[Opinion] Analysis of New Zealand Supreme Court’s Decision on Tax Avoidance

  • Blog|News|International Tax|
  • 3 Min Read
  • By Taxmann
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  • Last Updated on 17 January, 2025

Tax Avoidance

Piyush Baid & Priya Fulwani – [2025] 170 taxmann.com 366 (Article)

1. Summary

This landmark tax avoidance case involves Frucor Suntory New Zealand Ltd (“Frucor”) and the Commissioner of Inland Revenue (“Commissioner”). The Supreme Court of New Zealand concluded that a funding arrangement by Frucor constituted tax avoidance. The arrangement revolved around a $204 million convertible note issued by Frucor to Deutsche Bank, used to repay a loan and redeem shares. Of this, only $55 million was directly financed by Deutsche Bank, while the remaining $149 million was funneled via a forward purchase agreement with Frucor’s parent company. The Court determined that this arrangement was artificial, designed to secure unwarranted tax deductions, and upheld shortfall penalties for abusive tax positioning.

2. Background Context

Frucor Suntory New Zealand Ltd is a wholly owned subsidiary of the Danone Group, a global leader in the food and beverage industry. Frucor was initially established in New Zealand to facilitate the acquisition of Frucor Beverages Group Ltd, a local beverage company known for its range of energy drinks and other non-alcoholic beverages. The acquisition required significant financial resources, which were sourced through a combination of equity and debt funding provided by two Danone entities: Danone Asia Pte Ltd (“Danone Asia”), based in Singapore, and Danone Finance SA, a European financial arm of the group.

The funding arrangement was initially straightforward, with Danone Asia providing equity funding and Danone Finance SA extending debt funding to Frucor. However, in 2003, the structure was restructured into a more complex arrangement involving a $204 million convertible note issued by Frucor to Deutsche Bank. This convertible note had unique characteristics: $55 million was financed directly by Deutsche Bank from its internal treasury, while $149 million was funneled through a forward purchase agreement with Danone Asia.

Convertible notes are hybrid financial instruments that exhibit characteristics of both debt and equity. Typically, they are used by companies to secure financing while granting the noteholder the option to convert the note into equity shares at a later date. This makes them particularly attractive to external investors who seek the potential upside of equity investment while mitigating risks through debt-like protections. In this case, however, the convertible note was not used in the traditional sense. Instead, it became part of a structured arrangement aimed at optimizing tax outcomes.

The forward purchase agreement further complicated the structure. Under this agreement, Danone Asia committed to purchasing shares in Frucor at the maturity of the convertible note, effectively ensuring that the $149 million component was treated as equity for tax purposes in Singapore while being claimed as debt in New Zealand. This dual treatment was central to the tax advantages sought through the restructuring.

From Frucor’s perspective, the restructuring was designed to maintain a similar financial position as before, with interest payments on the loan replaced by payments on the convertible note. However, the New Zealand Inland Revenue Department viewed the arrangement differently, identifying it as a contrived scheme to exploit tax deductibility provisions and reduce overall tax liability. This set the stage for a protracted legal battle over the nature and intent of the funding arrangement.

3. Issues

  1. Was the funding arrangement tax avoidance under New Zealand law?
  2. Was the Commissioner’s reconstruction of the transaction justified?
  3. Were the shortfall penalties appropriate?
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