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New Limited Partnership regime announced

29 April 2005

New Limited Partnership regime announced

A new limited partnership regime designed to help encourage the flow of venture capital investment into New Zealand was announced today by Commerce Minister Pete Hodgson.

The limited partnership is the preferred business structure internationally for investing in venture capital. A limited partnership is composed of general and limited partners. While a general partner in a limited partnership is personally liable for the debts of the firm, a limited partner is an investor whose liability is limited to the size of the investment they make and who can only be involved in the firm’s management in certain prescribed circumstances.

Standard features for limited partnerships include: flow-through tax status; limited liability for investing partners and separate legal personality.

“The new regime is part of the government’s ongoing effort to remove tax and regulatory barriers to venture capital investment,” said Pete Hodgson. “This well-established model, reflecting international best practice, will provide greater clarity and certainty for investors when they look to invest in New Zealand.

“This is about creating opportunities for Kiwi businesses to get the capital they need to grow. We are committed to working with the venture capital industry to develop a well-functioning, successful venture capital market in New Zealand.”

The new limited partnership regime will complement the venture capital tax reforms enacted last year to remove tax barriers to New Zealand companies attracting private equity and venture capital from institutional investors in specific countries.

The changes aim to modernise existing New Zealand special partnership law and are in line with international norms. Legislation will need to be passed to bring the new regime into effect. A Bill is expected to be introduced in 2006.

Tax changes will be required to ensure that the limited partnership provides flow-through tax treatment. The government will issue a discussion document on the taxation of limited partnerships later this year, and the tax changes will accompany the limited partnership legislation.

Questions & Answers

What is a limited partnership?

A limited partnership is composed of ‘general’ partners who are liable for the debts and obligations of the partnership and one or more ‘limited’ partners, whose liability is limited to the amount of their investment, provided that they do not engage in the management of the partnership. Standard features for limited partnerships include: flow-through tax status; limited liability for investing partners; separate legal personality; and the ability for limited partners to participate in management in certain prescribed circumstances.

What are limited partners?

The limited partner is an investor with limited liability, so long as they do not engage in the management of the limited partnership. The limited partner is liable only for their contribution to the limited partnership and in this respect they are analogous to shareholders in a company. If a limited partner participates in management, limited liability is lost and the limited partner is regarded under the law to have become a general partner.

How will the new limited partnership regime differ from the current special partnership regime?

Currently, New Zealand has a form of limited partnership called the ‘special partnership’, in Part 2 of the Partnership Act 1908. However, because the legislation is out-dated, it does not have all the features preferred by international venture capital investors and the local venture capital industry has been unable to utilise the special partnership.

New features will include:

the name ‘limited’ rather than ‘special’ partnership to align with international norms; simplification of the registration process; an online centralised limited partnership register; the limited partnership will be a separate legal person; the limited partnership will continue indefinitely, rather than have a set life of seven years; and the introduction of ‘safe harbour’ activities for limited partners to provide clarification about what activities the limited partners may undertake with regard to the business.

How will the limited partnership be taxed?

The limited partnership will receive “flow-through” tax treatment. “Flow-through” means that the partnership itself is not taxed, rather each partner is taxed individually at that partner’s personal tax rate.

Will any tax changes be required?

The addition of separate legal personality means that the limited partnership would be treated as a company under the Income Tax Act 2004 and taxed accordingly, rather than have tax flow-through. Tax legislation will be required to ensure that the limited partnership provides flow-through tax treatment. The Government will issue a discussion document on the taxation of limited partnerships later this year, and the tax changes will accompany the limited partnership legislation.

When will the new regime come into effect?

A Bill will be introduced into the House in 2006, so it is anticipated that this will come into law some time in late 2006 or early 2007.

What is venture capital?

The term venture capital is typically used to describe a variety of private equity funding from funding of new companies and early stage expansion capital to management buy-in and buy-out transactions for established companies.

What other countries have a limited partnership regime?

The United States, Australia, United Kingdom, Canada, and Singapore, to name a few.

ENDS

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