GAAR can be invoked even if funding arrangement complies with ThinCap & TP: New Zealand’s SC

Case Details: Frucor Suntory New Zealand Ltd. v. Commissioner of Inland Revenue - [2022] 143 taxmann.com 114 (SC-NZ)

Judiciary and Counsel Details

• • William Young, Glazebrook, O’regan & Ellen France, JJ.
  • L McKay, M McKay & H C Roberts for the Appellant.
  • J B M Smith KC, E J Norris & L K Worthing for the Respondent.

Facts of the Case

The Supreme Court of New Zealand has ruled that interest paid on related party debt was liable to be disallowed under GAAR even if the funding arrangement complies with Thin Cap &Transfer Pricing rules.

The Court justified revenue’s action of invoking the General Anti Avoidance Rule (GAAR) to disallow deduction to interest payments on the convertible note where the interest payments were in substance repayments of principal.

Supreme Court Held

It was held that GAAR is applicable even though the funding arrangement fell within the ambit of interest deductibility provisions and also complied with applicable Special Anti-Avoidance Rules (SAARs) of Thin Capitalisation Rules (debt-equity ratio limit) and Transfer Pricing (arm’s length interest rate).