Tax Bill update

Earlier in March, the Finance and Expenditure Committee (FEC) reported the Taxation (Annual Rates for 2025-26, Multinational Tax, and Remedial Matters) Bill (the Bill) back to Parliament. This was followed by amendment papers No 559 and 560 (the Amendment Papers) which introduce a number of additional matters to the Bill including, primarily, a relaxation of thin capitalisation rules for foreign investment New Zealand infrastructure projects. Last night the Bill was enacted as the Taxation (Annual Rates for 2025–26, Compliance Simplification, and Remedial Measures) Act 2026.

The Bill was introduced in August last year and its contents were covered in our previous Tax Tips. In summary, the key items contained in the Bill included:

• Introduction of rules for non-resident visitors / digital nomads
• Tweaking settings around employee share schemes
• Introduction of the revenue account method in relation to foreign investment fund  income
• Limited fringe benefits tax reforms

The revised Bill, and the accompanying Amendment Papers, make some changes to what was previously signalled and introduce some additional changes. We discuss some of the key changes in this Tax Tips:

• Thin capitalisation - settings for infrastructure investment
• Student loans – discretion to provide relief from interest
• Tax pooling – income tax debt pilot
• GloBE rules – remedial timing amendment
• In-work tax credit – base rate increase

For completeness there are a handful of further amendments and remedials which are described in the accompanying Departmental Disclosure Statement and commentary.¹

The most significant inclusion in the Bill via the Amendment Papers is the changes to New Zealand’s thin capitalisation rules which aims to encourage and attract foreign investment in privately-owned infrastructure projects in New Zealand.

These changes were first signalled in the May 2025 Budget announcements which we covered in an earlier Tax Tips. Since then, further targeted consultation was undertaken before the draft legislation is included in the Bill via the Amendment Papers. The proposed new rule is closer to the targeted rule (as initially described), which targets infrastructure projects and businesses specifically rather than extending to third-party debt more broadly.

Under the proposed rules, interest costs that would otherwise be considered non-deductible under the existing thin capitalisation rules are allowed to be deducted where the entity and the debt satisfy certain conditions. In short, the entity must meet the requirements of being a qualifying infrastructure entity, with a qualifying infrastructure asset and qualifying infrastructure debt and makes the necessary election. 

Eligibile entities

Under the legislation as drafted, new section FE 7C of the Income Tax Act 2007 (the Act) ‘Exemption for eligible infrastructure’ prescribes that the exemption would be available to the following entities, with additional eligibility requirements to consider:

• New Zealand companies controlled by a non-resident company, trust, or individual person
• Non-resident partners (companies) of a New Zealand limited partnership
• Non-resident companies operating in New Zealand through a fixed or permanent establishment

While the rule is available to the above entities, they must also be an ‘eligible infrastructure entity’ to elect into the rule – which means the entity must be carrying on a business or project consisting of “creating, operating, maintaining, or upgrading qualifying infrastructure assets” which the entity owns, with an allowance for ancillary activities to facilitate the infrastructure activities.

There is also a qualifying value test for the entity to satisfy to be considered an ‘eligible infrastructure entity’ under which 95% of the entity’s assets are used in or for the purposes of the infrastructure and ancillary activities listed out above.

The rule also excludes entities with a permanent establishment or an interest in an entity, partnership or trust outside of New Zealand or owns assets situated outside New Zealand with limited exceptions.

Qualifying infrastructure asset

As the purpose of the rule is to promote investment in infrastructure projects in New Zealand, the ambit of what entities and projects qualify for the rule is strictly defined with reference to the asset being created, operated, maintained, or upgraded.

The Amendment Papers, soon to be incorporated into the Act as part of the Bill, explain that the asset must be located in New Zealand and provides, or is integral to providing essential services to the public or a class of persons on a shared use basis. It also includes a non-exhaustive but illustrative list of assets including:

• Transport infrastructure (roads, rail, ports, airports, and ferries)
• Energy infrastructure (electricity generation, transmission, and distribution assets)
• Water infrastructure (water supply, wastewater, and stormwater systems)
• Telecommunication infrastructure (fibre networks, data centres, and communication towers)
• Waste infrastructure (recycling facilities and landfills)
• Social infrastructure (hospitals, schools, libraries, prisons, large-scale student accommodation or similar public facilities)

Further, the Amendment Papers specifically exclude commercial buildings, industrial buildings and dwellings.

Qualifying infrastructure debt

Lastly, the debt the interest is incurred against itself must meet certain criteria to qualify for deductibility under the new rule. In order for the interest expense to be deductible the debt itself must be applied to the entity’s business or project, be third party in nature, and have limited recourse to the assets and income of the eligible infrastructure entity.

This requirement does not serve to exclude eligible and qualifying companies with related party debt or other non-qualifying debt from applying the rule in general. Such entities will still be able to apply the rule and take deductions for the interest expense associated with the qualifying debt, with the denials on non-qualifying debt remaining.

Elections required

Finally, there is an administrative element to the application of the rule whereby taxpayers must elect into the rule on an annual basis by lodging a letter via MyIR. The form of this election is prescribed in the commentary accompanying the Amendment Papers. This election can also be used to elect into group treatment, a streamlining measure which allows wholly-owned groups of companies (or subsets of such groups) be treated as a single entity for the purposes of applying the rule.

GloBE rules – remedial timing amendment

The GloBE rules (commonly referred to as Pillar 2) were agreed multilaterally by members of the OECD/G20 Inclusive Framework. At a high level, Pillar 2 is intended to ensure large multinational groups (MNEs) are subject to a minimum effective tax rate of 15% in each jurisdiction where they operate. 

New Zealand has implemented Pillar 2 by direct reference to the relevant OECD materials in domestic legislation. This means New Zealand’s rules are automatically updated for developments at the OECD level.

The Bill, via the Amendment Papers, addresses the recent OECD guidance introducing the new Side-by-Side (SbS) system, published on 5 January 2026. Under current legislation, this guidance would automatically apply in New Zealand for fiscal years beginning on or after 6 January 2026 (the day after publication), meaning it would technically not apply until 1 January 2027 for MNEs with a 31 December balance date. The intention of the amendment is to correct this timing issue so that the SbS system applies in New Zealand for fiscal years beginning on or after 1 January 2026 (based on the ultimate parent’s fiscal year).

The SbS system recognises that some jurisdictions (such as the US) have implemented rules in their domestic tax systems that are comparable to Pillar 2. It acknowledges these parallel rules by introducing two new Pillar 2 safe harbours, being the SbS safe harbour and the Ultimate Parent Entity (UPE) safe harbour.

Side-by-Side safe harbour

The SbS safe harbour applies to MNEs headquartered in a jurisdiction with a Qualified SbS Regime. A jurisdiction has a qualified SbS Regime if it has both an “eligible domestic tax system” and an “eligible worldwide tax system”. An eligible domestic tax system generally must have at least a 20% corporate tax rate and a minimum effective corporate tax rate of at least 15%, after making the appropriate adjustments consistent with a minimum tax. An “eligible worldwide tax system” is generally one that taxes the foreign income of resident corporations on an accrual basis rather than a realisation basis and applies an effective tax rate of at least 15% in relation to an in-scope MNE’s profits from their foreign operations. An MNE that elects the safe harbour will not be subject to top-up tax in another jurisdiction under the Income Inclusion Rule or the Undertaxed Profits Rule. However, this safe harbour does not protect an MNE group from another jurisdiction’s Qualified Domestic Minimum Top-Up Tax, which may still apply to group entities located in that other jurisdiction. 

UPE safe harbour

The UPE safe harbour applies to MNE’s headquartered in a jurisdiction with a Qualified UPE Regime. A jurisdiction has a Qualified UPE Regime if it has a pre-existing eligible domestic tax system (20% corporate tax rate and a 15% effective corporate tax rate). It ensures an MNE group will not be subject to the Undertaxed Profits Rule (UTPR) in respect of profits arising in the jurisdiction of the ultimate parent. It effectively replaces the Transitional UTPR Safe Harbour which is set expire at the end of 2025.

You can read about the SbS system in greater detail in our global publication from January here.

Student loans – discretion to provide relief from interest 

The Amendment Papers introduce a new discretionary power for the Commissioner of Inland Revenue to provide relief from core student loan interest for overseas-based borrowers. This represents an extension of the current rules, which only allow relief from late payment interest, and reflect concerns that ongoing interest charges can significantly increase loan balances and contribute to borrower disengagement. The discretion is intended to be broad, but applied on an ‘equitable’ basis, aiming for consistent treatment of borrowers in similar circumstances.

Access to relief is contingent on the borrower agreeing to repay their loan in full, either through a lump sum or a short-term instalment arrangement. Where a borrower enters into and complies with such arrangement, both core loan interest and late payment interest are cancelled for the duration of the arrangement.

Tax pooling – income tax debt pilot

A small but significant proposal included in the Amendment Papers will extend the period for which tax pooling can be used to pay unpaid income tax relating to the 2022-23 or 2023-24 income years² up to as far as 1 October 2027, rather than the relatively restrictive 75 days from balance date available at present.

We plan to release a more fulsome update on this in April, but if you are interested in settling overdue (or upcoming) tax debt with tax pooling, please contact our tax pooling team.

In-work tax credit – base rate increase

Lastly, the latest of the two Amendment Papers includes an increase to the in-work tax credit by $50 per week as a temporary measure to address increased cost pressures associated with the present conflict in the Middle East. The increase is expected to begin on 1 April 2026 for a fixed term, reverting to the current rate on the earlier of either 1 April 2027 or until the price of 91 petrol is below $3 per litre for four consecutive weeks.