A country with tax laws which include the classical system of company and shareholder taxation combined with an inter-corporate dividend exemption is particularly vulnerable to tax planning using controlled foreign corporations. Foreign corporations resident in low tax jurisdictions may be used by their controlling shareholders resident in high tax jurisdictions to avoid tax. This avoidance is a problem which New Zealand must face.

However, because of the international tax treaty system, it is desirable to tax only those corporations that are controlled by New Zealand resident shareholders.

Six countries, the United Kingdom, the United States of America, Canada, France, the Federal Republic of Germany, and Japan, have been sufficiently concerned about these problems to enact controlled foreign corporation legislation, even though most of them did not have the exacerbating feature of an inter-corporate dividend exemption in their tax systems.

This study examines the problems and the alternative approaches taken, and suggests a system based on that introduced into the United Kingdom, with appropriate adjustments for New Zealand circumstances.