When a major infrastructure project is on the table, funding is rarely straightforward. With the capital often coming from offshore and the funding model heavily debt-based, the tax rules can become a constraint rather than a safeguard. Projects that are economically viable can still struggle to fit within New Zealand’s thin capitalisation limits.

Recent legislative changes aim to address that tension.

Why the change matters

Infrastructure is central to New Zealand’s economic functioning and long-term growth. As noted by New Zealand Infrastructure Commission, the challenge is not only building new assets, but also maintaining and upgrading an ageing network. At the same time, fiscal pressures including an ageing population and slower productivity growth mean that private and offshore capital will continue to play a role.

Against that backdrop, the Government has introduced targeted amendments to the thin capitalisation rules, now enacted, to better accommodate infrastructure investment. The policy intent is clear: reduce tax-driven barriers to foreign investment in projects that are typically highly leveraged.

A quick refresher: thin capitalisation

Thin capitalisation rules are designed to prevent excessive debt loading into New Zealand entities by offshore investors.

In broad terms, interest deductions may be denied where:

• the New Zealand group’s debt percentage exceeds 60%, and
• it also exceeds 110% of the worldwide group’s debt percentage.

The concern is base erosion — without these rules, profits could be shifted out of New Zealand through deductible interest payments, leaving little taxable income in the jurisdiction.

Why infrastructure has been different

Infrastructure projects are typically more highly geared than other businesses. The presence of long-term, tangible assets and relatively stable cashflows often supports higher debt levels.

However, this commercial reality has not always aligned neatly with the standard thin capitalisation thresholds. While some relief was introduced in 2018 for public-private partnerships, it was limited in scope.

The latest amendments go further.

The new infrastructure concession

The new rules introduce a targeted concession: thin capitalisation limits will not apply to the extent that debt qualifies as “infrastructure debt.”

To access the concession, the entity must primarily carry on a business or project involving: 

• creating,
• operating,
• maintaining, or
• upgrading

qualifying infrastructure assets in New Zealand.

There is no requirement for the investment vehicle to be a formal public-private partnership, it may be entirely foreign funded.  Importantly, the project does not need to result in a new asset – maintaining or upgrading existing infrastructure can also qualify.

What counts as “infrastructure”?

The legislation focuses on tangible assets that provide services to the public, or a class of users.

Indicative categories include:

• transport infrastructure (roads, rail, ports, airports, ferries)
• energy infrastructure (electricity generation, transmission, and distribution assets)
• water infrastructure (water supply, wastewater, and stormwater systems)
• telecommunications infrastructure (fibre networks, data centres, and communications towers)
• waste infrastructure (recycling facilities and landfills), and
• social infrastructure (hospitals, schools, libraries, prisons, large-scale student accommodation or similar public facilities).

A key requirement is that the debt must relate to the infrastructure asset.

The 95% asset threshold — and the grey areas

A practical constraint sits in the asset use test: at least 95% of the total asset value must be attributable to the infrastructure project (including ancillary activities).

This is where judgement will be required.

Infrastructure projects often include ancillary or facilitative elements — for example:

• retail and hospitality at airports
• car parks or service facilities linked to transport hubs

These may qualify where they are integral to the infrastructure asset. However, if similar assets were developed independently or off-site, they would not meet the definition.

The boundary between core and ancillary activity is likely to be one of the more complex aspects in practice, although the Commentary to the legislation provides helpful guidance.

A targeted but complex relaxation

The new concession represents a deliberate shift: maintaining the integrity of the thin capitalisation regime, while recognising that infrastructure investment operates under different commercial settings.

Application of the rules will not be straightforward. However, the changes introduce a targeted concession for infrastructure investment. If effective, they may help remove a key tax constraint and support greater offshore participation.