Investing Offshore: How New Zealand Tax Can Apply

Many New Zealand residents now hold investments overseas – from share portfolios and managed funds to stakes in foreign startups or savings-type insurance policies. New Zealand's international tax rules are designed to make sure these offshore investments are taxed fairly alongside New Zealand investments, but the rules can work quite differently from what people expect.

This article explains three key areas in plain language: foreign investment fund (FIF) rules, controlled foreign companies (CFCs), and the transitional residency exemption for new and returning migrants. It is general information only and is not personalised tax advice.

Foreign Investment Funds (FIF) – When Offshore Portfolios Are Taxed

Broadly, the FIF rules apply to certain offshore investments such as foreign companies, foreign unit trusts, foreign superannuation schemes and some foreign life insurance policies with an investment component. In practice, that can include overseas share portfolios, exchange-traded funds, foreign managed funds and offshore employee share schemes once total exposure is above the relevant threshold.

From 1 April 2026, the de minimis threshold for individuals has increased to $100,000, measured by the original cost of the relevant overseas investments rather than their market value. This is helpful for clients because it allows more people to build diversified offshore portfolios without being brought into the FIF regime too early, reducing both compliance costs and complexity.

For clients who are above the threshold, FIF income must usually be calculated using one of several recognised methods. The right method depends on the type of investment, the level of ownership, how much information is available, and whether the investment is listed, unlisted, liquid or closely held.

The Main FIF Methods

Fair Dividend Rate (FDR)

For many investors, the default method is the fair dividend rate method. Under FDR, taxable income is generally 5% of the opening market value of the offshore investment each year, regardless of the actual dividend paid or whether the investment increased or decreased in value during that year.

This method is simple and works reasonably well for broad listed portfolios over the long term, but it can feel harsh in low-return years or where no cash has been received. In other words, a client may have to pay tax even when the investment has produced little income or has gone backwards in market value.

Comparative Value (CV)

The comparative value method is more closely tied to actual performance. It broadly looks at the change in value of the investment over the year and adds any dividends or distributions received.

This means CV can produce a lower outcome than FDR in a poor or flat year. However, in a strong growth year it can produce a higher tax result because it reflects actual economic gains rather than a standard 5% deemed return.

Cost Method (CM)

The cost method is less common and is generally used where market value is difficult to determine. It broadly applies a 5% return to the opening book value or cost base of the investment rather than to market value.

This can be relevant for certain harder-to-value offshore investments where a reliable market price is not available. It is more of a specialist method than one used for ordinary listed portfolios.

Deemed Rate of Return (DRR)

The deemed rate of return method is a more limited method that applies mainly to investments with debt-like or fixed-return characteristics rather than ordinary equity investments. It uses a prescribed return applied to the opening value of the investment.

This is not a general alternative for normal share portfolios. Instead, it is usually relevant only where the investment behaves more like a fixed-interest product than an ordinary growth share.

Revenue Account Method (RAM)

The revenue account method is a newer option designed to better align tax with actual cash events. Broadly, it taxes dividends when they are received and taxes 70% of gains when the investment is sold, rather than taxing an annual deemed return while the investment is still being held.

This can be particularly helpful for clients with unlisted offshore shares, private company interests, founder stakes or other investments that may rise in value for years without producing cash. Recent and proposed changes to RAM are intended to make this method available more widely, which could significantly improve outcomes for clients with long-term or illiquid holdings.

Attributable FIF Income (AFI)

The attributable FIF income method is aimed at investors who have a larger and more active interest in a foreign company and enough financial information to work out their share of the company's underlying income. It is more of an attribution approach than a deemed return approach.

AFI can be more appropriate where a client has a meaningful stake in a business and real access to its financial information, such as a founder, key employee or active investor. It may produce a fairer result than FDR where the investor is closely connected to the business and a simple 5% deemed return does not reflect the true nature of the investment.

How the FIF Changes Can Help Clients

One of the biggest concerns for clients under the traditional FIF rules is that tax can arise even when no cash has been received. That can be frustrating for investors in growth shares, private companies or offshore funds where value may increase on paper but no dividend is paid.

The increase in the threshold to $100,000 helps smaller investors by keeping more of them outside the FIF regime altogether. That means simpler tax compliance and more room to diversify offshore without immediately triggering complex calculation rules.

For clients who remain within the FIF regime, the move toward methods such as RAM can improve cash-flow outcomes by taxing realised gains and actual dividends rather than annual unrealised gains. Proposed changes for founders and active investors may also allow more suitable methods to continue even if ownership percentages reduce over time.

Controlled Foreign Companies (CFC) – When You Control the Offshore Business

The CFC rules are different from the FIF rules and mainly affect people who have a controlling or substantial stake in an overseas company. A foreign company is generally treated as a CFC if New Zealand residents together hold more than 50%, or if a single New Zealand resident holds at least 40% and no unassociated non-resident holds a larger stake.

Where the CFC rules apply and a New Zealand resident holds at least a 10% income interest, New Zealand can tax its share of certain income from the foreign company even if that income is not paid out as dividends. In broad terms, passive income such as interest, portfolio dividends, rent and royalties is more likely to be attributed, while genuinely active business income can sometimes be excluded.

This means the tax outcome for a small offshore shareholding can be very different from the outcome when someone effectively controls a foreign investment or trading company. In every case, it is important first to confirm New Zealand tax residency, check whether transitional residency applies, and then decide whether the situation falls under ordinary FIF rules or the CFC regime.

Life Insurance and Other Special Offshore Products

Some foreign life insurance policies with a savings or investment component can be treated as FIF interests where the insurer is a non-resident and the policy was entered into outside New Zealand. In those cases, only the savings component is usually relevant to the FIF rules, not the pure life-risk portion.

Because these products can behave more like fixed-return or debt-style investments, the standard fair dividend rate method is often not the best fit and may be restricted. Instead, other methods may apply that better reflect the actual economic return on the policy.

Some policies may also meet the definition of foreign superannuation, which can create complex overlaps between the FIF rules and the separate foreign superannuation withdrawal rules. In these cases, careful advice is needed to avoid unexpected outcomes.

Transitional Residency – a Valuable but Temporary Exemption

New and returning migrants to New Zealand may qualify for a temporary exemption, often called transitional residency, which shelters most foreign-sourced income for around four years. The exemption generally runs for 48 months from the end of the month in which the person first becomes tax resident, based either on the 183-day presence rule or on establishing a permanent place of abode in New Zealand.

While the transitional residency period is running, most foreign income – including FIF and CFC income – is usually exempt from New Zealand tax. That can make a very large difference to the timing of tax on overseas portfolios, pre-migration shareholdings and offshore business interests.

This exemption can create an important planning window. It gives clients time to understand their holdings, review structures, and decide what changes, if any, should be made before New Zealand tax begins to apply in full.

Why Tailored Advice Matters

International tax for individuals and family trusts is rarely straightforward once overseas portfolios, founder stakes or complex insurance and pension products are involved. Getting the sequence right – residency, transitional residency, the correct regime, and the timing of the first taxable year – is critical to avoid errors and unnecessary tax.

For many clients, the recent and proposed FIF changes are positive. They can reduce compliance burdens, improve cash-flow alignment, and produce fairer results for people investing offshore, especially where investments are long-term, illiquid or growth-focused.

If you hold or expect to hold offshore investments, especially as a migrant, returning New Zealander, founder or key employee, it is worth getting advice before making major decisions such as selling, restructuring or surrendering policies. Good planning can make a significant difference once New Zealand's international tax rules come into play.

Contact Greenlane CA Limited

• Email: info@glca.co.nz

• Phone: +64 9 522 5182

• Website: www.glca.co.nz

• Address: 97 Great South Road, Greenlane, Auckland 1051

Disclaimer

This newsletter is published by Greenlane CA Limited for informational purposes only. The content provided herein is of a general nature and does not constitute professional tax, accounting, legal, or financial advice. While every effort has been made to ensure the accuracy and completeness of the information contained in this newsletter, Greenlane CA Limited makes no representations or warranties, express or implied, as to the accuracy, reliability, completeness, or currency of the information.

Readers should not act or refrain from acting based solely on the information in this newsletter without first seeking professional advice tailored to their specific circumstances. Tax laws and regulations are subject to change, and the application of these laws depends on the particular facts and circumstances of each case.

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For advice specific to your situation, please contact Greenlane CA Limited directly.