Global Daily Tax News, New Zealand Tightening Thin Cap Rules On Foreign Banks, (Jun 1, 2026)

In its newly announced Budget, the New Zealand Government has announced plans to update thin capitalization rules for foreign banks.

The thin capitalization rules aim to prevent a company with overseas owners from being loaded with debt to generate interest deductions. For banks, the rules are designed to ensure that foreign-owned banking groups operating in New Zealand hold a minimum percentage of equity in New Zealand for tax purposes.

The thin capitalization rules for banks have historically aligned with the prudential capital requirements. Prudential capital requirements are aimed at ensuring that banks and other financial institutions have sufficient capital in reserve to withstand shocks and avoid failure.

Since the thin capitalisation percentage was last updated in 2012, prudential capital requirements have continued increasing (currently, 12.5 percent for systemically important banks and 10.5 percent for other banks).

In December 2025, the Reserve Bank proposed new prudential capital requirements. The new requirements for systemically important banks will be 12 percent, and 11 percent for other banks. The Government intends to align the thin capitalization tax rules with these thresholds.

The current minimum equity requirement for tax purposes (the "thin capitalization percentage") for foreign-owned banking groups is currently just six percent.

The changes would also provide for temporary changes to the requirements when the Reserve Bank adjusts its capital buffer requirements in response to market conditions.

The changes would apply from April 1, 2027.