EX 20D Adjustment of cost fraction for excessively debt funded CFC
When this section applies

(1)

This section applies for the purposes of the item (the CFC’s cost fraction) in section EX 20C(11) to a CFC that is excessively debt funded under subsection (2) in relation to a person (the interest holder) with an income interest in the CFC.

Excessive debt funding

(2)

A CFC is excessively debt funded under this section if—

(a)

the amount (the CFC’s debt-asset ratio) calculated using the formula in subsection (4) is more than 0.75; and

(b)

the amount (the CFC’s relative debt-asset ratio) given by section EX 20E is more than 1.10.

Calculations for CFC

(3)

For the purposes of subsections (4) to (8), the debts and assets of the CFC are determined under sections FE 8 to FE 11 (which contain rules for determining the apportionment of interest) as if the CFC were—

(a)

an excess debt outbound company; and

(b)

the only member of the CFC’s New Zealand group.

Formula for debt-asset ratio of CFC

(4)

The formula for the CFC’s debt-asset ratio referred to in subsection (2)(a) is—

(total CFC’s debts − group funding) ÷ (total CFC’s assets − group funding).

Definition of items in formula

(5)

The items in the formula in subsection (4) are defined in subsections (6) to (8).

Total CFC’s debts

(6)

Total CFC’s debts is the total amount for the CFC and the accounting period, determined under generally accepted accounting practice, of the outstanding balances of—

(a)

financial arrangements entered by the CFC, each of which—

(i)

provides funds to the CFC; and

(ii)

gives rise to an amount for which the CFC would have a deduction:

(b)

fixed-rate foreign equity that is issued by the CFC and held by a company that is a New Zealand resident, a CFC, or a FIF for which the interest holder uses the attributable FIF income method:

(c)

shares issued by the CFC in relation to which the CFC makes deductible foreign equity distributions to a company that is a New Zealand resident, a CFC, or a FIF for which the interest holder uses the attributable FIF income method.

Group funding

(7)

Group funding is—

(a)

if paragraph (b) does not apply, zero; or

(b)

if the interest holder chooses to rely on this paragraph and the item total CFC’s assets is greater than the item total CFC’s debts, the lesser of the item total CFC’s debts and the total of amounts, each of which is the outstanding balance for a financial arrangement, a fixed-rate foreign equity, or a share giving a right to a deductible foreign equity distribution,—

(i)

under which the CFC provides funds to another CFC associated with the CFC under section YB 2 (Two companies) or to a FIF for which the interest holder uses the attributable FIF income method and that is associated with the CFC under section YB 2; and

(ii)

that produces for the CFC an amount that is included in the item arrangement under section EX 20B(4) or is a deductible foreign equity distribution or a distribution for fixed-rate foreign equity.

Total CFC’s assets

(8)

Total CFC’s assets is the total value of the CFC’s assets determined under generally accepted accounting practice.

Cost fraction for excessively debt funded CFC

(9)

For a CFC that is excessively debt funded, the item cost fraction for the purposes of this section is the amount calculated using the formula in subsection (10) and determining the debts and assets of a CFC under sections FE 8 to FE 11 as if the CFC were—

(a)

an excess debt outbound company; and

(b)

the only member of the CFC’s New Zealand group.

Formula for cost fraction

(10)

The formula for the CFC’s cost fraction is—

attributable foreign company assets ÷ total foreign company assets.

Definition of items in formula

(11)

The items in the formula in subsection (10) are defined in subsections (12) and (13).

Attributable foreign company assets

(12)

Attributable foreign company assets is the total value of assets, consolidated under generally accepted accounting practice for the accounting period, of all the interest holder’s CFCs and of all the FIFs for which the interest holder uses the attributable FIF income method, to the extent to which each asset is—

(a)

used for the purpose of deriving an attributable CFC amount or an amount that is included in net attributable FIF income or loss; and

(b)

not used for the purpose of deriving an amount other than an amount referred to in paragraph (a).

Total foreign company assets

(13)

Total foreign company assets is the total value of assets, consolidated under generally accepted accounting practice for the accounting period, of all the interest holder’s CFCs and of all the FIFs for which the interest holder uses the attributable FIF income method.

Defined in this Act: accounting period, attributable FIF income method, CFC, deductible foreign equity distribution, deduction, excess debt outbound company, financial arrangement, fixed-rate foreign equity, loss, net attributable FIF income, New Zealand resident

Section EX 20D: inserted (with effect on 30 June 2009), on 6 October 2009, by section 156(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).

Section EX 20D heading: amended (with effect on 30 June 2009), on 2 November 2012, by section 43(1) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section EX 20D(1): amended (with effect on 30 June 2009), on 2 November 2012, by section 43(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section EX 20D(6)(b): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 21(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).

Section EX 20D(6)(c): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 21(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).

Section EX 20D(7)(b): replaced (with effect on 30 June 2009 and applying for income years beginning on or after 1 July 2009), on 30 June 2014, by section 88(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).

Section EX 20D(9) heading: amended (with effect on 30 June 2009), on 2 November 2012, by section 43(3) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section EX 20D(9): amended (with effect on 30 June 2009), on 2 November 2012, by section 43(4) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section EX 20D(10) heading: amended (with effect on 30 June 2009), on 2 November 2012, by section 43(5) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section EX 20D(10): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 2 November 2012, by section 43(7) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section EX 20D(10): amended (with effect on 30 June 2009), on 2 November 2012, by section 43(6) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section EX 20D(12) heading: replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 21(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).

Section EX 20D(12): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 21(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).

Section EX 20D(13) heading: replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 21(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).

Section EX 20D(13): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 21(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).

Section EX 20D list of defined terms attributable FIF income method: inserted (with effect on 1 July 2011), on 7 May 2012, by section 21(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).

Section EX 20D list of defined terms loss: inserted (with effect on 1 July 2011), on 7 May 2012, by section 21(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).

Section EX 20D list of defined terms net attributable FIF income: inserted (with effect on 1 July 2011), on 7 May 2012, by section 21(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).