Is Your Own Work Passive Income? In New Zealand, It Can Be

0:00Is pay for your own work passive income?

Is pay for your own work passive income? It sounds like a trick question. Under one set of New Zealand tax rules, the answer can be yes. Ben runs a small software business in Wellington, and some of his customers are American. He's thinking about a US company. As far as America goes, he can have one. No social security number, and no trip to the US. We're BaseAcross. We set up US companies for founders outside America, so we'll be straight with you.

Let's walk the track.

0:34Do you even need a US company?

The track forks almost at once. One way is a New Zealand limited company. It already gets you the big card processor, and it's what local banks and Inland Revenue understand. The other way is a US company. That's for selling as a US vendor, signing US contracts, raising from US investors, or a platform that asks for one. For card payments alone, you may not need one. One of Ben's American buyers wants a US vendor, so he takes the US track.

It has a few markers to stop at.

1:08Can New Zealand tax a US company as resident?

The first marker is about control. A company is resident in New Zealand if its head office or centre of management is here, or its directors exercise control of it here, wherever it was formed. It then pays company tax here. Controlled from New Zealand, a US company is resident here. Here's the guide's own illustration. Say Ben's Wyoming LLC makes a hundred and fifty thousand New Zealand dollars of profit, and he makes every decision as its only director.

It's resident here, so company tax comes to forty-two thousand dollars. That's an illustration, not a quote. How New Zealand treats the LLC is for his tax adviser.

1:52Forming it without an SSN

Past that marker, the track runs flat. A Wyoming LLC suits a business you run yourself, once you know how the controlled foreign company rules treat it. A Delaware C-Corp suits raising from US investors. Tell us where the directors will exercise control, because New Zealand's test asks. The company needs a registered agent, an address in that state for legal papers, not where you work.

Then the EIN. Without a social security number, it's a paper form to the IRS. Wyoming is most of a day behind you, but it all happens online and in writing.

2:32Which banks open from New Zealand?

The bank is a well-signposted stretch. One of the US fintech banks takes applications from founders living in New Zealand, and a multi-currency account can give the company US account details. If Ben wants to sell as a US business, the company can apply to the card processor's US side. It reviews him, and it can decline. Each provider decides for itself.

2:58Do the CFC rules reach you?

Now, back to the trick question. This marker is easy to walk past. Say Ben's company isn't resident here. New Zealand's rules on controlled foreign companies can still reach him. It's one if a single resident controls a large share, or a handful of residents control most of it. With a big enough stake, you're taxed on its passive income as it's earned, unless that's only a small slice of the total.

And for these rules, passive income includes income from services performed in New Zealand, and personal services income. So Ben, writing code in Wellington, can be earning passive income. A US company paid for that work may fail the test.

3:42Your return, the treaty and the IRS

The last marker is your own return. You're resident if you have a permanent place of abode here, or you're here more than a set number of days in any twelve months. Any interest in a controlled foreign company goes on your annual return. The US and New Zealand have a tax treaty in force, and it caps what America withholds on interest, royalties and dividends. Ben's pay for work done here generally isn't US income, so for him the treaty matters less.

On the American side, the company files a report with the IRS every year, even without sales, and missing it is expensive. It's usually due in the spring, and there's a form to ask for more time, filed before the deadline.

4:28The order to do it in

Before you set off, see a New Zealand tax adviser. Ask whether you need a US company at all, where it will be controlled, and whether its income is passive. Then form, then bank. Keep the books with income split by type, and minutes showing where control is exercised. Put the IRS report and your New Zealand return on one calendar. The full guide, with every source and a checklist for your tax adviser, is linked below.

And Ben? He asked his adviser the trick question before he ordered anything.