The Russell McVeagh Tax team has provided submissions on Inland Revenue's recent officials' issues paper "Thin capitalisation settings for infrastructure" (Issues Paper).
A copy of the Issues Paper can be found here, which was published on 19 May 2025.
Concern thin cap rules provide disincentive for investment in New Zealand infrastructure
In broad terms, the thin capitalisation rules seek to prevent non-resident investors from loading an excessive level of debt against their New Zealand-based business or assets. High levels of interest-bearing debt give rise to interest deductions in New Zealand which has the effect of reducing the taxable income of the non-resident’s New Zealand operations. The thin capitalisation rules operate to neutralise interest deductions for debt that is considered "excessive" in this context.
Notwithstanding the important role of the thin capitalisation rules, there is a concern that those rules may currently discourage non-resident investment in privately owned infrastructure projects in New Zealand. The rules essentially limit acceptable debt levels for a New Zealand group to the higher of: (i) 60% of the value of the New Zealand group's assets or (ii) 110% of a multi-national group's worldwide debt of which the New Zealand group forms part.
The concern is that such rigid limits may not be suitable in the context of an infrastructure project and may be providing a disincentive for foreign investment in this sector.
The Issues Paper outlines certain proposals to amend the thin capitalisation rules to address this concern. The proposals include a specific concession that applies to infrastructure projects (beyond the existing concession for PPPs) or a more general rule that is not restricted to infrastructure but that is targeted at third party debt used to fund commercial activities in connection with New Zealand.
Thin capitalisation proposals – key submission points
Russell McVeagh made submissions on the proposals in the Issues Paper and how they should best be implemented to promote direct foreign investment in New Zealand infrastructure assets. This is consistent with the Government's focus on economic growth and the draft National Infrastructure Plan released this week by the New Zealand Infrastructure Commission.
In summary, our submissions and recommendations regarding the points in the Issues Paper are:
- We support the introduction of a targeted rule applying only to infrastructure projects and providing a specific thin capitalisation concession for such projects. The existing concessionary rule for PPPs is limited and should extend to other projects where high gearing can be commercially achieved given the project assets and related income stream. In our view, any such targeted rule should not be restricted in its application to third party debt and should also apply to related party debt advanced by investors (subject to appropriate parameters, such as a specified percentage of project debt).
- We also support the introduction of a more general rule that is focused on debt advanced for specific business activity in New Zealand. In that context, we accept that more rigorous restrictions on related party debt are required. We do, however, consider that more analysis is required in relation to the requirement that the debt is limited recourse to New Zealand assets (particularly for debt advanced within a general corporate treasury function). We also recommend that taxpayers have the ability to selectively apply a new general rule to particular group members as a result (such as a project SPV). If the new rule is complied with in relation to certain New Zealand members (given the nature of the assets and the particular debt terms) and the existing safe harbour debt threshold is complied with in relation to other members, we do not consider that that should give rise to an unacceptable tax policy outcome.
Consultation on the Issues Paper closed last Thursday. We understand Inland Revenue officials are now considering the submissions received and the expectation is that any law change will take effect in relation to assets constructed after a specified date (such as 1 April 2026).