Income Tax Treatment of Payments to Non-resident Software Suppliers

New Zealand Inland Revenue Department has released Interpretation Guidelines dealing with the income tax treatment of payments for computer software made to non-resident suppliers.

The Guidelines also analyse the impact of double tax agreements on such payments. The tax treatment would vary depending on whether the non-resident supplier is deriving royalties or business profits. If the payment received by the non-resident supplier is income or royalties derived from New Zealand, then the payment will be subject to taxation in New Zealand.

However, under double tax agreements, business profits will be subject to tax in New Zealand only if the non-resident supplier derives the income through a permanent establishment in New Zealand.

Royalties, under double tax agreements are liable to withholding tax in New Zealand, subject to a maximum specified by the relevant agreement.

The Guidelines examine the tax implications of the following transactions:

A sale of the copyright in a computer program

A licence of a copyright right in a computer program

A sale of a copy of a computer program subject to copyright

A lease of a copy of a computer program

A supply of services for the development or modification of a computer program

The supply of know-how relating to a computer program

What is "Royalty"?

Royalty is defined in the Income Tax Act 1994 as:

" a payment of any kind, whether periodical or not and however described or computed, to the extent to which it is derived as consideration for-

The use of, or the right to use, any copyright, patent, trademark, design, or model, plan, secret formula or process, or other like property or right;

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The supply of scientific, technical, industrial or commercial knowledge or information;

The supply of any assistance which is furnished as a means of enabling the application or enjoyment of anything referred to in any paragraphs a. to e.

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Whether or not that payment is an instalment of the purchase price of any real or personal property:

Classes of income derived in New Zealand

The following are the classes of income derived in New Zealand:

Income derived from any business wholly or partly carried on in New Zealand;

Income derived from any business carried on out of New Zealand to the extent that that income consists of ÖÖÖÖÖ royalties;

Income derived from the sale or other disposition of any property, corporeal or incorporeal, situated in New Zealand;

Income from...