New Zealand Inland Revenue has proposed updated guidance on the taxation of cross-border software payments, clarifying the treatment of cloud services, resellers, and mixed software arrangements. The draft confirms that SaaS, PaaS, and IaaS are generally treated as services rather than royalties, while payments involving copyright or know-how may remain subject to withholding tax.
New Zealand’s Inland Revenue has opened a consultation on 2 September 2026 on Exposure Draft No. PUB00266, which proposes replacing Interpretation Guideline No. IG0007 on the income taxation of payments to nonresident software suppliers.
The draft updates 2003 guidance on the income tax treatment of payments to non-resident software providers, reflecting modern digital transactions, including cloud services and market intermediaries. It adopts a transactional approach, focusing on contractual rights and obligations to determine whether payments are royalties, business income, or proceeds from goods.
The guidelines provide a framework for classifying various activities, including the licensing of copyright, the supply of technical know-how, and specialised development services. Furthermore, the text clarifies how double tax agreements and withholding tax obligations apply to these cross-border arrangements.
How Inland Revenue classifies software transactions
The authority applies a transactional analysis approach based on actual legal structures and obligations rather than contract labels. When arrangements involve multiple components—for example, both software access and support services—Inland Revenue uses the Buckley & Young approach. If one component is ancillary or incidental, the entire transaction follows the dominant classification. Where components are distinct and material, payments must be apportioned on a reasonable basis.
Cloud services treated as services, not royalties
SaaS, PaaS, and IaaS models are classified as service supplies rather than royalties because they provide on-demand access without transferring copyright rights. Under Section YD 4 of domestic law, services income is New Zealand-sourced if the business operates in New Zealand, a contract is made or performed there, or personal property is used there. For cloud services specifically, property is considered used in New Zealand when physical hardware is located in the country.
If a Double Tax Agreement applies, New Zealand cannot tax non-resident provider income unless a permanent establishment exists locally.
NRCT exclusion and the personnel exception
Effective 1 April 2026, legislative amendments explicitly exclude SaaS, PaaS, and IaaS from non-resident contractor’s withholding tax (NRCT). However, this exclusion does not apply where cloud service delivery involves personnel physically located in New Zealand performing the service. Even where personnel are present, withholding tax may be avoided if staff meet the 92-day rule under domestic law, qualify for protection under an applicable Double Tax Agreement, or total payments remain at or below $15,000 within 12 months.
How resellers and VARs are taxed
Basic resellers that purchase and on-sell cloud access—even when using the provider’s logos and trademarks—have their transactions classified strictly as service transactions and do not trigger royalty withholding.
Value-added resellers that provide additional services (migration, configuration, training) using their own staff remain classified as service transactions. However, when a VAR must acquire actual copyright rights or confidential know-how from the non-resident provider to deliver services, the transaction becomes mixed.
In mixed scenarios, payments must be apportioned: the service portion escapes withholding (unless a local PE exists), while the portion representing copyright or know-how licensing is classified as a royalty. Royalties attract Non-Resident Withholding Tax (NRWT) at the domestic rate of 15%, subject to reduction under applicable Double Tax Agreements.
The deadline for submitting comments on the New Zealand Inland Revenue Exposure Draft No. PUB00266 ends on 31 October 2026.
