Changes to be introduced to overseas investment rules
The New Zealand Government recently released a draft bill setting out its proposed changes to the country’s overseas investment laws. The proposals were foreshadowed in an announcement made in November 2018, but further detail has been included in the draft bill.
The bill has been subject to speculation that as a result of COVID-19, the bill will either be fast tracked, or amended to allow the Government to follow the Australian initiative of introducing a zero dollar threshold – effectively meaning all investments into New Zealand by overseas persons would be subject to financial capability and good character screening by the Overseas Investment Office (OIO). An announcement is expected on this shortly.
Current timing sees the bill passed before this year’s national general election (which would need to be before 6 August 2020). The bill’s drafting sees most of the new law effective 42 days after enactment, while the national interest test (discussed below) will come into effect within 6 months, and the call in power (also discussed below) within 12 months.
The main proposed changes to the regime are:
1. New National Interest test:
A new national interest test will grant the relevant Minister (yet to be determined) power to decline an application where the Minister considers the investment not to be in the national interest. The national interest test will be mandatory where a transaction is before the OIO and:
- a foreign Government would directly acquire sensitive assets or hold a 10% or greater interest in the target; or
- strategically important businesses are involved (SIB Transactions).
SIB Transactions will include transactions involving the following sectors:
- military or dual-use technology;
- critical direct suppliers to the military;
- ports or airports;
- electricity generation, distribution, metering, or aggregation;
- drinking water, waste water, or storm water infrastructure;
- telecommunications infrastructure or services;
- a financial institution or is involved in financial market infrastructure;
- media business with significant impact;
- irrigation schemes
- high-risk critical national infrastructure
- certain entities with access to sensitive data.
Ministers will have flexibility to apply the test to any transaction. Cabinet papers indicate that this is aimed at investments that would result in a limited number of entities owning a significant portion of an industry or a supply chain.
Finally, the Government will have “call in powers”, which means the relevant Minister will be able to “call-in” a transaction that is not otherwise the subject of an OIO application (i.e. not sensitive land, not a fishing quota, or worth less than NZ$100m), and make that transaction subject to the national interest test.
The assessment as to whether a transaction is approved under the national interests test or call in power is broad and covers risks to national security or public order (which incorporates consideration of economic, security and other broad interests).
2. Tax Disclosure:
Under the new regime investors applying for OIO approval will be required to disclose information about their proposed investment structure and tax treatment to Inland Revenue. This is expected to result in far greater scrutiny of tax structuring on transactions.
3. Enhanced enforcement powers:
The bill includes a string of provisions designed to give the OIO regime greater teeth. These include increased pecuniary penalties, enforceable undertakings, injunctive relief, and statutory management.
We also expect greater use of the OIO’s existing powers that enable it to force parties to dispose of assets acquired in breach of its rules.
4. Reducing red tape:
Thankfully the bill includes a range of changes designed to streamline the application of the OIO regime, simplifying its complexity. The rationalisation of numerous elements of the application process and regime to remove immaterial transactions/considerations includes:
- Leases: The OIO regime will only apply to leases of 10 years instead of 3 years (other than residential leases which stay at 3 years).
- Sensitive adjoining land: scope to be reduced to more objectively sensitive land.
- Benefits test: simple before and after test to be proportionate to the sensitivity of the land, and benefits factors consolidated. The existing counterfactual test will be removed which is expected to make applications far more straightforward.
- Investor test: significantly rationalised to become more bright-line and focus on material risks only (goodbye Google searches). This will now cover:
- Proven serious criminal offending and civil contraventions or formal proceedings on the same (e.g. jail 1yr in last 10, 5 yrs at any time, pecuniary penalty, court fines etc).
- Replacing the business experience and acumen criterion with an objective assessment of relevant factors (e.g. director disqualifications, tax evasion, abusive tax position, outstanding tax of $5m or more).
- Timeframes: the OIO will be subject to prescribed timeframes, though the detail on these is yet to be announced.
5. Exemptions for listed and other New Zealand entities:
The OIO has announced that certain New Zealand controlled entities currently classified as “overseas persons” will not be subject to the regime. In particular:
- New Zealand listed entities: will be considered overseas persons only if overseas persons own more than 50% (Ownership Test), or overseas persons with 10% or more cumulatively hold more than 25%, or control 50% or more of the Board (Control Test).
- New Zealand non-listed entities: may apply for exemption if they are considered fundamentally New Zealand owned or controlled or to have a strong connection to New Zealand. This is likely to mean the Ownership Test or Control Test are not met.