A US Citizen Buying Shares in a New Zealand Company – What You Need to Know
- David Tzimenakis
- 1 day ago
- 5 min read
For many US citizens living in New Zealand, buying shares in a New Zealand company seems like a straightforward investment. Unfortunately, the US tax rules don't always agree.
For your average US investor buying shares on the NZX, fortunately the implications are usually minimal.
The US tax rules regarding company reporting can be complex, and are highly dependent on the actual percentage share of a company that a US citizen owns.
Someone who buys a small parcel of shares in a New Zealand or even Australian listed company generally has very different obligations from someone who owns part of a family business or starts their own company.
In this article, we'll look at how the rules change as your ownership increases, and when additional US reporting begins.
It should be noted that our article today is referring to US tax rules. There can be complicated NZ implications of company ownership, especially if the company is based overseas.
Buying Ordinary Shares
When purchasing shares in an NZX listed company, such as Fisher & Paykel Healthcare or Mainfreight, the US. tax treatment is generally quite straightforward, and little different from how US stocks are reported.
Of course, any income you receive from the stocks will require US tax reporting in the year it occurs. Things can get a little complex regarding the Imputation Credit system however.
For those who aren’t familiar with Imputation Credit, it essentially works like this:
1. NZ Company makes $1000 profit – Pays 28% tax to the IRD ($280)
2. Company pays a $100 dividend to a taxpayer
3. A 28% ($28) Imputation Credit is attached to this to account for the tax the company has already paid on its earnings
4. Taxpayer in most cases, tops up the tax to the IRD to their marginal tax rate (ie 33% )
This system is designed to stop company income being taxed twice, firstly as profit taxed within the business, and again on the dividend paid to the taxpayer.
The imputation credit system doesn’t exist in the USA, and it is important that your US tax accountant analyse this to ensure that income is correctly reported in your US tax return.
If you later sell the shares for a profit, the capital gain must also be reported on your U.S. tax return.
One item to keep in mind is that your profit will be calculated in US dollars. So, even if in NZD terms you do not make a capital gain, depending on the FX rate between NZD/USD on the date of purchase and sale, its possible that this alone could create a capital gain.
For most investors, that's where the reporting ends.
PFIC – Passive Foreign Investment Company
When buying stock in any business, it is important to firstly determine whether the company is classed as a PFIC (passive foreign investment company) for US tax purposes.
A PFIC is a non-US company, which generates at least 75% of its income from passive sources or holds at least 50% of its assets for the production of passive income.
Generally speaking, a PFIC is usually any non-US managed fund, ETF, index fund or mutual fund.
PFIC investments can be taxed punitively by the IRS, along with complex filing obligations. Despite this, by getting advice early (in the same year of your first investment), more beneficial tax outcomes are available. This does require early elections however.
Owning Less Than 10%
Where the position remains relatively simple if you own less than 10% of a New Zealand company.
Provided the company isn't a Passive Foreign Investment Company (PFIC), your ongoing obligations are generally limited to reporting dividends and any capital gains when you eventually dispose of your shares.
This is the position many employees find themselves in after receiving shares through an employee share scheme, or where they've invested in a friend's business without taking a significant ownership stake.
While the US reporting remains fairly straightforward, it's still important to understand that your ownership percentage can become relevant if additional shares are issued or transferred in the future. Getting good US tax advice at the beginning of this process is important.
Reaching 10% Ownership
Once your ownership reaches 10%, the US. tax rules become considerably more complicated.
Owning at least 10% of the voting power or value of a foreign corporation means you're now considered a US shareholder, and reporting obligations begin.
That doesn't necessarily mean that any US tax would be owing, but does mean an entirely new set of rules may now apply.
When Does a Company Become a Controlled Foreign Corporation?
A foreign company becomes a Controlled Foreign Corporation (CFC) when more than 50% of the company is owned by 5 or less US. shareholders, with each of those US shareholders owning at least 10%.
Notice that simply owning 10% doesn't automatically create a CFC.
For example, if you're the only US shareholder and own 15% of a New Zealand company, it isn't a CFC because US shareholders collectively own less than 50%.
However, if four US citizens set up a New Zealand company, and each own 20%, the company would be a CFC because the business would be 80% owned by US citizens.
Likewise, if you own 100% of your own New Zealand company, it will almost certainly be a CFC.
What Happens Once the Company is a CFC?
This is where the reporting becomes significantly more involved, and we strongly recommend obtaining expert US tax advice prior to establishing an NZ company.
Most US shareholders of a CFC will need to file Form 5471, one of the most complex international information returns required by the IRS.
Form 5471 has multiple filing categories, each category requiring varying degrees of information to be provided. In most cases, for a CFC the form can require detailed financial statements, balance sheets, profit and loss information, ownership disclosures and numerous supporting schedules.
In addition, if the CFC is trading in a currency different to its home currency (ie NZD), foreign currency gains/loss may need to be considered on its day-to-day trading.
CFCs can also trigger other US tax rules, including GILTI (Global Intangible Low-Taxed Income).
It is important to obtain US tax advice, to ensure that any NZ CFC operates in a way that is acceptable from a US tax standpoint, and doesn’t create unnecessary tax or compliance costs.
Summary
One of the biggest mistakes we see is business owners assuming their New Zealand accountant will tell them if these rules apply.
The reality is that many New Zealand accountants don't specialise in US international tax, and these reporting requirements are unique to the United States.
If you're a U.S. citizen and are thinking about buying shares in a New Zealand company, or your ownership has recently increased, it's worth understanding your US reporting obligations before the next tax filing season.
In many cases, the earlier the issue is identified, the easier it is to deal with. At The US Tax Team New Zealand, we offer specialised US tax advice. Reach out to us – info@usatax.nz
