New thin capitalisation rules for New Zealand infrastructure projects

Current thin capitalisation rules can deny interest deductions where a New Zealand group’s debt-to-net asset ratio exceeds 60%, and 110% of the wider group’s worldwide ratio. For capital-intensive infrastructure projects which can support higher levels of third-party debt due to the expected stable long-term cashflows, denying interest deductions appears less justified when the debt levels are commercially acceptable. It also likely increases the cost of capital in New Zealand adding pressure to infrastructure development pipelines. To address this concern and to incentivise greater foreign investment into New Zealand to help close the infrastructure deficit, new rules would exempt “eligible infrastructure entities” from the thin capitalisation rules.

The proposed changes apply only to debt from unrelated third parties. This means debt provided by any person with an ownership interest in the borrower, or any of their associates, will generally not qualify. A limited exception applies for eligible infrastructure entities that are listed on a stock exchange, in which case debt provided by a shareholder that holds less than 5% of the shares can be ignored.

The debt must be applied to the eligible infrastructure entity’s business or project only. It cannot have any equity-like features (for example, debt that is convertible into shares), and must have “limited recourse” only to the assets and income of the entity. Shareholders or partners cannot provide any form of guarantee over the debt.

What is “eligible infrastructure”?

To be a qualifying infrastructure asset, the asset must be tangible and located in New Zealand, it must be used to provide, or be integral to providing, essential services to the public or a class of users on a shared-use basis.

The proposed legislation provides a non-exhaustive list with examples of assets that would be considered “infrastructure” within scope of the new rule. These include assets used for:

• transport (for example roads, rail, ports, airports, and ferries),
• the energy sector (for example electricity generation, transmission, and distribution assets),
• water management (for example water supply, wastewater, and stormwater systems),
• telecommunication (for example fibre networks, data centres, and communication towers),
• waste management (for example recycling facilities and landfills), and for
• social purposes such as hospitals, schools, libraries, prisons, large-scale student accommodation or similar public facilities.

Commercial buildings (such as offices, supermarkets and malls), as well as industrial buildings and dwellings are all expressly excluded from the new rule.

Who will be able to apply the new rules and when?

To qualify, the entity must primarily carry on a business or project of creating, operating, maintaining or upgrading qualifying New Zealand infrastructure assets (and related facilitative or ancillary activities); and have at least 95% of the value of its assets attributable to those activities. Assets attributable to those activities may include tangible assets, intangible assets, financial assets, goodwill and deferred tax assets.

However, there are a number of other restrictions that could inadvertently foot fault investors. Notably, to be eligible, the entity must not hold offshore investments, have operations in other jurisdictions, or any assets situated outside New Zealand – except if those assets are held in relation to the eligible infrastructure activities and either the value of the assets is “minor” in relation to the total assets held by the entity, or the asset is situated outside New Zealand for maintenance purposes or otherwise only temporarily (no more than 6 months cumulatively), or is a hedging arrangement.

The new rule would apply to both New Zealand companies controlled by foreign investors, and foreign companies operating in New Zealand through a partnership or a fixed establishment.

Eligible entities can apply the rule, on an individual or group basis, for the 2026−27 and later income years. This means that for taxpayers with early balance dates the rules will apply for the current year once enacted. An annual election is required in order to apply the new rule, which can be done alongside an annual income tax return. 

The Amendment Paper includes several other changes which will be welcome news for impacted taxpayers, including changes to:

• Clarify the tax treatment of “specified contractors” – recent changes to the Employment Relations Act 2000 in response to the Supreme Court’s decision in Uber (SC 105/2024), have created a risk of misalignment between tax and employment law. To correct that risk, the Amendment Paper proposes to align the definition for tax purposes so that a worker excluded from being an employee (and deemed to be working under a contract for services under the Employment Relations Act) would have the same status for tax purposes. We note that taxpayers subject to schedular payment rules are not impacted. This change would apply from 21 February 2026 – being the date the new definition took effect for employment law purposes.
• Allowing tax pooling to be used to cover certain historical debts – specifically pooling is proposed to be made available for debts relating to the 2022–23 and 2023–24 income years, when a contract with a pooling intermediary is entered into by 1 October 2026. To apply certain other criteria must be met, including that the taxpayer has no GST or employment related tax arrears. This pilot change is intended to gauge whether broader use of pooling to cover historical debts could support Inland Revenue with greater debt recovery.
• Expanding the Commissioner’s ability to use credit reporting for certain debts – to facilitate greater use of credit reporting for certain substantial overdue debts to credit reporting agencies. Specifically proposed changes would allow the Commissioner to more easily dispense with notification requirements via electronic mail (including myIR) or by standard post, as opposed to the personal delivery or registered post that is currently required. Further changes would ensure when a taxpayer continues to miss tax payments the Commissioner can update disclosures to ensure the reported information is up to date.
• Ensure the OECD GloBE side-by-side package applies to the 2026 fiscal year for NZ members of MNE groups, as intended – the changes would ensure that the OECD GloBE guidance, published on 5 January 2026, containing various simplifications to the rules and the “side-by-side” system would take effect for the 2026 fiscal year for impacted taxpayers (largely multinational enterprises with a December year-end). The clarification will be welcome news for impacted taxpayers (i.e. groups with US-headquartered ultimate parent companies).