New Zealand: Income Tax Treatment of Payments to Non-resident Software Suppliers

New Zealand Inland Revenue Department has released Interpretation Guidelines dealing with the income tax treatment of payments for computer software made to non-resident suppliers.

The Guidelines also analyse the impact of double tax agreements on such payments. The tax treatment would vary depending on whether the non-resident supplier is deriving royalties or business profits. If the payment received by the non-resident supplier is income or royalties derived from New Zealand, then the payment will be subject to taxation in New Zealand.

However, under double tax agreements, business profits will be subject to tax in New Zealand only if the non-resident supplier derives the income through a permanent establishment in New Zealand.

Royalties, under double tax agreements are liable to withholding tax in New Zealand, subject to a maximum specified by the relevant agreement.

The Guidelines examine the tax implications of the following transactions:

• A sale of the copyright in a computer program
• A licence of a copyright right in a computer program
• A sale of a copy of a computer program subject to copyright
• A lease of a copy of a computer program
• A supply of services for the development or modification of a computer program
• The supply of know-how relating to a computer program

Royalty is defined in the Income Tax Act 1994 as:

The following are the classes of income derived in New Zealand:

Royalties are deemed to be derived in New Zealand if they are:

• Paid by a person who is resident in New Zealand and not paid in respect of a business carried on by a person outside New Zealand through a fixed establishment outside New Zealand; or
• Paid by a person who is not resident in New Zealand and are allowed as a deduction to the person for the purposes of tax in New Zealand.

Since this is an outright sale of the right and not an assignment of a right to use the copyright, the consideration is not royalty.

The payment will not be taxable in New Zealand unless it is derived from New Zealand. This is possible if the non-resident is carrying on a business in New Zealand. Under double tax agreements, the income will be subject to New Zealand only to the extent the income is attributable to a permanent establishment of the non-resident in New Zealand.

The consideration received falls within the definition of royalty and if is deemed to be derived in New Zealand . It will be liable to tax in New Zealand. Withholding tax subject to any limitation in the relevant double tax agreement will apply.

In this case the copyright over the computer program remains with the seller. Therefore the payment will not be royalty.

The consideration may still be liable as business profits, subject to the relevant double tax agreement.

Apart from producing rental income, licensing of copyrighted articles can also be considered as finance leases. Finance leases will be treated as sale and loan back transactions. The interest component will be considered as income and be subject to non –resident withholding tax, subject to limitations in the relevant double tax agreement regarding interest.

Payments to the non-resident supplier will be liable to withholding tax, subject to limitations in the relevant double tax agreement.

Payments could also be business income, depending on the circumstances.

These payments would fall within the definition of royalty and be liable to withholding tax, subject to limitations in the relevant double tax agreement.