On 19 March 2020, the Overseas Investment Amendment Bill (No. 2) 2020 (the “Bill”) was introduced to Parliament. The two key intentions of the Bill are to strengthen and simplify the overseas investment regime to better support productive overseas investment into New Zealand.
We note that this phase of proposed changes follows those made in October 2018 to bring residential land and forestry right acquisitions into the scope of the overseas investment regime.
We highlight below some of the more notable and relevant changes proposed by the Bill by reference to the categories of “strengthening” and “simplifying”.
The Bill proposes changes to strengthen how the Overseas Investment Act 2005 (the “Act”) manages risk by way of the following key changes.
Introducing a “national interest test”
This emulates the Australian test and provides the Minister with broad discretionary powers to deny consent to any investment that the Minister considers is contrary to New Zealand’s national interest. The test will apply to overseas investments in New Zealand’s “strategically important business” assets, or investments made by foreign governments. As mentioned in our previous article, New National Interest Test Proposed for New Zealand’s Overseas Investment Rules – it will be important that there is sufficient clarity around the test so that foreign investors are not deterred from making productive investments in New Zealand. Based on the Treasury’s analysis, approximately 20 transactions per year will be automatically subject to the test (being less than 10% of the total number of transactions).
Introducing a “call-in power”
This will allow a transaction ordinarily outside the scope of the Act to be subject to Government review where the investment relates to a “strategically important business”. The Government will then have broad powers to impose conditions on, prohibit or dispose of the “called-in” investment where the transaction “gives rise, or is likely to give rise to a significant risk to national security or public order”. The use of similar powers in comparative jurisdictions suggests that these powers will be used sparingly and relatively few transactions would be subject to in-depth screening.
To note, “strategically important businesses” that the national interest test and call-in power will apply to, generally includes significant ports and airports, infrastructure for utilities and important financial institutions and entities related to dual use military technology.
Changes to Farm Land Advertising
Key changes include:
- requiring advertising to be made before a transaction is entered into;
- increasing the length of the advertising period (noting that amendments will be made to the Overseas Investment Regulations 2005 (“Regulations”) to adjust the required advertising period);
- clarifying that the type of interest in the land relevant to the overseas investment must be the subject of the advertisement (e.g. before a 50 year lease may be entered into with an overseas person, the vendor must advertise the 50 year lease on the farm land); and
- providing Ministers with the ability to exempt a person or transaction from the advertising requirement for farm land when the cost of compliance is unduly burdensome.
The elevated standards for overseas ownership of farm land are a response to the public perception that corporate farming is replacing New Zealand family-owned and operated farms. In addition, some of the farm land advertising requirements are probably due for an update (e.g. a vendor can currently meet advertising requirements by placing a placard on the relevant land). We agree that the changes to the advertising processes will help give New Zealanders the best chance to acquire the relevant interests on the farm land before it is subject to overseas investment. However, the requirement to advertise farm land before an agreement is entered into could create difficulties for a transaction that involves farm land (in particular, wider corporate transactions involving a small farm land component). While the Bill introduces a more detailed exemption regime, it is not yet clear when exemptions will be granted. If it is not made clear that corporate transactions involving farm land are exempted from onerous advertising requirements ahead of the transaction, this could be of concern.
New tax information disclosure requirements:
The Bill includes a new power (once regulations are made) to require investors to disclose investment structure and tax treatment information to the IRD for the purposes of assisting with the administration or enforcement of tax law and supporting the integrity of New Zealand’s tax system. This reflects similar requirements in overseas regimes, but the detail of the regulations will be critical with respect to defining the extent of these obligations.
The Bill will strengthen the Act’s enforcements powers by:
- Providing the Overseas Investment Office (“OIO” with the ability to accept enforceable undertakings from investors who have breached the Act. These undertakings will be enforceable in court and would serve as a useful enforcement option for mid-level breaches where seeking court orders would be disproportionate to the breach that occurred. The maximum penalties for breaching an undertaking are to be set at $50,000 for an individual and $300,000 in any other case.
- Currently, the maximum penalty under the Act is $300,000. The Bill splits and increases the maximum penalties to $500,000 for an individual and $10 million in any other case.
- The Bill provides the OIO with an ability to seek specific injunctions. This ability is analogous to similar powers given to the regulators under the Commerce Act 1986 and Financial Markets Conduct Act 2013.
The Bill also simplifies the Act to make productive investment into New Zealand easier in a number of key ways.
Reducing the scope of the Act
The Bill proposes to exclude lower-risk investments from screening, such as:
- Leases: The Bill proposes to increase the screening threshold for leases or other less-than-freehold interests in sensitive land (that is not residential) from three years to ten years (whether this threshold is reached in a single interest or cumulative interests).
- Fundamentally New Zealand entities: Ministers will have a new power to exempt persons, transactions, interests or assets that the Minister considers to be fundamentally New Zealand owned or have a strong connection to New Zealand from the overseas investment regime. We look forward to the detail for determining whether an entity is “fundamentally New Zealand owned”.
- New Zealand listed entities: The Bill will amend the definition of “overseas person” for New Zealand listed issuers with the effect that, a New Zealand listed issuer will be an overseas person if it meets the “ownership test” or the “control test”. In effect, New Zealand listed issuers will no longer be considered overseas persons, unless they are more than 50% owned by overseas persons or one or more overseas persons holds an interest of 10% or more and combine to account for more than a 25% interest. This means that listed companies with diverse shareholdings, the majority of which are New Zealanders, would no longer be caught by the Act.
- Adjoining Land: Currently, consent must be obtained for acquiring land (that is not otherwise sensitive) but adjoins sensitive land. The Bill amends and generally reduces the scope of “adjoining land” that can make land sensitive by focusing on particularly important sensitive public land and land that is significant to Maori.
The Treasury estimates a 14% decrease in the number of applications screened with the changes enacted. Accordingly, this will reduce transaction costs for excluded investments and make some investments (where the cost of the consent process would have been disproportionate to the value of the investment itself) more attractive.
Introducing a “before and after” counterfactual test
In general, transactions that involve sensitive land must currently meet the benefit to New Zealand test which involves an assessment of 21 different factors (as well as other factors included in the Regulations). The benefits of the transaction offered by an applicant are weighed against what an adequately funded, alternative New Zealand purchaser could offer. This hypothetical “with or without” test will be replaced with a new “before and after” counterfactual test based on 7 broad factors including economic benefits, benefits to the natural environment and continued or enhanced access over sensitive land. The new test involves a comparison of the applicant’s proposed plans for the investment and the present state of the land and activities on it. This will help applicants identify benefits more easily as it takes away the complex and highly theoretical nature of the existing counterfactual test. Overall, we expect this test to be less complicated and speculative. In saying that, there is also scope for more discretion to be exercised by the decision-maker. As such discretion is likely to be exercised in a largely conservative manner, we are not convinced that this new test will be of real benefit to investors.
To note, for sensitive land transactions where the investment involves water extraction for bottling or other extraction of water in bulk for human consumption, an additional factor has been introduced, namely, whether the investment will, or is likely to result in a negative impact on water quality and sustainability.
Adopting a “proportionate approach”
The Bill introduces a statutory requirement for decision-makers to consider whether the benefit of the proposed overseas investment is proportionate to the sensitivity of the land and the nature of the transaction. For example, the benefits offered by an applicant in respect of a large area of very sensitive land are expected to be greater than a smaller area of less-sensitive land being acquired.
Revamping the investor test
The Bill proposes to remove some unnecessary or duplicate screening of investors. These changes include:
- repeat investors would no longer be required to carry out a full screening process for subsequent investments if they have already been screened and approved;
- removing the requirement for New Zealander’s identified as relevant overseas persons or individuals with control over a foreign company to be subject to the test; and
- restricting the scope of the good character assessment by removing the current business experience and acumen criteria and limiting matters that the Minister is required to take into account that reflects adversely on a person’s fitness to have the particular overseas investment from any matter to only those matters listed in the Act.
The Bill proposes to introduce statutory timeframes for decisions by the OIO. The timeframes for decisions will likely be different for each consent pathway. The OIO may have the ability to extend the period in a small range of circumstances, e.g. where matters are complex.
We support the introduction of statutory timeframes as this would provide greater certainty for investors and bring us in line with other comparable jurisdictions.
Overall, we expect that the changes proposed by the Bill will be welcomed by the business community to the extent that many fundamental issues with the current regime are being addressed. There appears to be a focus on reduced complexity and consent timeframes in an effort to bring New Zealand’s regime in line with the other global benchmarks. However, as always, there will be devil in the detail and we will keep you updated as the Bill progresses.
If you would like any further information about the proposed changes, or how they may affect your business, then please contact the Business Advice Team.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.