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Spotlight on … Frucor Suntory New Zealand Limited - CIR wins appeal in tax avoidance caseSep-21-2020

On 3 September 2020, the Court of Appeal ruled that a financing arrangement entered into by Frucor Suntory New Zealand Limited was a tax avoidance arrangement to obtain a tax advantage through interest deductions. The Court of Appeal held that the parent company's subscription for equity was effectively repackaged as a loan from Deutsche Bank to achieve intended tax benefits. Specific provisions of the Income Tax Act 2004  had been used to claim deductions for interest in an artificial and contrived manner, which could not have been within Parliament's contemplation when it passed the law. When the court examined the economic and commercial effect of the funding arrangement in its context, it was clear that tax avoidance was its principal purpose or effect or, at least, tax avoidance was not merely an incidental purpose or effect of the arrangement. 
 
The decision handed down by the Court of Appeal will impact upon taxpayers who enter into a tax-driven financing arrangement having artificial features, as the decision strengthens the Inland Revenue's position on anti-avoidance.