “Relief from Double Taxation” provision. This article requires both countries to provide a foreign tax credit (FTC) for taxes paid to the other nation. A U.S. citizen in New Zealand who pays income tax there can claim a credit for those taxes on their U.S. tax return. The FTC directly reduces the U.S. tax liability on the same income, mitigating the impact of being taxed twice and ultimately fulfilling the treaty’s goal of avoiding double taxation.