By\u00a0Alex Kingston, Liam O\u2019Brien &\u00a0Hamish Butterworth-Snell<\/p>\n
On 2 September 2026, Inland Revenue released its draft interpretation guideline PUB00266<\/a>\u00a0on the classification of payments made by New Zealand entities to non-residents in connection with software transactions (the draft guideline). Whilst the focus of the draft guideline is on classifying the transactions, it also summarises the relevant income tax implications, including whether the payments should be treated as royalties, business or rental income, services income, or non-taxable.<\/p>\n The final version of the guideline will replace IG0007 (2003 guideline), which was released at a time when DVD players were becoming mainstream, smartphones had not appeared, and the streaming giants were unheard of.<\/p>\n Despite the 23-year age gap, the draft guideline expressly states that no change in Inland Revenue\u2019s interpretative position is intended. Instead, it clarifies how that position applies to modern software payments. However, there are several updates to be aware of, especially around cloud computing transactions.<\/p>\n Cloud computing services<\/p>\n As a refresher, cloud computing is the on-demand delivery of computing resources or services such as software, infrastructure, and storage over a network. The three main cloud computing service models are:<\/p>\n
When analysing these transactions for tax purposes, the focus is on the legal rights and obligations created by the arrangement and the nature of the supplies agreed between the parties, rather than the contractual labels used by the parties or the intended commercial outcome of the arrangement.<\/p>\n Possible tax outcomes<\/p>\n The tax treatment of cross-border software arrangements is highly fact-dependent. Key tax questions include: \u00a0<\/p>\n
It is also important to consider the effect of any applicable double tax agreement (DTA). Relevant issues include:<\/p>\n
These questions can be difficult to answer, particularly where arrangements are documented through bespoke contracts that combine services and intellectual property rights. Inland Revenue\u2019s draft guidance includes 22 detailed examples illustrating how different arrangements may be treated. Rather than attempting to cover each of the draft guidance examples here, our examples below illustrate common arrangements and the potential tax implications. These examples are necessarily simplified and general in nature, and outcomes will depend on the specific contractual terms and circumstances. In addition, the examples do not consider whether the non-resident provider may have separate New Zealand tax obligations.<\/p>\n Cloud computing examples<\/p>\n Example A. Direct SaaS subscription<\/p>\n A New Zealand company (NZ Co) subscribes to cloud-based software hosted overseas and can configure certain features but cannot modify the software or exploit its copyright. NZ Co receives only on-demand access to the software and no rights to exploit the underlying copyright.<\/p>\n Expected tax outcome:<\/p>\n
Example B. Basic reseller arrangement<\/p>\n NZ Co acts as a non-exclusive reseller of cloud-based software hosted by an overseas supplier (Foreign Co), undertaking marketing and on-selling access to New Zealand customers. Foreign Co retains the copyright and NZ Co receives no rights to reproduce or otherwise commercially exploit the software.<\/p>\n Expected tax outcome:<\/p>\n
Example C. Value-added reseller arrangement<\/p>\n NZ Co acts as a value-added reseller (VAR) of Foreign Co\u2019s cloud-based software. NZ Co provides additional services (rather than just re-selling access), including implementation, data migration and customisation, and receives substantive rights to adapt the software, access Foreign Co\u2019s confidential know-how and use its intellectual property. As these rights are substantive rather than incidental, the arrangement is treated as a mixed transaction comprising cloud-based services, copyright and other intellectual property rights, and know-how.<\/p>\n Expected tax outcome:<\/p>\n
Deloitte comment: The term VAR is a new concept introduced since the 2003 guideline. Whether a VAR arrangement gives rise to a royalty will depend on the legal rights granted. The presence of customer services may not be sufficient to give rise to royalties. However, in some cases, a VAR may be granting IP use or confidential know-how. These rights may fall within the definition of a royalty which would create a mixed transaction as seen above. Interesting cases are likely to arise around whether resellers are drawing on their own expertise with a particular software despite also having access to a software provider\u2019s confidential information.<\/p>\n Other software examples<\/p>\n Example D: Licence to copy and sell software<\/p>\n NZ Co receives a non-exclusive right from Foreign Co to make unlimited copies of its software and sell those copies to New Zealand customers for a regular fee. As Foreign Co retains ownership of the copyright and NZ Co\u2019s rights are limited in scope and duration, the arrangement is treated as a copyright licence rather than an outright sale or assignment of those copyright rights.<\/p>\n Expected tax outcome:<\/p>\n
Deloitte comment: This scenario is likely to be equally relevant for original equipment manufacturer arrangements (OEM arrangements), where a New Zealand software developer embeds its foreign suppliers\u2019 software and technology into the product supplied to its own customers. Often such OEM arrangements will give rise to a royalty, provided they require exploitation of copyright or other intellectual property rights.<\/p>\n Example E: Development and modification services<\/p>\n NZ Co engages Foreign Co to develop a new computer program to NZ Co\u2019s specifications, with NZ Co assuming the development risk and owning the resulting copyright and other intellectual property. Despite the agreement being described as a \u201clicense\u201d and the payments being labelled as \u201croyalties\u201d, the arrangement is classified as a supply of development services because NZ Co bears the development risk and owns the resulting copyright rights.<\/p>\n Expected tax outcome:<\/p>\n
Deloitte comment: Not all software-related service fees are treated as ordinary services. A service fee may be a royalty where the service enables the customer to apply or use an underlying copyright or know-how that itself gives rise to a royalty. By contrast, a fee for ordinary helpdesk support to help customers use off-the-shelf software should not constitute a royalty.<\/p>\n ATO position<\/p>\n In coincidental timing, the Australian Taxation Office (ATO) finalised its position on 4 September 2026 regarding when a payment under a software intermediation arrangement is subject to withholding tax in Taxation Ruling TR 2026\/2. In contrast to Inland Revenue\u2019s position, the ATO takes a broader interpretation of when a royalty may arise in a cloud-computing context. This makes it difficult for global software companies trying to navigate different tax authority interpretations. Deloitte Australia has published an article<\/a> summarising the ATO\u2019s position.<\/p>\n Final thoughts<\/p>\n Overall, the draft guideline provides welcome confirmation of Inland Revenue\u2019s approach to cross-border software payments made by New Zealand residents, and it is positive that Inland Revenue\u2019s position is broadly aligned with the international approaches in the OECD Model Tax Convention and the US regulations in respect of classifying common software transactions.<\/p>\n One aspect of the draft guideline that could create complications and would benefit from further consideration is whether a time-limited software licence could be treated as a finance lease. If so, such an arrangement may be re-characterised for tax purposes as a deemed sale and loan, with payments split between principal and interest repayments, leading to withholding tax and DTA complexity. Inland Revenue has indicated that the interaction between the finance lease rules and the characterisation of software payments may produce unintended outcomes, and has proposed an amendment in the Taxation (Annual Rates for 2026-27, FBT Simplification, Foreign Investment Fund, and Remedial Measures) Bill (the Bill). The proposed amendment would change the definition of \u201cfinance lease\u201d so that ordinary and non-exclusive software licensing arrangements would generally not be considered finance leases.<\/p>\n Finally, the draft guideline also coincides with an amendment in the Bill in respect of unsuccessful software development. It is encouraging to see Inland Revenue continue to consider software-related tax issues that are raised by the industry.<\/p>\n Submissions on the draft guideline close on 31 October 2026. Please contact your usual Deloitte adviser if you would like to discuss how the draft guideline may apply to your business\u2019s software arrangements.<\/p>\n","protected":false},"excerpt":{"rendered":"By\u00a0Alex Kingston, Liam O\u2019Brien &\u00a0Hamish Butterworth-Snell On 2 September 2026, Inland Revenue released its draft interpretation guideline PUB00266\u00a0on…\n","protected":false},"author":2,"featured_media":608114,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[138,111,139,69],"class_list":["post-608113","post","type-post","status-publish","format-standard","has-post-thumbnail","category-business","tag-business","tag-new-zealand","tag-newzealand","tag-nz"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/608113","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=608113"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/608113\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/608114"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=608113"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=608113"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=608113"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nSoftware as a service (SaaS)
\nPlatform as a service (PaaS)
\nInfrastructure as a service (IaaS)
<\/p>\n
\nDoes the non-resident derive income with a New Zealand source?
\nIs the payment a royalty that may give rise to non-resident withholding tax (NRWT)?
\nIs the payment subject to non-resident contractors\u2019 tax (NRCT)? If so, do any of the NRCT exemptions apply?
\nDoes the payment contain multiple different components, requiring apportionment? \u00a0
\nCould the financial arrangement rules re-characterise the payment?
<\/p>\n
\nWhether a DTA can reduce a withholding tax rate or affect the availability of an exemption.
\nWhether the overseas company has a permanent establishment (PE) in New Zealand, resulting in profits attributable to the PE being subject to New Zealand income tax.
\nHow a payment is characterised under the relevant DTA, for example as business profits, a royalty, or interest.
<\/p>\n
\nNo royalties should arise from this transaction because there are no rights to exploit the underlying copyright\/intellectual property.
\nNo NRCT should apply (broadly because the transaction involves the provision of SaaS and does not involve personnel in New Zealand).
<\/p>\n
\nNo royalties should arise from this transaction (for the same reason as Example A).
\nNo NRCT should apply (for the same reason as Example A).
<\/p>\n
\nAn exercise will be required to apportion the consideration on a reasonable basis.
\nThe portion of the consideration relating to use of copyright, other intellectual property rights and know-how is treated as a royalty and is generally subject to NRWT at 15% (subject to a reduced rate applying under a DTA). Investment income reporting obligations should also arise.
\nThe remaining portion of the payment, i.e. relating to the cloud computing services component, should not be considered a royalty nor subject to NRCT (for the same reasons as in Examples A and B).
<\/p>\n
\nThe payments are royalties due to NZ Co receiving the right to commercially exploit the underlying copyright rights, and are generally subject to NRWT at 15% (subject to a reduced rate applying under a DTA). Investment income reporting obligations should also arise.
<\/p>\n
\nNo royalties should arise because NZ Co owns all of the underlying copyright\/intellectual property rights, and no payment is for use of the service-provider\u2019s copyright rights.
\nNo NRCT should apply assuming work is carried out fully offshore.
<\/p>\n