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New Zealand is now very much on the radar for off-shore funds, in particular the white hot property market. This rising lender interest reflects New Zealand’s comparatively successful Covid-19 response to date – both in health and economic performance.
This note sets out some key considerations for potential lenders.
Carrying on business in New Zealand
A key consideration for lenders will be whether to incorporate a New Zealand entity.
This is a finely balanced assessment as any lender carrying on business in New Zealand is required to comply with the New Zealand Companies Act, the financial service providers’ regime, and New Zealand’s anti-money laundering requirements – which include an obligation to have a compliance programme and officer. And of course there are tax implications.
An overseas company operating in New Zealand must register as such under the Companies Act. For large companies, registration will bring an obligation to file annual reports and financial statements.
Lenders may also be required to register as a financial service provider and, if lending to retail customers, to join an approved dispute resolution scheme.
Whether an entity is carrying on business in New Zealand or not is a question of fact. There is no brightline test and limited case law to assist in making a determination.
Relevant factors include maintaining bank accounts in New Zealand, having employees in New Zealand and having a degree of regular involvement in transactions within the country. The existence of one of these factors may not necessarily be sufficient for finding that a business is carried on in New Zealand. However, the more that exist, the more likely it is that a business is being carried on in New Zealand.
Overseas Investment Act
New Zealand’s Overseas Investment Act (OIA) allows an overseas entity to take security in New Zealand without consent, provided that security is entered into in good faith and in the ordinary course of business and is not entered into with the intent of avoiding consent.
Similarly, consent is not required to enforce that security or to acquire the secured property as a result of enforcing a permitted security arrangement in good faith.
Payments of interest are subject to withholding tax. This is either resident withholding tax (for which New Zealand resident lenders generally obtain exempt status) or non-resident withholding tax (NRWT). The rate of NRWT depends on the location of the lender but is generally 10% or 15%.
In many cases, the NRWT rate can be reduced to 0% if an approved New Zealand borrower (Approved Issuer) pays a levy. Approved Issuers must generally pay a “approved issuer levy” (AIL) equivalent to 2% of the interest payment. The AIL regime requires both the registration of the borrower as an approved issuer and registration of the loan as a registered security with Inland Revenue.
The Personal Property Securities Register (PPSR) is a national online register where security interests in personal property can be registered and searched.
New Zealand’s land register system is fully computerised. All land titles and interests are stored in a computer-based national register and, since 2009, all land dealings must be completed online from Land Information New Zealand’s website. Lawyers must be used to register transfers of land title and for the registration of land title security interests.
Usual security for transactions like this
New Zealand is a secured creditor friendly jurisdiction in terms of ease of taking security and enforcement. Common security includes general security agreements, share security and mortgages.
Once granted, security should be properly perfected in order to best protect the lender’s interests. Mortgages over land are registered on the online electronic land titles register. Security interests over non-land assets are perfected by registering a financing statement on the PPSR.
A secured creditor may take direct enforcement action or appoint a receiver. Receivership is the most common form of enforcement in respect of real and personal property in New Zealand.
Receivers are appointed pursuant to a contractual power to do so in a security agreement, without the need for Court approval. Once appointed in respect of all the borrower’s assets, a receiver has the right and power to manage the business and to realise the assets of the borrower in receivership.
Please get in contact with one of our experts if you would like to discuss this topic further.