Reform of the Overseas Investment Act 2005: Facilitating productive investment that supports New Zealanders’ wellbeing

Ministerial foreword#

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To grow our economy and lift productivity we need investment - both by New Zealanders and by overseas investors. This reform is one way to support this.

We have good foundations for future growth, including strong institutions, respect for contractual and property rights, and high international rankings for ease of doing business and freedom from corruption.

However, we have a prolonged current account deficit and low per-capita investment in productive businesses.

Overseas investment can help us build our productivity to support the economy and employment. The Overseas Investment Act 2005 seeks to strike a balance between:

• facilitating overseas investment, and
• protecting the government's right to both screen against undesirable investors, and to screen investments in some classes of asset that the government considers should not necessarily be sold to overseas investors.

This reform seeks to reduce unnecessary complexity and ensure that compliance costs are proportionate to risks.

It also examines ways to better ensure that overseas investment is consistent with New Zealand's national interests. Many countries with which we have strong relationships can block investments that are inconsistent with their national or security interests in ways that we cannot. Examples include investments in critical infrastructure and investments in companies with strong links to global value chains and distribution networks – infrastructure and companies that many believe it is in our interests to own.This reform tests the appropriateness of our arrangements and whether more should be done to protect New Zealand's national interests.

All the options in this consultation document maintain the protection of our most sensitive assets - so, for example, overseas persons must obtain consent to buy farms or residential land in New Zealand.

While some options consider removing some fundamentally New Zealand entities from the regime and simplifying processes for investments by overseas persons that have already obtained consent, the Government remains committed to a regime that recognises it is a privilege to own our most sensitive assets.

This Government has already updated the investment rules. In October 2018 we loosened screening rules for forest land to encourage foreign investment in forestry. We also tightened the requirements for investments in farm and horticultural land, and banned foreign buyers from acquiring existing homes. We also allocated the Overseas Investment Office an extra $7 million in funding to support its compliance and enforcement work.

I encourage you to provide your views on the options for reform, and help us to ensure that New Zealand remains an attractive destination for overseas investment that is consistent with our national interests.

 

Hon David Parker
Associate Minister of Finance

What is this consultation document about?#

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1. In October 2018, the Government announced that the Overseas Investment Act 2005 (the Act) would be reformed.

2. The Act requires an overseas person to get approval ('consent') before they take ownership or control of sensitive land, significant business assets or fishing quota (collectively called 'sensitive assets'). It recognises that it is a privilege for an 'overseas person' to own or control such assets.

3. The reform aims to achieve a balance between supporting high-quality investment and ensuring governments have flexibility to manage any risks arising from overseas investment.

4. This consultation document seeks your views on potential reforms that could:

• better identify the sensitive assets and types of investor that need approval under the Act, and
• improve the way that investments are assessed ('screened') to decide if they get approval.

5. The reform builds on changes made in 2018, in which:

• the Overseas Investment Office's Ministerial Directive Letter was updated to clarify the treatment of farmland and forestry land (finalised in December 2017),
• the process for acquisitions of interests in forestry assets on sensitive land was streamlined, and
• overseas persons were restricted from buying residential land, forestry rights and other regulated 'profits à prendre' on sensitive land without consent.

6. This reform is not a 'first principles' reform. This means it does not consider the Act's purpose or substantive matters associated with the 2018 changes to the Act.

7. A glossary of terms used in this consultation document can be found at Appendix C.

8. This consultation document describes the Act and Overseas Investment Regulations 2005 to help you understand and provide your views on the reform options. The descriptions are general in nature and are not intended to be relied upon when considering any transaction that may require consent under the Act. For legal or other expert advice, you should contact a professional adviser.

How can you contribute?#

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9. We invite interested people and organisations to give their views on the reform options in this consultation document. You can do this by:

• attending a public meeting or hui, and/or
• completing a written submission and either emailing it to [email protected] or posting it to:
  
  Overseas Investment Act Reform
  The Treasury
  PO Box 3724
  Wellington 6140
  
  The closing date for submissions is 24 May 2019.

10. The Government would like to know your views on whether this document accurately identifies the problems with the Act, options for reform and the effects of the options – and if you have any alternative ideas. There are questions to guide you on page 18 and in each section of this paper.

11. Treasury officials will analyse all submissions that are received by the closing date, and consider them in developing advice to the Government on proposals to reform the Act.

12. You can find an editable template to create your written submission and more information about meetings, hui and this reform on the Treasury's website at https://treasury.govt.nz/overseas-investment-consultation.

How your submission information can be used - and your rights#

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13. When you make a submission, the Treasury will take it that you have consented to us putting a PDF copy on the Treasury website. If you do not want your submission to be uploaded, please state this clearly on your submission.

14. If your submission contains confidential information or you do not want it published for any other reason, please:

• indicate this on the front of the submission, and mark any confidential information clearly, and
• provide a separate version that excludes the relevant information, which we can publish on the website.

15. People and organisations can ask to see your submission under the Official Information Act 1982. If you have any objection to us releasing any information in your submission, please state it clearly in the cover letter or email that goes with your submission, including the parts that you consider should be withheld and your reasons for withholding the information.

16. Under the Official Information Act, reasons for withholding information could include that the information is commercially sensitive or that you wish us to withhold personal information, such as names or contact details. The reason cannot include an automatic confidentiality disclaimer from your IT system.

17. The Treasury will take your objections into account and consult submitters when responding to requests under the Official Information Act.

18. You also have rights, under the Privacy Act 1993, in relation to the way the Treasury (and other agencies) can collect, use and disclose information about you and individuals referred to in your submission. You have the right to access personal information about you that the Treasury holds and to seek any corrections.

19. Any personal information that you supply to the Treasury in making a submission will only be used for the purpose of helping us to develop policy advice in relation to this reform. If you do not wish your name, or any other personal information, to be included in any submissions that we may publish, please clearly indicate this in the cover letter or email that goes with your submission, as well as following the steps in paragraph 14.

Overseas investment in New Zealand#

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Overseas ivestment brings benefits#

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20. The Government's economic strategy aims to build a productive, sustainable and inclusive economy. Overseas investment contributes to this aim when it brings with it new jobs and increases productivity, which is the biggest determinant of people's living standards in the longer term.

21. Financial capital is required for economic growth. However, as a small nation with relatively low national savings and a range of investment needs, New Zealand faces a problem – its domestic savings do not meet its domestic investment needs. Covering the shortfall between savings and investment requires New Zealand to increase its domestic savings, use foreign savings, or accept that necessary investments must be delayed, proceed at a higher cost or, in some cases, not proceed at all. These kinds of delay can come at considerable economic cost.

22. Overseas investment therefore supports our businesses to invest by bridging the gap that currently exists between New Zealand's savings and investment needs. It enables new firms to be established and existing firms to expand and become more productive. It is also associated with wage and employment growth. Firms at least partly funded by foreign direct investment (a type of overseas investment) are among the largest employers in New Zealand. Firms acquired by overseas owners tend to increase employment and wages more quickly than similar domestic firms.[1]

23. Overseas investment can also help us to catch up with leading economies' productivity levels – that is, to produce more from the work we do. As New Zealand has a small domestic market and is far from international markets, it needs flows of people, capital, trade and ideas to support productivity. Overseas investment supports these flows. International evidence suggests that it can have the following effects (although evidence is limited and mixed about the extent to which overseas investment has produced these in New Zealand):

• technology and process innovations: Overseas investment may help domestic firms to adopt up-to-date technologies and processes to support workers to undertake high-value work, either by buying new technology with invested funds or learning from foreign-owned firms. Foreign‑owned firms generally have higher productivity levels and stronger management practices than domestic firms, but this could partly be due to foreign investors investing in relatively better-performing firms (and there is poor evidence of these benefits in New Zealand[2]). Domestic firms may be encouraged to innovate as competition increases, which is particularly important in a small market like New Zealand,
• skill increases: Foreign direct investment can result in the transfer of new expertise and skills into the country being invested in, for example if expertise is transferred by the foreign owners or through links to parent businesses,
• more diverse international connections and access to global distribution networks and markets: In the absence of a large domestic market, international connections enable New Zealand firms to access distribution networks and markets that would otherwise be unavailable, widening their reach. Such connections can also reduce the risks associated with increased global protectionism, and
• participation in global value chains: Much of the growth in trade since 2000 has been driven by the rise of global value chains, where different manufacturing processes are happening in different countries. Many firms coordinate these chains through the control associated with direct investment. New Zealand has relatively little involvement in global value chain trade due to a number of factors, including its geographical distance from other economies, but overseas investment can help to change this.

However, overseas investment can also have risks#

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24. Overseas investment can also raise community concerns, impose direct costs and have potential risks. Particular concerns and risks include:

• overseas investment could (in rare cases) lower economic activity in New Zealand, for example if:
  • an investment increased the chance that all or part of a firm would be moved offshore, and/or
  • overseas investors invested in undesirable assets (such as unproductive assets or assets in unsustainable sectors) or in assets where they did not have advantages compared to domestic owners,
• overseas investors could underinvest in New Zealand assets during periods of global economic stress and instead prioritise their own domestic operations,
• foreign investment could lead to profits going offshore rather than being retained and invested or spent in New Zealand. The extent to which this is a problem is not clear. An asset's sale price should reflect the value of the expected future profits, and this capital (released in the sale) may be reinvested in the New Zealand economy,
• foreign investment could increase the prices of and reduce New Zealanders' ability to buy assets,
• high levels of foreign ownership or control of sensitive New Zealand assets could:
  • conflict with some people's view that sensitive assets in New Zealand, particularly land with productive, environmental, historic or cultural value (such as in te ao Māori [the Māori world]), should be owned and controlled by New Zealanders. That is, the assets have a high 'ownership value'. Some people feel a reduced sense of wellbeing simply knowing that these assets are no longer in New Zealand ownership or under New Zealanders' control, and/or
  • increase the risk of activity that is not in line with New Zealand cultural norms, which could have undesirable impacts on others or the environment, even if the behaviour is lawful. For example, this could happen if an investor restricted access to a property or the foreshore where it had traditionally been allowed,
• in some circumstances, overseas-owned businesses could pay less tax than equivalent businesses owned by New Zealanders, and
• overseas ownership or control of certain assets, such as critical infrastructure or strategically important industries, could pose risks to New Zealand's national security or public order. These risks are heightened when an investor is a foreign state or a state-linked entity that may be pursuing broader policy or strategic (as opposed to purely commercial) objectives that do not align with New Zealand's interests.

The Overseas Investment Act seeks to ensure that overseas investment is beneficial#

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25. Overseas persons operating in New Zealand are – like domestic investors and businesses – subject to New Zealand's laws. These laws include a range of legislation focused on land use, environmental protection and business activities, such as the Resource Management Act 1991, the Conservation Act 1987, tax laws, the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, the Commerce Act 1986 and the Companies Act 1993.

26. The Overseas Investment Act (the Act) complements these pieces of legislation by offering additional protections in respect of overseas persons. It acknowledges that it is a privilege for overseas persons to own or control sensitive New Zealand assets – that is, certain types of land, significant business assets (generally those worth at least $100 million) and fishing quota.

27. In these cases, the Act requires proposed investors to be screened – a process in which they must generally demonstrate that they have appropriate levels of business experience and acumen, that they are financially committed to the investments, and that they are of good character.

28. Where proposed investments involve sensitive land, overseas persons must also show that their investments will likely benefit New Zealand. Conditions can be imposed on investments to better ensure that they deliver those benefits.

29. The Overseas Investment Office (OIO) assesses applications from overseas persons lodged under the Act to determine whether they meet the relevant criteria for consent.

But it is not clear that the Act is operating efficiently or effectively#

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The Act's complexity and breadth may be discouraging investment

30. New Zealand is ranked as one of the easiest countries in the world in which to do business. However, the Act's perceived complexity and the breadth of investment screening may be discouraging the overseas investment that New Zealand needs. For example:

• anecdotal evidence suggests applying for a consent can cost more than $100,000 (excluding application fees),[3]
• it takes an average of about 100 working days to process an application for consent to acquire sensitive land.[4] Around half of this time is taken up by decision makers processing the application and the other half by overseas persons gathering information, and
• it can take longer than 100 working days if the application is complex or goes through the 'proposal to decline' process.[5] Overseas persons report that it can take up to a year (in total) to receive a decision.

31. The Act also requires screening for investments that are not likely to be high risk, or relate to land unlikely to have significant ownership value to New Zealanders, such as land adjoining sports fields.

32. Some users of the Act and economic commentators believe that the regime's complexity and scope are partly responsible for New Zealand's underperformance relative to other small states in attracting overseas investment. This is consistent with evidence that restrictive investment screening reduces rates of overseas investment.[6] The Act may also compound other factors that can limit New Zealand's attractiveness to investment, including the increasing international competition for investment, and New Zealand's small size and distance from other markets.

33. New Zealand attracts proportionately less, and has correspondingly lower stocks of, foreign direct investment than many other small, advanced economies. While New Zealand's foreign direct investment stock as a percentage of GDP (38 per cent) is similar to the OECD average, it is significantly below that of other small, advanced economies. Foreign direct investment inflows as a percentage of GDP are also relatively low (see Figure 1).

34. Some international surveys have ranked New Zealand's investment screening regime among the most restrictive regimes in the world.[7] The OECD assesses New Zealand's regime as the seventh most restrictive in 68 countries, including all OECD countries. This ranking largely results from the significant amount of land subject to screening under the Act. While the breadth of New Zealand's screening regime means that any changes made as a result of this reform will not materially alter the ranking, there is an opportunity to improve New Zealand's perceived attractiveness to investment by reducing unnecessary complexity and scope.

Figure 1: Comparison of New Zealand's and other states' foreign direct investment inflows[8] as a percentage of GDP

35. New Zealand has also struggled to attract the most valuable forms of investment, such as greenfield investment.[9] Greenfield investment establishes new operations and therefore tends to be a particularly strong contributor to economic growth.

36. Compared to other small, advanced economies, New Zealand has a low number of announced greenfield investments ('announced' is a measure of investors' intentions to make greenfield investments, and is an indicator of future foreign direct investment).[10] This may partly be due to our small domestic market and distance from other markets. However, our newer technology sectors that target global markets have been attracting significant overseas capital in recent years, generally at levels and in entities that do not require approval under the Act.

37. The OIO recently changed some of its practices to reduce the length and overall cost of the application process to applicants, as part of its work to address problems identified in a 2016 internal review. These changes included improving guidance and application templates, offering pre‑application meetings to give early feedback to applicants, triaging applications, streamlining elements of investor screening for repeat applicants, taking steps to improve engagement with the investment community, and establishing the OIO as a stand-alone business group within Land Information New Zealand.

38. Two external reviews commented on the OIO processes in 2018. One noted that the OIO's changes had improved the quality of applications being considered and reduced the time taken to process applications,[11] and the other noted that the OIO provided the right information to the decision makers.[12] The current problems associated with the Act's complexity, uncertainty and breadth are principally caused by legislative requirements, which the OIO and applicants must follow.

The Act's perceived gaps may limit holistic assessments of investments' effects

39. While the Act's complexity, uncertainty and breadth are causing concern, so too are perceived gaps in the screening regime.

40. The Act seeks to ensure that overseas investment is likely to benefit New Zealand, but it does not allow decision makers to assess investments' likely effects holistically. For example, there is a limited capacity to consider a proposed investment's implications for New Zealand's national security, water or Māori cultural values. These gaps limit the government's ability to decline certain high-risk investments that might have negative effects on New Zealanders' wellbeing.

Simplifying and improving the Act#

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Overview of the Overseas Investment Act#

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41. An overseas person cannot acquire an interest in sensitive land, significant business assets or fishing quota without receiving consent under the Act. This reflects the Act's purpose: acknowledging that it is a privilege for overseas persons to own or control sensitive New Zealand assets. Appendix B compares the Act's requirements with those in comparable jurisdictions.

42. In general terms, an overseas person is:[13]

• an individual who is neither a New Zealand citizen nor 'ordinarily resident in New Zealand',
• a body corporate (such as a company) that is incorporated outside New Zealand, or is a 25 per cent or more subsidiary of a body corporate incorporated outside New Zealand (that is, a company incorporated in New Zealand that is at least 25 per cent owned or controlled by a foreign company), or
• a body corporate or another entity (and including a partnership or trust) that is 25 per cent or more beneficially owned or controlled by overseas persons (whether or not the entity is incorporated or established in New Zealand, or listed on a domestic stock exchange such as the New Zealand Stock Exchange [NZX]).

43. Land is 'sensitive' if it is of a particular type and size or adjoins other types of land of a particular type and size. For example, much agricultural land is sensitive because it is non-urban land greater than five hectares. As of October 2018, residential and lifestyle land, irrespective of size, are also deemed sensitive land.

44. Acquisitions of 'significant business assets' by overseas persons require screening. Overseas investments in significant business assets are:[14]

• the acquisition of securities (for example, shares) in a person (for example, a company) if:
  • it results in the overseas person having a 25 per cent or more ownership of or control interest (or increasing an existing 25 per cent interest) in that entity, and
  • the value of the securities, consideration or assets of that entity (including subsidiaries of which it has at least 25 per cent ownership) exceeds $100 million,
• the establishment of a new business in New Zealand, costing more than $100 million, where that business operates for more than 90 days a year, or
• the acquisition of property used to carry on business in New Zealand if the total consideration paid exceeds $100 million.[15]

45. Under the Act and the Fisheries Act 1996, a direct investment by an overseas person in fishing quota must be screened. Acquiring securities (for example, ordinary shares) in a person that has an interest in fishing quota requires consent if the investment results in:

• an overseas person obtaining a 25 per cent or more ownership or control interest (or increasing an existing 25 per cent interest) in that entity, or
• the entity becoming an overseas person (that is, where total overseas ownership or control reaches 25 per cent).

46. Figure 2 provides an overview of the types of application made under the Act.

Figure 2: Types of application made under the Act[16] (June 2013 to August 2018)

47. The tests that an investor must satisfy to obtain consent depend on the type of asset they are intending to acquire. The main asset types, and their associated tests, are:

• significant business assets: An overseas person must satisfy the 'investor test', which broadly assesses their character and capacity (this is further described from page 51),
• residential and lifestyle land only: There are a number of ways in which overseas persons can obtain consent to buy residential land. These largely depend on the land's intended use. For example, an overseas person wanting to buy a house to live in must demonstrate a commitment to do that. An investor wanting to buy land to develop generally must pass the investor test and commit to building new dwellings or development works to support new dwellings,
• sensitive land that is not residential: In addition to satisfying the investor test, an overseas person must satisfy the 'benefit to New Zealand test' (this is further described from page 61). Depending on the type of land being acquired, the overseas person must generally show that their investment is likely to benefit New Zealand or, where an applicant seeks to acquire an interest in non-urban land of at least five hectares, provide 'substantial and identifiable' benefits to New Zealand,[17]
• forestry activities on sensitive land (freehold, leasehold or forestry rights): An overseas person must satisfy the investor test and one of three tests:
  • the 'special forestry test' – a 'checklist' type of test for an investor who wants to either establish a new forest or acquire an interest in an existing forest and operate it with specified existing arrangements remaining in place (such as public access arrangements),
  • the 'modified benefit to New Zealand test', which is generally for an investor who wishes to either establish a new forest or acquire an interest in an existing forest but is unable to maintain existing arrangements (such as public access), or
  • the benefit to New Zealand test, which is generally for an investor who wishes to acquire an interest in sensitive land for forestry and another purpose, and
• fishing quota: Investors must satisfy a range of requirements under the Fisheries Act 1996. These include the investor test and an assessment against a list of factors similar to some of those found in the benefit to New Zealand test (see page 61). The criteria also include a requirement for the interest in fishing quota to be capable of being registered in the Quota Register or the Annual Catch Entitlement Register and for the relevant overseas person to be a body corporate.

The scope of this reform#

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48. The Government's Terms of Reference for this reform are set out in Appendix A. The Government's objective is to ensure that the screening regime for overseas investments:

• provides a clear pathway for consent for investments that support a productive, inclusive and sustainable economy and create opportunities for regions and businesses to grow and connect internationally,
• provides appropriate protection against the risks to New Zealand associated with the overseas ownership of sensitive assets – particularly in ensuring that New Zealand's national interest is sufficiently protected, and
• imposes compliance and administrative costs that are proportionate to the risks associated with the investments.

49. According to the Terms of Reference, the reform is to consider whether specific parts of the Act meet this objective. This includes considering the appropriateness of:

• the definition of overseas person as it relates to bodies corporate,
• the factors underpinning the benefit to New Zealand test (including whether those factors should include water extraction, tax residency, and Māori cultural values as they relate to the physical and historic characteristics of the relevant sensitive land),
• the extent that any negative benefits of a prospective investment can be considered under the benefit to New Zealand test,
• the investor test,
• the existing levels of discretion afforded to decision makers, with regard to whether the appropriate balance is struck between certainty for overseas persons and allowing a more holistic and adequate consideration of the implications of overseas investment for New Zealand's national interest, and
• the treatment of land adjoining other types of sensitive land.

50. This consultation document focuses on opportunities (that are consistent with the Act's purpose) to simplify and improve the Act's efficiency and effectiveness, while also addressing any gaps in the Act that pose risks to New Zealanders' wellbeing.

51. To help achieve the Government's objective, the next three sections seek your views on options to improve how the Act regulates:

• what we screen: Can we better identify sensitive assets and the types of interest in those assets that need to be screened? Stakeholders have expressed concern that the Act defines sensitive land too widely, imposing unnecessary compliance costs. This section discusses the treatment of land that adjoins other land with sensitive characteristics (from page 20), leasehold interests in land (from page 25) and periodic leases (from page 27),
• who we screen and when: There may be an opportunity to reduce both the number of entities that have to obtain consent to acquire sensitive New Zealand assets, and the number of transactions that require consent. This section discusses opportunities to address concerns:
  • that the current definition of an overseas person is overly broad and imposes disproportionate compliance costs (from page 31), and
  • about the extent to which the Act should screen small acquisitions or changes to shareholdings by overseas persons, and passive shareholdings where overseas persons have no control over sensitive assets or their level of control does not change (from page 42), and
• how we screen: There may be an opportunity to improve how we screen overseas investments, as existing requirements are complex and costly and limit decision makers' ability to consider the full effects of investments. This section discusses:
  • options for improving the investor test (from page 56),
  • options for improving the benefit to New Zealand test, including whether it should allow consideration of additional factors (from page 66),
  • whether New Zealand should introduce a national interest test or another test that would allow a more holistic assessment of an investment's likely effects, and how this test might interact with the benefit to New Zealand test (from page 70),
  • whether New Zealand should introduce a national security and public order 'call-in' power for transactions not currently captured by the Act (from page 73),
  • the requirement to offer certain types of land (special land) to the Crown (from page 91),
  • the requirement to publicly advertise farmland (from page 95), and
  • whether there is scope to improve decision-making times (from page 98).

How are reform options being assessed?#

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52. For each of the topics in the next three sections, this document describes concerns about how the Act currently operates.

53. The document uses three criteria (see below) to assess the extent to which options for change are likely to meet the Government's objectives for reform, compared with the status quo. Consistent with the Treasury's Living Standards Framework (see the box at right), these criteria reflect the broad range of ways that overseas investment can influence New Zealanders' wellbeing.

54. It is important to recognise that these criteria are often in tension – for example, if there is a reduction in decision makers' ability to manage the risks associated with overseas investment, then certainty for overseas persons will generally increase. Conversely, increasing decision makers' flexibility to decline prospective investments will often erode certainty. Balancing these objectives is central to this reform. Finally, no weighting has been applied to these criteria when assessing proposed options.

55. Criterion 1 - Manages the risk of overseas investment to New Zealanders' wellbeing: This criterion considers whether an option provides decision makers with the flexibility to effectively manage or protect against current and emerging risks from overseas investment to New Zealanders' wellbeing. It includes considering whether an option may create or increase opportunities for avoiding the Act. This criterion is therefore important for assessing how an option would likely manage any negative effects of overseas investment on the four capitals - financial/physical, human, social and natural.

56. In applying this criterion, it is necessary to consider whether risks are potentially better managed in ways other than through the Act, such as through other legislation.

57. Criterion 2 - Supports overseas investment in productive assets: This criterion considers whether an option supports confidence in New Zealand as an attractive investment destination for productive investment. It includes considering whether an option minimises the costs involved in preparing applications and complying with consent conditions, and in administering and enforcing the regime. The criterion is important as it considers whether a reform supports New Zealand's openness to investment that delivers benefits such as enhanced productivity. It is therefore most directly concerned with an option's likelihood of increasing the financial/physical and human capitals.

58. Criterion 3 - Encourages more predictable, transparent and timely outcomes: This criterion considers whether an option is consistent with the basic principles of best‑practice regulation.[18] It considers whether the option achieves its objectives in a way that makes the law more certain, predictable and transparent, and encourages timely decision making. This criterion is important as it considers whether options will support investor and public confidence in the overseas investment regime. This is particularly relevant to assessing an option's likelihood of increasing the financial/physical and social capitals.

59. The analysis in this consultation document reflects an estimate of each option's expected effect when considered in the context of the overall screening regime, rather than an option's likely effect in relation to the particular issue being discussed. Finally, while the status quo is not formally assessed in this document, there is always the option of retaining existing arrangements.

60. Some options for reform may, if adopted, have significant effects overall, while others may affect certain types of investor or investment. For example:

• most overseas persons and, in the case of non-natural persons (for example companies, other bodies corporate[19] and trusts), individuals with control of those overseas persons (such as directors) must satisfy the investor test when acquiring almost any type of sensitive asset. Consequently, options to better target the investor test, simplify its requirements or limit the number of times that repeat, high-quality investors must satisfy it could significantly improve the screening process's efficiency and investor certainty,
• options to change the process and tests used to determine whether an investment is likely to benefit New Zealand are the most significant aspect of this reform. For example, proposals that allow for a more holistic screening of particularly sensitive transactions (such as a national interest test), while streamlining requirements for less sensitive transactions, have the potential to increase significantly the regime's efficiency and better protect New Zealand's interests, and
• adjustments to 'who we screen' would likely affect only certain categories of investor (such as entities that identify, and are identified, as 'fundamentally New Zealand' bodies corporate, or portfolio investors), but could potentially offer those investors significantly greater certainty and reduced compliance costs.

61. All options are designed to be consistent with New Zealand's local and international obligations, including free trade agreements and obligations as a member of the World Trade Organization. New Zealand is able to make changes to the criteria that are used to assess applications made under the Act, consistently with our international obligations. However, international obligations constrain our ability to introduce investment screening for new categories of asset.

62. For each topic under consideration, the Government would like your views on the following questions:

• Do you agree that there is a problem, and:
  • if so, has this document described it accurately? Can you tell us about your experience, including when it happened?
  • if not, do you support the existing arrangements. If so, why?
• Do you have any comment on the potential effects of the options? Are you able to quantify potential effects on compliance costs?
• Do you think the right reform options have been identified, and:
  • if so, which of the options identified do you prefer and why?
  • if not, what alternative option would you support and why?

63. While this reform is focused on options for legislative change and consultation is led by the Treasury, you are welcome also to provide feedback on your operational experience with the OIO. The OIO will be able to use your feedback as part of its continuous improvement programme.

What assets do overseas persons need consent to invest in?#

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64. The Act requires overseas persons to obtain consent before they can invest in sensitive land, significant business assets and fishing quota. Sensitive land includes:

• residential land,
• non-urban land greater than five hectares,
• the foreshore and seabed,
• beds of lakes over 0.4 hectare,
• land over 0.4 hectare that is subject to a heritage order or is heritage listed,
• specified islands, and
• sensitive adjoining land.

65. Consent is required to obtain sensitive land if the interest being acquired is for a term of three years or more. For example, leases of three years or more as well as freehold interests in sensitive land generally require consent.

Sensitive adjoining land#

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What currently happens?

66. The Act requires transactions to be screened if they involve land that adjoins other land that has sensitive characteristics, such as the foreshore, a lakebed, some types of conservation land, historic places and wāhi tapu (sacred places).[20] We call this land 'sensitive adjoining land'. The land with sensitive characteristics is sometimes called 'Table 2 land', referring to Table 2 in Schedule 1 of the Act.

67. Table 2 land includes land that is listed, or is part of a class that is listed, as a reserve, a public park or other sensitive area by the regulator (the OIO) under section 37 of the Act. The OIO has defined the section 37 list as including all land over 0.4 hectares that a regional plan, district plan or proposed district plan provides is to be used as a reserve, as a public park, for recreation purposes or as an open space. It also includes national parks.[21]

68. Screening seeks to ensure that transactions are beneficial to the conservation of, or public access to, Table 2 land (for example, the foreshore where access may be through land subject to a transaction). It recognises that the development and use of sensitive adjoining land could have environmental effects on, or affect access to, Table 2 land.

69. The Resource Management Act guides most decisions about the environmental effects of land development and use, as well as access to waterways. However, the Overseas Investment Act provides an opportunity for decision makers to negotiate conditions on the investment that provide benefits to New Zealand.

70. Of 567 applications involving sensitive land between June 2013 and August 2018, 14 per cent (78) were only screened because they involved sensitive adjoining land (that is, land next to Table 2 land) (Figure 3).[22]

Figure 3: Types of sensitive land cited in applications (data from June 2013 to August 2018)

71. Of the applications involving only sensitive adjoining land, most (60 of 78) were screened as a result of their adjoining only one type of Table 2 land. Of these 60 transactions, consent was only required for 35 because the land adjoined land that was listed as a reserve, public park or other sensitive area designated under section 37. Due to changes in May 2017 to narrow the scope of the section 37 list, the share of screened transactions with these features has fallen.

What are the problems with current law and practice?

72. Some stakeholders have raised concerns that the current definition of sensitive adjoining land seems broader than necessary, and therefore could be creating unnecessary compliance costs. In particular:

• screening includes matters that are not relevant to a transaction's particular risks to Table 2 land. The most relevant factors are environmental, historic and cultural values, and access. However, an application for consent to acquire sensitive adjoining land must be assessed against a range of factors, such as the transaction's economic effects, which may not relate to environmental, historic, cultural or access concerns, and
• Table 2 land is defined broadly. This has three primary implications:
  • it includes some land of less environmental, historic or cultural sensitivity that is easily accessible. This issue is particularly relevant to some land listed under section 37. For example, consent may be required for commercial land in an industrial area because it adjoins land designated as a recreation reserve or a river that is part of the coastal marine area,
  • the way land is treated under the Act can depend on how individual local authorities designate it in their district plans. This means that land of similar sensitivity across New Zealand may not be treated equally under the Act, and
  • it increases the time and complexity associated with identifying whether land is sensitive. For example, a 'sensitive land certificate' may need to be obtained – at the overseas person's expense – to determine whether the land is sensitive or not.

73. Section 37 also has particular problems of its own. An important classification of land under the Act is set by the regulator (the OIO) rather than in the Act. Stakeholders have raised concerns that section 37, along with the different ways individual local authorities designate land, creates uncertainty about when consent is required.

How could these problems be fixed?

74. While options outlined elsewhere in this document (for example, to simplify the benefit to New Zealand test) would reduce the cost of screening transactions involving sensitive adjoining land, we have identified other options that could further address these problems.

75. Option 1 would remove Table 2 land from the definition of sensitive land, with the exception of the following categories, which would continue to trigger screening requirements:

• foreshore or lakebeds. This would be consistent with provisions in the Resource Management Act for the maintenance and enhancement of public access to coastal marine areas and lakes, and
• some land that is significant to Māori. This would comprise Māori reservations, and land that includes a wāhi tapu or wāhi tapu area that is entered on the New Zealand Heritage List/Rārangi Kōrero or for which there is an application that has been notified.

76. The Resource Management Act would continue to govern the use of the land subject to a transaction (including the environmental effects on the types of land currently included in Table 2).

77. Option 2 would narrow the definition of Table 2 land by removing the section 37 list, but would continue screening adjoining land of environmental, cultural or historic significance and/or where public access is important (the following box provides examples of the types of land currently captured by section 37 that could be retained in the Act).

78. This option would exclude most recreation reserves from screening requirements (except those adjoining the foreshore or lakebeds, and those managed by the Department of Conservation, if retained). These excluded recreation reserves are generally of the least environmental concern and can usually be accessed via public roads or tracks.

79. These options are assessed against the reform criteria in Table 1 below.

Leases of sensitive land that require screening#

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80. Overseas persons must gain consent to lease sensitive land, or obtain a profit à prendre, for three years or more.[23] If an overseas person wishes to re-grant a lease, they can use an exemption to bypass screening as long as certain criteria are met.[24] This significantly reduces the compliance cost of re-grants of shorter-term leases.

81. Leases are screened as they can last for a long time and give the lessees use and enjoyment of land provided by freehold interests.

82. Solely leasehold transactions make up 14.2 per cent of all sensitive land transactions.

What are the problems with current law and practice?

83. Anecdotal reports from investors and lawyers suggest that overseas investment is being deterred by the disproportionate cost, time and stringency of the screening process for leases. Despite the often short-term nature of leases, these transactions are subject to the same scrutiny and compliance costs as higher-sensitivity transactions that involve land leaving New Zealand ownership or control indefinitely.

84. In addition, overseas persons find it difficult to demonstrate that short-term investments will deliver benefits that satisfy the consent process.

85. Because the costs of obtaining consent to enter a short-term lease are the same as those of applying to acquire a freehold interest, overseas persons may have incentives to acquire freehold interests. This is seemingly contrary to the Act's purpose.

How could these problems be fixed?

86. We have identified two options that could address these problems.

87. Option 1 would exclude all short-term leases (for example, leases of 10 years or fewer) from the screening requirements to better recognise their relatively low-risk nature. However, there is a risk that this could encourage investors to enter a series of short-term leases rather than enter a long-term lease. This is distinct from leases that contain options to renew, where the tenure is calculated to include rights of renewal, which are generally captured by the Act's screening requirements.

88. If Option 1 were adopted, the criteria for the re-grant exemption would need to be reconsidered.

89. Option 2 would create a split category of screening, under which the threshold for consent would be:

• for non-urban land of five hectares or more and residential land, leases that have tenures of 10 years or longer, and
• for all other classes of land, leases that have tenures of 35 years or longer. This is consistent with requirements under the Resource Management Act for a subdivision of land by a lease of part of the allotment.

90. Option 2 would remove screening requirements for some leases of less sensitive areas of land. The Act currently recognises this difference in sensitivity. For example, to obtain consent to acquire non-urban land of more than five hectares, an investment must be likely to have 'substantial and identifiable' benefits (rather than just benefits).

91. Under both options, consideration could be given to extending the relevant time period for screening profits à prendre over all or certain types of sensitive land.

Technical issue: periodic leases#

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What currently happens?

92. A periodic lease is a lease that has no set end date (that is, it is not a fixed-term lease) and that continues until either party gives written notice to end the lease. Historically, periodic leases have not been part of New Zealand's overseas investment regime unless they have provided certainty of a term of three years or more.

93. Reforms in 2018 amended the regime to make transactions involving residential land subject to the Act's screening process. Notably, Schedule 3 was enacted to clarify the law relating to periodic leases of residential land.

94. There is a risk that this provision has had the unintended effect of implying that all periodic leases other than those of residential land are part of the Act's screening regime.

What is the problem with current practice?

95. Periodic leases are inherently uncertain because they can be terminated at any time by either the lessors or the lessees. A requirement for consent seems to be a disproportionate response to the potential risks associated with these leases.

How could this problem be fixed?

96. We have identified one option to address this problem. This is to remove the requirement for consent for all periodic leases, irrespective of the type of land.

97. Table 3 assesses the option against the reform criteria.

Who needs consent, and when, to invest in sensitive assets?#

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98. Currently, overseas persons are generally required to obtain consent before they can acquire sensitive assets. The Act screens direct purchases of sensitive assets by overseas persons, such as an individual or entity buying sensitive land. It also screens indirect investments in sensitive assets by overseas persons, such as an individual buying shares in a company that owns sensitive land. Specifically, consent is required when an overseas person (and its 'associates'):

• attains a 25 per cent or more ownership or control interest in an entity (for example, 25 per cent of the ordinary shares in a company) that holds sensitive assets (this is called the '25 per cent threshold'),[25]
• increases, by any amount, an existing 25 per cent or more ownership or control interest in an entity that holds sensitive assets,[26] or
• acquires an interest, of any size, in an entity that holds sensitive land or fishing quota, and where that investment makes the entity an overseas person by being 25 per cent owned or controlled by overseas persons.[27]

99. While the Act's definition of an overseas person is relatively simple to apply to natural persons, it can be complex when legal entities that have multiple owners (some of whom may be New Zealanders or New Zealand entities).

100. The Act's definition of an overseas person focuses on the extent to which a person outside New Zealand has ownership or control of a sensitive asset. This appears to be because if they own the asset they can get value from it (for example, by using it or enjoying other economic benefits associated with it). A person who controls an asset has influence on how it is used, including the extent to which it is protected for future generations or the effects its use may have on New Zealanders' wellbeing.

101. These definitions work quite well for most entities and effectively ensure that their ownership and/or control of sensitive New Zealand assets requires consent. However, there is a view that, for some entities, the Act does not balance the government's need to manage the potential risks of foreign investment with the regime's compliance costs. This is particularly the case for:

• bodies corporate incorporated in New Zealand (especially those also publicly listed in New Zealand),
• portfolio investors,
• entities that are beneficially owned by New Zealanders (for example, KiwiSaver schemes that are managed by Australian trustees),
• investors acquiring small interests in an entity, where those acquisitions result in the entity becoming an overseas person (here the issue relates to the tipping point for an entity being deemed an overseas person), and
• investors who often already have consent making small adjustments to their holdings, where those adjustments do not materially change their levels of control.

102. The problems with the treatment of these entities and the types of transactions, as well as potential options to resolve them, are discussed below.

The definition of overseas person as it applies to bodies corporate#

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What are the problems with current law and practice?

103. The Act should manage the risks associated with overseas persons' ownership and control of sensitive assets. However, the current definition of overseas person captures a range of domestically incorporated bodies corporate that are majority owned and controlled by New Zealanders. They include many of the largest 40 entities on the NZX.

104. The Act's capture of bodies corporate that some would consider fundamentally New Zealand companies imposes significant costs on affected entities and the broader New Zealand economy. This seems disproportionate to the risks being managed, as such entities are unlikely to be the targets of the Act – for example, because ownership of sensitive New Zealand assets by such companies does not raise public concern. Costs include:

• the direct costs of obtaining consent, which stakeholders advise can exceed $100,000 ^{due to the need for legal advice and other consulting services, and}
• the costs associated with the time taken to obtain consent, including lost opportunities. For example, entities may not be able to bid successfully for assets because vendors are unwilling to wait for consent, or the wait for consent may mean they have 'idle' capital that is not earning a return (or has a lower return than desired).

105. Listed bodies corporate, whose shareholders can change daily, have additional costs. New Zealand bodies corporate near the 25 per cent threshold for becoming 'overseas persons' cannot confirm their ownership in real time. An estimate of the ownership structure of a listed company typically takes around five working days, and it can take longer to determine beneficial ownership (if at all).

106. This results in:

• some bodies corporate that are close to, but have not reached, the 25 per cent threshold obtaining consent to ensure that they do not inadvertently breach the Act, and
• other bodies corporate likely unintentionally breaching the Act and exposing themselves to the risk of enforcement.

107. Problems with the current definition are likely to increase, because:

• since October 2018, when consent became required to purchase residential land, the number of transactions screened has increased, and
• overseas ownership of listed entities in New Zealand has been increasing.[28] This is expected to continue due to domestic capital markets maturing, large global investment funds increasingly diversifying, and proactive efforts by the NZX and the Government to attract foreign equity.

How could these problems be fixed?

108. We have identified four options to remove from the regime domestically incorporated bodies corporate with significant connections to New Zealand. While none would resolve broader issues associated with obtaining ownership information from relevant share registries, they would reduce the frequency with which screening requirements are triggered.

109. Option 1 would increase the percentage of overseas ownership required for a domestically incorporated and listed body corporate to qualify as an overseas person, from 25 per cent to 49 per cent.[29]

110. This is designed to better target the regime at entities where the majority of economic returns associated with sensitive assets would flow offshore. It is similar to the approach used in Canada under the Investment Canada Act.

111. Option 2 targets the screening regime at entities where overseas persons have material degrees of control over sensitive assets.

112. Under this approach, a domestically incorporated and listed body corporate would be an overseas person only if 'substantial holdings'[30] by overseas persons in classes of securities that confer control rights[31] cumulatively totalled 25 per cent. This is similar to the approach used in Australia under the Foreign Acquisitions and Takeovers Act 1975 and would effectively remove widely held companies (that is, listed companies with diverse shareholder bases) from the regime.

113. Option 3 would impose screening requirements on domestically incorporated and listed bodies corporate when:

• more than 49 per cent of the economic returns flow to overseas persons (that is, the entity is majority, or close to majority, foreign owned), and/or
• overseas persons collectively hold substantial holdings in a securities class that confers control rights at a level of 25 per cent or more (that is, the entity is subject to foreign control).

114. Option 4 would not change the definition of an overseas person. Instead, all domestically incorporated bodies corporate could apply for an exemption from the Act if they have a strong connection to New Zealand and a strong record of compliance. For example, an entity could qualify if:

• it is incorporated in New Zealand,
• it is headquartered in New Zealand,
• it is at least 51 per cent owned by New Zealanders,
• New Zealanders control the board (that is, New Zealanders constitute at least half of the board of directors),
• it is listed on a securities exchange, is listed on a New Zealand securities exchange and has dispersed overseas shareholdings. That is, 'substantial holders' do not comprise 25 per cent or more of a class of securities with control rights,
• no 'foreign government'[33] or its associate(s) owns equity in the entity,
• it has received consent for at least two investments under the Act in the previous five years, and
• it has a strong record of compliance with the requirements of the Act and New Zealand law more broadly. For example, no enforcement action under the Act has been validly taken against the entity.

115. To support compliance, exempted entities would be required to notify the OIO whenever there was a material change in their ownership or control (for example, the appointment of a new director to the board).

116. Option 4 could operate as an alternative to, or complement, any of Options 1-3.

117. Options 1-4 are summarised in Figure 4. They are assessed against the reform criteria in Table 4.

Figure 4: Comparison of options to remove 'New Zealand' companies from the regime[34]

Screening of portfolio investors#

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What currently happens?

118. A portfolio investor is an entity that obtains a significant minority interest (that is, generally less than 10 per cent) in a body corporate, investment fund or individual project but has no, or a limited, ability to influence any material control over that entity. As it has no controlling interest and long-term returns are generally the priority, its investments are deemed passive investments.

119. Structured as trusts or bodies corporate, portfolio investors are generally professional investors that comply with international regulatory best practice. Many are overseas persons under the Act, so are required to obtain consent before acquiring interests in sensitive New Zealand assets. They can include portfolio investors (such as KiwiSaver schemes)[35] that are investing on behalf of, or controlled by, New Zealanders, if 25 per cent of the entities' governing bodies are overseas persons. This is despite the fact that those New Zealanders would generally be able to acquire such assets in their own right without consent.

120. The Overseas Investment Regulations 2005 (the Regulations) theoretically enable qualifying[36] portfolio investors and entities that are New Zealand controlled to apply for an exemption from the Act's consent requirements in relation to significant business assets and sensitive land. An exemption would be in the form of an Order in Council, which generally requires Cabinet approval.[37]

121. Under the exemption regime, an investment made by an exempted entity (Entity A) in another entity (Entity B)[38] generally would not contribute to Entity B being deemed an overseas person. For example, if Entity B is 20 per cent owned by overseas persons and Entity A acquires five per cent of Entity B, Entity B would not qualify as an overseas person, despite being 25 per cent owned by overseas persons.

What are the problems with current law and practice?

122. There is a question about when screening should apply to transactions in which overseas persons do not obtain majority ownership or meaningful control of sensitive New Zealand assets. As portfolio investors do not have majority ownership or exert control, it could be seen as inappropriate – as indicated by the existing exemption provisions in Schedules 3 and 4 – that they be required to obtain consent to acquire sensitive New Zealand assets in all cases.

123. In addition, imposing consent requirements (with associated compliance costs and delays) on such investments may disincentivise investment in New Zealand. This is particularly problematic given New Zealand's financing gap for large infrastructure, and stakeholders' views that portfolio investors:

• have an important role in meeting New Zealand's funding requirements, and
• can offer unique expertise to domestic partners.

124. Imposing screening requirements on entities (beneficially owned or controlled by New Zealanders) such as KiwiSaver schemes and other regulated superannuation funds may also inhibit the Government's broader objective of maximising New Zealanders' retirement savings.

The existing exemptions do not resolve these issues

125. The existing exemptions were designed to resolve some of these issues for portfolio investors that met relevant requirements. However, there are a number of significant problems with their operation. In particular:

• a requirement to amend the Regulations to exempt entities from the Act increases the regime's complexity and delays decision making relative to other exemptions, because Cabinet approval is required,
• there are no legislative criteria for the types of entity likely to qualify for the exemption. This creates uncertainty about the provisions' scope and limits their usefulness for investors, and
• in 2018, amendments to the Act's exemption‑making power mean that adding new portfolio investors or New Zealand-controlled persons to Schedule 3 or Schedule 4 might not be possible.

What are the options for reform?

126. We have identified four options to amend the treatment of portfolio investors. These aim to ensure that screening is only required for transactions in which sensitive assets will be majority owned or materially controlled by overseas persons. Under each option, broadly consistent with the Schedule 3 and 4 exemptions, it is proposed that any investments made by an exempted entity in a New Zealand entity would not contribute to the entity being deemed an overseas person.

127. Option 1 would establish a class exemption for a portfolio investor where the entity's policy is to:

• limit its interest in New Zealand companies to portfolio minority investments. It does not seek to control these companies, and
• not seek representation on the boards of companies in which it holds securities.

128. This option is modelled on OIO guidance to access the existing Schedule 3 exemption. However, unlike the Schedule 3 exemption, investors would self-assess their compliance with the requirements. That is, Cabinet would not determine whether any entity qualified for the exemption in advance of that entity acquiring sensitive assets.

129. Option 2 would establish a class exemption for entities beneficially owned or controlled by New Zealanders. That is where:

• at least 51 per cent of the entities' funds are invested on behalf of non-overseas persons (that is, New Zealanders), and
• any control rights associated with the entities' holdings are at least 76 per cent beneficially held by New Zealanders (that is, overseas persons cannot have negative control over any entity in which the entities invest).

130. Option 3 would be a narrower class exemption, aimed at entities that are beneficially owned or controlled by New Zealanders but limited to domestically regulated superannuation funds, such as KiwiSaver schemes.

131. Option 4 would amend the Act to allow individual exemptions for portfolio investors and entities beneficially owned or controlled by New Zealanders. Entities could apply for an exemption if they met the criteria specified in Options 1 and 2 for portfolio investors and entities beneficially owned or controlled by New Zealanders. Ministers would make the decisions and conditions could be applied (consistent with other exemptions under the Act).

132. Options 1-3 are alternatives. Option 4 could operate either in isolation or in conjunction with any other option.

133. Table 5 assesses these options against the reform criteria.

Technical issue: 'tipping point' for requiring consent#

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What currently happens?

134. An overseas person seeking to acquire an interest in an entity (including a body corporate, partnership or trust) that owns or controls an interest in sensitive land or in fishing quota requires consent if the acquisition results in that entity becoming an overseas person. For example, Person A requires consent to buy one per cent of Company B if Company B is 24 per cent overseas owned and also owns or controls sensitive land.

135. This provision – section 12(b)(iii) of the Act[39] - reduces the risk of a group of overseas persons (who are not associates)[40] gaining control of sensitive assets without demonstrating that the overseas ownership or control would benefit New Zealand.

What are the problems with current law and practice?

136. The Act imposes consent requirements on overseas persons making small investments that give them no control. The requirements could disincentivise investment in New Zealand entities and increase the risk of overseas persons breaching the Act inadvertently. This is because:

• screening requirements can impose costs that outweigh the potential returns from small investments. This is particularly problematic for listed entities close to the threshold for being overseas persons, where consent requirements could be triggered many times a day, and securities may only be held for short periods,
• it is difficult to determine when a transaction will trigger a requirement for consent, particularly for overseas persons investing in listed entities.[41] This increases the chance of overseas persons inadvertently breaching the Act, and
• even if an entity seeks consent for its investment because it believes the investment's value will exceed the compliance cost, it is challenging to satisfy the screening criteria. This is because it is difficult to demonstrate any additional benefit to New Zealand from owning a small, non‑controlling stake in an entity.

137. While inadvertent breaches of the law are likely happening, the provision may not be enforced because it is difficult to establish when breaches occur. While other changes proposed in this chapter could reduce the frequency with which the provision is triggered, additional reforms would ensure that the regime operates effectively.

How could these problems be fixed?

138. We have identified three options to address the problems with section 12(b)(iii) of the Act. However, general limitations regarding identifying the beneficial ownership of entities listed on the NZX mean that none addresses the problem of identifying when an entity is close to becoming an overseas person.

139. Option 1 would replace section 12(b)(iii) with a general anti-avoidance provision that prohibits a person delaying a transaction that would result in an entity becoming an overseas person, in order to allow the entity to buy sensitive land without obtaining consent. This would simplify the regime by targeting the Act at deliberate attempts to undermine its intent.

140. Options 2 and 3 aim to better target the regime at cases where an acquirer of securities in a transaction that results in an entity becoming an overseas person could theoretically have control over sensitive assets.

141. Option 2 would require consent for a transaction in an entity that owns or controls an interest in sensitive land where an overseas person acquires a class of securities in that entity, if:

• when the transaction is complete, the acquirer will hold at least five per cent of the total number of securities in that class, and
• as a result of the transaction, the entity invested in will be an overseas person (or the acquisition is the first such transaction after the entity becomes an overseas person).

142. Option 3 would establish the same control thresholds for consent as Option 2, but limit their application to publicly listed entities (the provision for other entity types would stay the same). This is designed to target the arguably more significant problems that section 12(b)(iii) presents for listed entities. Under this option, the rules could be closely aligned with the substantial product holder regime under the Financial Markets Conduct Act 2013.[42] For example, there could also be a one per cent threshold for transaction size.[43]

143. Table 6 gives examples of how Options 2 and 3 would work. Table 7 assesses each option against the reform criteria.

Technical issue: incremental investments above a 25 per cent interest#

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What currently happens?

144. The Act requires screening for a transaction where an overseas person makes additional incremental investments (directly or indirectly) in a sensitive asset for which they already have consent to hold a 25 per cent interest.

145. Some small incremental investments that do not materially change an investor's control of sensitive New Zealand assets are exempted from the requirement to obtain consent under the Regulations.[45] The exemption applies if:

• the overseas person already has consent to hold shares[46] in the target company that holds (directly or indirectly) sensitive assets,
• the shares being bought (the incremental investment) are of the same class as those for which the overseas person holds consent,
• the investment is for either:
  • less than five per cent of the total number of shares for which the overseas person initially had consent, or
  • less than 10 per cent of all shares in the class and does not result in the overseas person crossing a control threshold (25, 50, 75 or 90 per cent), and
• the investment occurs within five years of the overseas person initially getting consent.

146. The exemption reflects the view that the risks of some small transactions are so minimal that obtaining consent is disproportionately costly.

What are the problems with current law and practice?

Primary problem

147. It is not clear why the Act needs to screen incremental investments that do not cross important control thresholds.

148. Arguably, any increase in a control or ownership interest that does not cross a key control threshold does not result in a substantial change in ownership or control. Requiring consent for such incremental investments unduly restricts investors reinvesting in companies. The risks from reinvestment that does not cross an important control threshold are low.

149. An investor's interest in a company can also increase because of other investors' actions that are outside their control, such as when other shareholders in a company participate in a share buyback[47] and the investor does not participate. In this case, consent is technically required even though the overseas person took no action.

Secondary technical problems

150. The OIO has indicated that it screens transactions that, but for technical issues, would qualify for the exemption. This creates unnecessary compliance costs for investors and the OIO and there is anecdotal evidence that:

• these costs are discouraging overseas persons from increasing their interest in companies by relatively small amounts, and
• companies are unknowingly breaching the Act.

151. The technical issues are described below.

152. Technical Issue 1: Investments where the person increasing the shareholding is not the consent holder. The exemption only applies to a person who already has consent. It does not apply to transactions if a company 'downstream' or 'upstream' of the consent holder wishes to increase its shareholding - even if the transaction does not materially alter the company's ownership or control structure. This situation is illustrated in Figure 5, and explained in the subsequent paragraph.

Figure 5: Two scenarios showing changes in the upstream ownership of sensitive assets and how they interact with the exemption for minor and incremental changes in ownership or control

153. The differences between the two scenarios in Figure 5 are the timing of the transactions and who holds the consent (there is no difference in ownership structure and risk).

• In Scenario 1, Overseas Company 2 acquires consent on Day 1. Its shareholder, Overseas Company 1, does not qualify for the exemption for the share subscription on Day 2 because it does not hold the consent.
• In Scenario 2, Overseas Company 1 acquires the consent on Day 1 and qualifies for the exemption on Day 2 because it holds the consent.

154. Technical Issue 2: Investments in assets that did not require consent at the time of the initial investment. The exemption does not apply to a transaction if the asset was not sensitive when the overseas company initially acquired its interest. An asset can become sensitive over time if:

• there is a law change or regulatory change – for example, a rating category of land changes to residential, or a neighbouring property becomes a reserve, or
• a change to the asset's nature makes the asset sensitive. For example, an increase in the value of a company (to more than $100 million) makes shares in the company become 'significant business assets'.

155. Technical Issue 3: Five-year restriction. The exemption is only available for incremental investments made within five years of the original consent. This limit may be to prevent a company's ownership or control structure changing over an extended period. However, there are other protections against this, such as the ongoing good character conditions in a consent. The rule can also be considered inconsistent with the basis of the exemption (that is, that small changes in ownership present limited risks in general).

How could these problems be fixed?

156. Option 1 would address the primary problem. It would allow an overseas person to increase its control interest by any amount below the relevant key control threshold. This could be done by amending the trigger sections in the Act[48] rather than expanding the exemption in the Regulations.

157. Any increases in ownership interest would also be restricted within those thresholds. However, this may depend on any changes in the definition of 'overseas person' as it relates to bodies corporate, as discussed in the previous section. Table 8 provides examples of how it would apply.

158. Option 2 addresses Technical Issue 1 by allowing any upstream or downstream shareholder in the consent holder (direct or indirect) to qualify for the exemption. This would ensure that small upstream transactions (such as capital raisings) that will not result in any material changes to the ultimate ownership or control of the sensitive asset do not require consent.

159. Option 3 addresses Technical Issue 2 by allowing a shareholder to qualify for an exemption if:

• consent was not required at the time of the original transaction, and was not in fact obtained, and
• the underlying asset has become sensitive since the original transaction.

160. Option 4 addresses Technical Issue 3 by removing the five-year limit from the exemption.

161. These options could be adopted in isolation or as a package. Table 9 assesses these options against the reform criteria.

How does the Act screen transactions in sensitive assets?#

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Assessing investors' character and capacity#

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What currently happens?

162. Overseas persons seeking consent to invest in sensitive New Zealand assets must, in most cases, satisfy the investor test (some sensitive land transactions are exempt [49]).

163. The investor test seeks to ensure that overseas investors will behave in a way that is consistent with New Zealand laws and norms. It therefore considers the nature of the investor rather than the investment.

164. The test is transaction based, which means repeat investors must satisfy it for each transaction. However, the OIO is streamlining its processes for repeat investors, including by building investor profiles that can be used to speed up assessments.

Who the investor test is applied to

165. The investor test focuses on the overseas person(s) with the most influence over the proposed investment – that is, the 'relevant overseas person' (ROP) or the 'individual with control' (IWC) over the ROP (if the ROP is not a natural person; see Table 10). It is for decision makers to determine who the relevant ROP and IWC are in respect of each transaction. This reflects:

• the commercial reality that, for many investments, looking solely at the entity acquiring an asset does not reveal who actually has control of relevant assets, and
• that a bright-line definition of ROP/IWC could lead overseas persons to take avoidance measures. For example, defining all entities two levels up an asset's ownership chain as ROPs could result in the asset's ultimate owners avoiding screening by creating additional holding companies between themselves and the overseas person.

What risks the investor test seeks to manage, and how

166. Each ROP/IWC must satisfy the investor test's four criteria: business experience and acumen, financial commitment, good character, and immigration eligibility. These criteria assess the risks that overseas investors may pose, for example to New Zealand's economy, society, security or reputation. In doing so, they seek to ensure that overseas investors will behave in a way that is consistent with New Zealand's laws and norms.

What are the problems with current law and practice?

167. The investor test imposes compliance costs that are potentially disproportionate to the risks posed by most overseas persons.

Who the investor test is applied to

168. Consistent with the Act's purpose, it is appropriate to screen overseas persons who may have material ownership of, or meaningful control over, sensitive assets (that is, ROPs and IWCs). However, stakeholders have raised concerns that:

• the broad definition of ROP/IWC can mean the investor test is applied to individuals who, in practice, have limited involvement with prospective investments. This could increase compliance costs considerably and give New Zealand a reputation for having an overly intrusive screening regime,
• the investor test can apply to New Zealanders despite their being entitled to acquire sensitive assets in their own right without being screened. For example, New Zealand directors of overseas companies seeking consent to acquire sensitive assets may be designated as IWCs,
• the investor test does not allow decision makers to consider the broad 'character' of a corporate entity involved in a transaction (separate from its owners/directors), and
• repeat investors are required to satisfy the test every time. This could impose compliance costs disproportionate to the risks posed by the investor in respect of each investment.

What risks the investor test seeks to manage, and how

169. It is not clear that the investor test assesses risk in the most effective way, or that its benefits outweigh the compliance costs it imposes. Table 11 considers all of the test's criteria in terms of the risks the criterion seeks to manage, and how decision makers consider compliance with those criteria. It also assesses each criterion's merits.

How could these problems be fixed?

170. We have identified three options to resolve the investor test's problems, and several other changes to improve the test. The latter could be adopted in addition to Options 1‑3, or in isolation.

171. Option 1 would slightly narrow the scope of the investor test. It would:

• retain the business experience and acumen criterion but remove the financial commitment and immigration criteria,
• simplify the 'good character' criterion by:
  • narrowing the "whether convicted or not" aspect of the requirement to consider offences or contraventions, so that allegations are only considered for certain crimes (for example, those relating to fraud, dishonesty, corruption or tax avoidance), and
  • removing the requirement for decision makers to consider "any other matter that reflects adversely on the person's fitness to have the particular overseas investment".

172. Option 2 would significantly narrow the scope of the investor test. It would:

• remove the business experience and acumen, financial commitment and immigration eligibility criteria, and
• simplify the good character criterion by removing:
  • the "whether convicted or not" aspect of the requirement to consider offences or contraventions, and
  • the requirement for decision makers to consider "any other matter that reflects adversely on the person's fitness to have the particular overseas investment".

173. Option 3 would fundamentally amend the investor test by shifting to a bright-line, 'checklist'-style assessment. The assessment would require, for example, that an ROP/IWC:

• does not have any criminal convictions (punishable by a term of imprisonment) or civil penalties,
• has not had any adverse findings from a security agency,
• is not/has not been an undischarged bankrupt,
• is not/has not been disqualified from directing a business under the Companies Act, or disqualified under any provision of the Securities Act 1978, the Securities Markets Act 1988, the Financial Markets Conduct Act or the Takeovers Act (or equivalent law in other jurisdictions), and
• is not/has not been subject to a confiscation order under the Proceeds of Crime Act 1991 (or equivalent law in other jurisdictions).

174. If a bright-line test were adopted, the appropriate time limits for the chosen criteria would need to be considered (that is, how recently a breach would need to have occurred for it to be relevant). For example, under the Financial Service Providers (Registration and Dispute Resolution) Act the consideration of some disqualifying convictions is limited to those that took place within the previous five years.

175. Under Options 1-3, the requirement for an applicant to make a statutory declaration of 'good character' could continue, as could the OIO's practice of having conditions of consent that require an ROP/IWC to remain of good character (and taking enforcement action if these conditions are not met).

Additional potential changes

• New Zealanders: Remove the requirement for New Zealanders identified as ROPs/IWCs to satisfy the investor test given that New Zealanders are not the intended subjects of the Act.
• Corporate character: Expand the test's scope by allowing it to apply to non-natural persons (for example, bodies corporate and trusts). This would enable a broad consideration of corporate character rather than it being assessed by proxy through an entity's governing members. It could consider, for example, a parent company's tax arrangements or its labour and environmental practices. The test would continue to be applied to natural persons identified as ROPs/IWCs.
• Standing consent: Introduce a 'standing consent' for the investor test. This would exempt overseas persons who have previously received consent via the investor test if there have been no changes in ROPs'/IWCs' nature and suitability. The notification of any such changes would be mandatory and the standing consent could be removed if conditions, such as compliance with the Act, were not met. If there has been a change in ROPs/IWCs (for example, new directors have been appointed to a board), only those involved would be tested/re-tested.[52]

176. Table 12 assesses these options against the reform criteria.

Screening the impacts of investments#

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What currently happens?

177. As well as satisfying the investor test, overseas persons wishing to buy sensitive land must generally satisfy the benefit to New Zealand test.[53] This test requires them to demonstrate that their investment will, or is likely to, benefit New Zealand (or any part of it or group of New Zealanders). If the relevant land includes non-urban land of more than five hectares, the benefits must be, or be likely to be, substantial and identifiable.

178. In considering whether a prospective investment satisfies the test, decision makers examine the proposed investment's likely effects on up to 21 economic, environmental and cultural factors (see Table 13). These factors are included in the Act and the Regulations. Decision makers determine the factors that are relevant to their decisions, and their relative importance. The test is unique among global investment screening regimes. Its closest comparator is Canada's 'net benefit' test (under the Investment Canada Act), but this focuses on economic factors.

179. Decision makers must use a counterfactual test to help determine if a proposed investment is likely to benefit New Zealand. The test, defined in case law, compares what is likely to happen if an overseas investment proceeds with what is likely to happen without it ('the counterfactual').[54]

180. The OIO generally considers that a "competent and adequately funded alternative New Zealand purchaser" would be the most likely counterfactual. An applicant may be able to use a different counterfactual if they can provide convincing evidence in support of it (for example, if they can show that the vendor is the most likely alternative owner if the overseas investment does not proceed).[55]

181. The Ministerial Directive Letter provides additional guidance to the OIO on applying the benefit to New Zealand test.

What are the problems with current law and practice?

182. Parts of the benefit to New Zealand test are unclear and unnecessarily complex. This can create uncertainty, impose unnecessary costs and result in time-consuming processes, all of which can deter overseas investment.[56] In addition, the test's design and gaps in coverage may undermine decision makers' ability to deny consent to investments that are not in New Zealand's national interest.

183. These problems relate to:

• the types of factors used for screening,
• the way in which these factors are reflected in legislation, and
• the threshold for determining whether an investment is beneficial.

The type of factors assessed

184. There are gaps in the test that undermine the government's ability to manage the risks of overseas investments: The Act generally seeks to ensure that investments in sensitive assets are only allowed where they are beneficial to New Zealand. It should therefore enable decision makers to consider holistically a proposed investment's likely benefits and risks, while acknowledging that some risks are potentially better managed through legislative tools other than the Act.

185. While the test includes a large number of factors, there are gaps that may limit decision makers' ability to consider an investment's full effects. In particular:

• there is limited ability to manage risks to national security associated with a particular investment (rather than an investor).[57] The Act does not:
  • distinguish between non-government and government investors (or their associates). Government investors may have broader political or strategic foreign investment objectives,
  • allow decision makers to consider national security when determining whether an investment is likely to be beneficial. It does allow decision makers to consider whether New Zealand's strategic and security interests are or will be enhanced by a prospective investment, but they have only a limited ability to look at the risks,[58] or
  • allow the government to assess whether an investment in a significant business asset (where the transaction does not include any sensitive land) is beneficial. This is despite the fact that investments in strategically important industries (such as transport and media) and critical infrastructure[59] (such as electricity distribution networks and financial markets) could provide opportunities for espionage or sabotage, and allow investors to exert inappropriate leverage over New Zealand,
• there is no ability to manage any risks to national security and public order presented by investments not currently subject to screening (for example, investments in business assets below the monetary threshold). This could be particularly problematic with respect to small firms with advanced dual-use technology (that is, technology with both civilian and military applications). The risks of foreign ownership and control are receiving increasing international attention and partner countries are taking steps to manage them,[60]
• there is limited ability to deny consent to transactions (above the monetary threshold) that could be seen to present risks of substantial economic harm to New Zealand, such as investments in critical infrastructure (such as the financial sector, electricity and water distribution networks, and fuel pipelines), entities that link New Zealand to global value and distribution networks, and where investors have access to subsidised capital that may distort the allocation of economic resources or trade flows, and
• there are concerns that the Act does not allow certain other types of risk to be fully considered. In keeping with the Terms of Reference, this consultation document considers concerns about:
  • water extraction: There are some public concerns about overseas investments involving water bottling. These include the potential environmental effects and that overseas persons may profit from a high-value resource without paying a charge (further discussed from page 82),
  • the integrity of New Zealand's tax system: There is a concern that overseas persons may not pay enough tax or return enough value to New Zealand (from page 85), and
  • Māori cultural values as they relate to physical and historical features of sensitive land: Media commentary, protests and submissions show some concern that the existing benefit to New Zealand test does not consider Māori cultural values enough (from page 88).

186. There is uncertainty about the extent to which negative effects can be considered when assessing consent applications:When determining whether an investment is beneficial, decision makers' practice has been to not consider potential downsides of an investment because the Act does not specifically refer to them. For example, if an investment is likely to result in reduced walking access, this would not be weighted as a cost against any benefits that the investment brings (though it might inform the counterfactual).

187. The government's flexibility to add factors to the test undermines certainty:The Act allows the government to add factors to the benefit to New Zealand test by regulation. Depending on the amendment regulations' transitional provisions, the new factors can affect any applications that are undecided at that point. This provides the government with the flexibility to quickly address any perceived screening gaps but, as noted by the OECD,[61] it undermines investor certainty. Parliament's Regulations Review Committee has also criticised the provision because it enables the executive branch of government to make regulations that effectively amend primary legislation made by Parliament.[62]

How the factors are reflected in legislation

188. The large number of test factors (and overlaps between them) increases compliance costs and limits decision makers' ability to assess effects holistically: Despite contrary guidance from the OIO, the large number of factors in the test can lead overseas persons to structure their applications to meet as many as possible (even if the likelihood of a benefit arising is doubtful) or use one action to satisfy many. For example, if an investor plans to buy a business on sensitive land, expanding a product line could demonstrate benefits across five factors:

• the creation of new jobs,
• increased export receipts,
• greater productivity on the land,
• additional investment for development purposes, and
• increased processing in New Zealand of New Zealand's primary products.

189. This encourages unnecessarily lengthy, complex, fragmented and duplicative applications that increase costs for overseas persons and decision makers. It can also limit decision makers' ability to assess proposals holistically and result in long processing times.

The threshold for determining whether an investment is beneficial

190. The counterfactual test is complex, increasing uncertainty and compliance costs: This test is one of investors' main concerns. They find it unclear and costly to comply with and suggest that it has limited relevance in many cases. The OIO likewise reports that counterfactual submissions vary in quality. It says overseas persons can struggle to develop appropriate counterfactuals and identify their 'points of difference' (how their investments will be more beneficial than the counterfactuals, and why).

191. The test is particularly difficult to apply:

• where the relevant land could have many uses, so there is no obvious counterfactual. For example, empty land zoned for development, particularly for commercial purposes, could be used in many ways, and
• in cases involving proposed sales of well managed assets between overseas persons, where a prospective purchaser must demonstrate benefits additional to those already demonstrated in the vendor's original application.

192. The second of these scenarios arises often,[63] and investors have described it as a significant hurdle to investing in New Zealand. Anecdotal evidence also suggests that the law can lead vendors to underinvest in land planned for sale (or the assets on that land) to better enable overseas persons to satisfy the test. These do not appear to be intended consequences of the law, given the relevant land is already owned by overseas persons.

How could these problems be fixed?

193. Options outlined elsewhere in this consultation document could reduce some of the problems outlined above. For example, reforms to the definition of overseas person and sensitive adjoining land will help to ensure that screening focuses on higher-risk transactions.

194. Table 14 describes five options that could address the problems further. Options 1-4 are alternative approaches. Option 5 could operate in isolation or as a complement to any other option.

195. Option 1 would retain much of the design of the existing benefit to New Zealand test, while broadening its coverage to address perceived gaps. Decision makers would be able to consider:

• any negative effects of a proposed investment to the extent that those effects relate to factors in the test (such as job losses), and
• the effects that the investment will or is likely to have on New Zealand's national security.

196. The ability to add factors to the benefit to New Zealand test by regulation would be removed.

197. Option 2 would introduce a substantial harm test that would operate in conjunction with a simplified benefit to New Zealand test. That is:

• all investments would have to satisfy the investor test,
• investments in sensitive land would also have to satisfy the simplified benefit to New Zealand test, and
• certain transactions to acquire sensitive land or significant business assets would also be subject to the substantial harm test.

198. The substantial harm test would provide decision makers with broader grounds to decline prospective investments. It would be based on OECD guidance on managing risks associated with investments, and be similar to the test that underpins Japan's foreign investment screening regime. In particular, decision makers would have the power to deny consent to investments that pose risks of substantial harm to New Zealand. These could broadly include:

• threats to public order: Investments that would damage the functioning of New Zealand's society or threaten New Zealand's political or economic survival,
• threats to public health and safety: Investments that would severely damage the health and safety of the New Zealand public or a section of the public, and/or
• threats to essential security interests: Investments that would threaten New Zealand's economic wellbeing and/or national security. Ministers would be able to decline transactions proposed for completion during a time of war or armed conflict, or any other emergency in international relations.

199. The high threshold for activating the substantial harm test means it could only be exercised by Ministers (that is, it could not be delegated). Ministers would be accountable for its use and for determining what constitutes 'substantial harm' (rather than, for example, assessing a prospective investment against legislated criteria that attempt to define substantial harm). This would ensure that the test is responsive to a dynamic global environment. The threshold for substantial harm would be a policy decision for each government.

200. Operationally, the test would be used for any transaction identified by the security services as presenting potential national security risks. The Minister would also be able to call in any other prospective investment (generally screened under the Act) for consideration against the substantial harm test.

201. To balance the additional flexibility that the substantial harm test provides for decision makers in assessing applications for consent, all applications involving sensitive land would be assessed against a simplified benefit to New Zealand test. The existing test would be reformed to:

• combine factors with similar objectives to reduce their number and specificity,
• remove the requirement for benefits associated with non-urban land of more than five hectares to be 'substantial and identifiable'. This is because any investment that has a risk of causing substantial harm to New Zealand could be denied consent under the substantial harm test. This would also reduce the framework's complexity, and
• remove the ability to add factors to the test by regulation.

202. With reference to the applicable counterfactual (from page 75), a simplified test could ask decision makers to consider whether:

• an investment will or is likely to result in economic benefits to New Zealand, including but not limited to the introduction of new technology or skills, increased efficiency or productivity, and the creation of new job opportunities,
• there will be adequate mechanisms to provide, protect or enhance areas of:
  • significant indigenous vegetation,
  • significant habitats of indigenous fauna, and
  • significant habitats of trout, salmon and wildlife protected under section 3 of the Wildlife Act, and game defined in section 2(1) of that Act,
• there will be adequate mechanisms to:
  • provide, protect or enhance public access to or across the relevant land, and
  • protect or enhance historic heritage, including wāhi tapu, within the relevant land, and
• the overseas investment will or is likely to give effect to or advance a significant government policy or strategy.

203. As with the current test, a relevant requirement could be whether any special land (for example the foreshore) has been offered to the Crown or whether farmland has been advertised for sale (subject to the potential changes outlined in the sections starting on pages 91 and 95 respectively). Depending on the decisions made, the simplified benefit to New Zealand test could also include factors related to water extraction and Māori cultural values as they relate to the physical and historical characteristics of the relevant sensitive land.

204. The simplified benefit to New Zealand test would largely encompass factors covered by the existing test, with many of the currently narrowly expressed factors captured in a new 'economic benefits' factor. This new test would not include some factors that applications cite reasonably frequently, such as those relating to consequential benefits[64] and New Zealanders' oversight of and participation in the investment and the overseas person.[65] This is based on the assumption that benefits relating to these factors could be raised through other factors in the simplified test (for example as economic benefits).

205. The simplified benefit to New Zealand test would not cover negative effects (as proposed under Option 1). This is because the substantial harm test would empower decision makers to deny consent to investments with significant negative effects.

206. Figure 7 illustrates Option 2.

Figure 7: Overview of Option 2 (substantial harm test and simplified benefit to New Zealand test)

207. Option 3 would operate similarly to Option 2. The primary difference is that the national interest test would allow decision makers to consider whatever features of a prospective investment - both positive and negative - they consider relevant when determining whether to grant consent. This is in contrast to the prescribed factors in the existing benefit to New Zealand test and those proposed in the substantial harm test.

208. As with the proposed substantial harm test, only Ministers would be able to use the test and they would determine what is, or is not, in New Zealand's national interest. However, unlike the substantial harm test, a national interest test would allow Ministers to consent to transactions that they determine to be in New Zealand's national interest rather than only deny consent to those that pose substantial harm.

209. To support investor confidence, if a national interest test were adopted it is proposed that:

• the government would provide guidance on the factors likely to be considered, and their relative importance, in determining what constitutes New Zealand's national interest,
• before an application could be declined, the relevant Minister would consult security Ministers and other Ministers as relevant (for example the Minister of Foreign Affairs or the Minister for Economic Development). This is similar to the requirements under the Outer Space and High-altitude Activities Act 2017,
• Ministers could be required to publish the reasons for declining prospective investments unless it risked the release of sensitive national security information, and
• decisions could be reviewable (either on the merits or judicially).

210. As in Option 2, all applications involving sensitive land would continue to be assessed against a simplified benefit to New Zealand test, even if they were also expected to be subject to the national interest test.

The national interest test's design

211. When considering whether a prospective investment is in the national interest, the Minister (in a way similar to the national interest test in the Outer Space and High‑altitude Activities Act) could consider:

• economic or other benefits,
• any risks to national security, public safety, international relations or other national interests,
• the extent to which risks can be mitigated by consent conditions or other legislation, and
• any other matters that they consider relevant, such as the investment's environmental or cultural implications.

The national interest test's application

212. The national interest test could be used to assess applications to acquire:

• an interest in a strategically important industry or activity (that is, one critical to New Zealanders' wellbeing) such as:
  • media,
  • telecommunications,
  • transport,
  • defence and military,
  • encryption and securities technologies and communications, and/or
  • finance,
• critical infrastructure, and
• any asset where the applicant is a 'foreign government' or its associate.

213. Note the list is more likely to be specified in regulations than in primary legislation, to ensure that the Act remains responsive to changes in government and the types of risk presented by foreign investment.

214. The national interest test could also apply to investments that the security services identify as posing a potential risk to national security or that are called in by Ministers. This means that Ministers could elect to apply the national interest test to any transaction screened under the Act. This is important to ensure that Ministers and security agencies have the discretion to assess applications that may not present as higher risk at face value or as higher risk today, but could in the future as the threat environment changes.

215. Figure 8 illustrates Option 3.

Figure 8: Overview of Option 3 (national interest test and simplified benefit to New Zealand test)

216. Option 4 would more fundamentally alter the Act's consent framework and considerably increase decision makers' discretion. The benefit to New Zealand test would be replaced with a national interest test (that is, all transactions would be subject to the national interest test). The test itself would be designed in the same way as in Option 3 and would apply to all investments screened under the Act, excluding those in residential land and forestry assets on sensitive land (unless the acquisitions would be subject to satisfying the current benefit to New Zealand test).

217. This is the simplest approach to addressing the identified problems, and most similar to Australia's foreign investment screening regime. It is depicted in Figure 9.

218. Under this option, consideration would be given to whether to retain the existing requirement to offer special land back to the Crown. It is necessary because this requirement is currently triggered under the benefit to New Zealand test for certain transactions.

Figure 9: Overview of Option 4 (national interest test)

219. Option 5 would grant Ministers the power to call in for screening certain transactions involving an overseas person (or their associates) if they raised national security and/or public order risks, even if they would not ordinarily require screening under the Act (that is, if they were below the current screening threshold of $100 million).

220. Transactions that could be called in on national security grounds could include, for example, investments in dual‑use technology firms and critical direct suppliers to the government's defence, security and/or intelligence functions. The public order grounds are intended to be used to call in investments in the media sector (although it is possible that the media sector may be called in on national security grounds).

221. International agreements that generally restrict New Zealand's ability to screen additional classes of investment provide exceptions for measures that address certain types of national security, and certain agreements also allow for measures to address public order concerns.

222. Transactions that raise national security or public order risks, but are ordinarily screened under the Act, would only be subject to this test if Option 5 were adopted on its own. If any of Options 1-4 were adopted, such transactions would be screened under the new general consent framework, because each option would allow decision makers to consider prospective transactions' implications for national security and public order (in addition to other matters).

223. Such powers are not unusual globally. For example:

• under Canada's National Security Review of Investments regime, transactions that are otherwise not subject to investment screening can be assessed to manage any potential national security risks,
• the Committee on Foreign Investment in the United States (CFIUS) can block, modify or unwind any transaction by or with any foreign person that could result in foreign control of a United States business,
• the US Foreign Investment Risk Review Modernization Act, upon commencement, will expand on the CFIUS to include, among other matters, investments in real estate located near sensitive government facilities, and minority investments that might not be controlling but that provide access to sensitive information or technology (such as dual-use technology), and
• in late 2018, the German Government agreed to include German media companies within the scope of its foreign investment screening regime, which includes considering whether the acquisition of a domestic company by a non-EU resident poses a threat to German "public order or security".

224. If a national security and public order call-in power were adopted, the government could provide guidance on the types of transaction likely to be affected.

Design of the call-in test

225. In considering whether to consent to a transaction that has been called in (and that does not ordinarily require screening under the Act), Ministers would only be able to consider factors that relate to protecting or enhancing New Zealand's national security and public order. The investor test and benefit to New Zealand test (or a potential replacement/supplement, such as a national interest test) would not apply.

226. Before deciding whether a prospective investment can proceed, Ministers could also be required to consider whether any risks could be mitigated by consent conditions or regulatory tools in other legislation, and to consult security Ministers and other Ministers as relevant (for example, the Minister of Foreign Affairs).

227. It is likely that only a small number of transactions would be called in using this power, and that the government would only impose conditions on, or block or unwind transactions in rare circumstances where there are significant national security or public order risks.

Identifying relevant transactions

228. For the call-in power to be effective, the government must be able to identify relevant transactions that may raise national security concerns. International models used to achieve this include, but are not limited to:

• mandatory notification: Overseas persons are required to notify the government of all prospective investments that fit within a defined range of assets or sectors (those considered more likely than others to raise national security and/or public order concerns). Penalties for non-compliance include the unwinding of transactions. This is similar to Canada's regime, except that all investments in Canada by overseas persons must be notified, whatever their nature,
• voluntary notification: Overseas persons can elect to notify the government of prospective investments that fit within a defined range of assets or sectors. Transactions that are not notified at application but later found to present security risks could be unwound. This is similar to the CFIUS process, and
• a combined approach: Overseas persons are required to notify the government of all prospective investments that fit within a defined range of assets or sectors (those considered more likely than others to raise national security or public order concerns). Outside these assets and sectors, a broader range of assets and sectors and assets would be subject to voluntary notification. This is similar to an option considered by the United Kingdom during consultation on its 'National Security and Infrastructure Investment Review' green paper.[66]

229. Table 15 assesses Options 1-5 against the reform criteria.

 

Special land provisions#

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What currently happens?

230. The Act provides that where sensitive land includes foreshore, seabed, riverbed or lakebed land (special land), this land is offered to the Crown before consent is granted.

231. This provision was introduced with the 2005 Act. It reflects the concept of 'ownership value'. That is, that some New Zealanders derive a welfare benefit from knowing that certain types of land are owned and controlled by New Zealanders (in this case, the Crown).

232. The process for offering special land to the Crown is set out in regulations 12-26 and is summarised below.

233. The special land provisions have applied to approximately 16 per cent of sensitive land applications in the past five years, and 66 per cent of forestry applications since the introduction of a special forestry pathway in October 2018. The Crown has acquired an interest in special land (mostly riverbed land) in a very small number of cases since the provision was introduced in 2005.

What problems are there with current law and practice?

234. The main problem with the current special land provisions is that they create significant compliance costs, delays and uncertainty for vendors, overseas persons and the Crown. These issues stem from both the Act and the Regulations.

235. In the Act, the main issues are:

• coverage: The Act does not specify when the special land provisions apply - that is, whether they apply only to direct purchases of freehold interests or also to leasehold interests and indirect interests (such as when an investor is acquiring securities in an entity that has an interest in special land),
• inconsistency: The special land provisions differ according to the pathway to consent used:
  • in the benefit to New Zealand test, an offer of special land to the Crown is one of 21 factors that decision makers may consider when assessing the benefits of a potential overseas investment in sensitive land, and
  • in the special forestry test, offering special land to the Crown is a compulsory requirement. Consent cannot be granted to an overseas person until the Crown waives its right to the land or agrees in principle to the sale, and
• access: The special land provisions do not secure access to the special land.[75] This means that the public may not be able to access special land acquired by the Crown, and may make it difficult for the Crown to manage the special land and for the public to enjoy it.

236. In the Regulations, key concerns relate to:

• responsibility: Unlike other aspects of the consent process, the responsibility for a special land offer sits with the vendor, despite the offer process influencing whether the overseas person receives consent, and
• surveying and valuation: Surveying and valuing special land - particularly riverbeds - is a time-consuming process that can delay a sale (it can take up to six months). In practice this means that vendors often offer land to the Crown for free to speed up the consent and sale process. In many cases the cost to the Crown of obtaining a survey and valuation exceeds the financial value of the special land (although not necessarily the ownership value).

How could these problems be fixed?

237. We have identified three options to resolve the above problems, which could be adopted on their own or as a package.

238. Option 1 would clarify in the Act that the special land provisions apply only where an overseas person is buying a freehold interest in special land (either directly or in clear cases of total ownership, such as through using a holding company).

239. Option 2 would treat the special land provisions consistently in the Act by making them a requirement for consent (not merely a factor in the benefit to New Zealand test).

240. Option 3 would establish a way to provide access (via adjoining land) to special land that is acquired by the Crown (for riverbeds and lakebeds) or put into the common marine and coastal area (for the foreshore and seabed). For example, agreement on access arrangements could be required as part of the offer negotiation.

241. Option 4 would improve the offer process described in the Regulations by:[76]

• providing a process for special land to be offered to the Crown for free if the parties choose to do so,
• making the overseas person rather than the vendor responsible for carrying out the process of offering land to the Crown, and
• requiring special land to be valued only if the Crown rejects the offer price.

242. Table 20 assesses these options against the reform criteria.

Farmland advertising#

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What currently happens?

243. Farmland must be advertised for sale on the open market before consent can be given to an overseas person to purchase it. The intent of this requirement is to ensure that New Zealanders have the opportunity to acquire, enjoy and use farmland rather than overseas persons acquiring that land through private sales, where no New Zealanders can make competing offers.

244. In the past two years, approximately 51 applications have met the farmland advertising requirement. An additional 14 applications have been granted an exemption from the requirement.

What are the problems with current law and practice?

245. The current requirement does not appear to be meeting the Act's policy objectives. This is because:

• the advertising requirement can be met after a conditional sale and purchase agreement has been entered into: Land must be genuinely available for acquisition in order to meet the requirement. However, the land may be advertised after a conditional agreement has been signed, provided the agreement allows the vendor to accept any alternative offer from a non-overseas person. This means vendors can do the minimum necessary to meet the requirement, knowing that agreements for transactions have already been signed. Buyers can also seek to influence advertising methods to minimise competing interest in farmland. This can lead to advertising that is not genuine,
• the minimum advertising standards are ineffective: Some advertising methods are outdated and ineffective (for example, a vendor can meet the requirements by placing a placard on the relevant land), and the advertising period of 20 working days is not always long enough for buyers to complete enough due diligence, particularly for high-value investments,
• the process lacks flexibility: Before consent can be granted, the advertising requirement in the Regulations must be met, or alternatively the transaction must be exempted from the requirement. There is no middle ground (for example, allowing an alternative form of advertising, better suited to the circumstances, to be undertaken, such as enabling focused advertising in cases in which there is only a small pool of potential buyers), and
• there is no legal guidance on when it may be appropriate to grant a discretionary exemption: This can make it difficult to obtain exemptions outside certain established situations, such as a boundary adjustment where there is only one plausible buyer of the land.

How could these problems be fixed?

246. We have identified two options to address the current issues relating to the farmland advertising requirement.

247. Option 1 would strengthen the current requirement and allow greater flexibility to address situations where advertising serves little or no purpose, or the requirement is unsuitable for the assets that must be advertised. It would do this by:

• requiring advertising before a sale and purchase agreement is entered into with an overseas person (noting that the overseas person could still make an offer),
• changing the minimum advertising standards to require at least two forms of advertising, while removing a notice or placard as an acceptable form of advertising,
• making exemptions more flexible by specifying that:
  • an application for an exemption may be submitted and decided before an application for consent, and setting a fee for doing so. This would provide overseas persons with certainty about the application of the farmland advertising requirement before they apply for consent, and
  • exemptions may be granted subject to conditions. These conditions could include requiring an alternative mode of advertising to address situations where the requirement leads to unsuitable advertising, and
• providing guidance (either Ministerial or through clear legislative provisions) that clarifies when discretionary exemptions should be granted.

248. Not all of these changes would need to be adopted for this option to proceed. For example, the changes to minimum advertising standards and exemptions could be made without requiring advertising before a sale and purchase agreement is entered into with an overseas person.

249. Option 2 would remove the requirement to advertise farmland (consent to acquire farmland would still be required). It is based on the assumption that:

• if a vendor wishes to test the market and receive the best offer from a competitive process, they will likely do so, or
• if they do not wish to test the market, they will likely have reasons for this. This means they will have little or no interest in effective advertising or competing offers resulting from that advertising.

250. Table 21 assesses these options against the reform criteria.

Timeframes for decisions#

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What currently happens?

251. There are no time limits for decisions on applications for consent under the Act. While the OIO has committed to process certain applications quickly (for example, to process an application to acquire residential land through the 'commitment to reside' pathway within 10 days) and has agreed a number of key performance indicators with Ministers for different types of consent application, these are not binding.

What problems are there with current law and practice?

252. OIO data suggests that it takes around 100 working days on average for an application under the Act to be processed (see Figure 10).[77] The process for assessing applications is iterative, as an overseas person applying to acquire sensitive assets may be asked to provide additional information to support a consent decision (particularly for more complex applications). This raises the following problems:

• the process is significantly longer than similar processes overseas (which generally have statutory time limits), reducing New Zealand's attractiveness to investment relative to other countries. For example, Australia generally requires decisions within 30 days, Canada generally within 45 days and France generally within two months,
• there is no certainty about processing times in advance of an application being lodged (although the OIO does provide guidance on likely processing times once an application has been accepted for processing). This reduces investors' ability to enter into contracts for purchase that are conditional on OIO approval within a reasonable period, or to otherwise plan their businesses,
• it increases costs for investors, including legal costs and delay costs (such as the cost of having 'idle' capital while an application is considered), and
• it can result in some investors submitting lower-quality applications, increasing costs for the OIO (for example, because investors are aware that they will have multiple rounds of feedback to finalise their applications).

Figure 10: Median number of days from an application being accepted to being approved

253. These timeframes, and the associated lack of certainty, increase the regime's regulatory burden and reduce New Zealand's attractiveness as an investment destination. They can also impose significant costs on New Zealand vendors. For example, a vendor may have to accept a lower sale price from a New Zealander to avoid uncertainty and delay, and forgo other opportunities while waiting for a prospective buyer to obtain consent.

254. These problems have two primary drivers:

• the regime's complex administration and compliance requirements (although OIO process improvements have reduced application processing timeframes). Options to address the overly complex legislative requirements have been discussed in other parts of this document, and
• the absence of statutory timeframes for decision makers, which makes the process uncertain and open-ended. The following sections discuss this issue.

How could these problems be fixed?

255. These problems may be resolved if the Act were to include deadlines for making decisions on applications. This could be done in two main ways:

• Option 1 would impose a deadline for decisions on all applications (for example, 45 working days), with decision makers empowered to either unilaterally extend the deadline by a period of up to 30 working days or by another agreed period
• Option 2 would introduce deadlines tailored to each of the Act's consent pathways, with decision makers similarly empowered to either unilaterally extend the timeframe by up to a prescribed period or by a period agreed to by the overseas person. The following deadlines (and extension periods) could apply:[78]
  • 60 working days for consent applications subject to a national interest or substantial harm test (if adopted), with a possible extension of up to 30 working days,
  • 45 working days for consent applications subject to the benefit to New Zealand test (or the modified benefit to New Zealand test), with a possible extension of 30 working days,
  • 30 working days for consent applications subject to the investor and bright-line residential tests[79] or special forestry tests, with a possible extension of 15 working days,
  • 20 working days for consent applications subject only to the investor test, with a possible extension of 10 working days, and
  • 10 working days for consent decisions involving only a bright-line residential test.

256. Under each option, if the timeline were not met and there had been no contact between the decision maker and the overseas person about either an extension of the deadline or a proposal to decline the investment,[80] the relevant transaction could be deemed to have received consent. This is consistent with the approach taken in Canada, which, like New Zealand, generally only provides consent to transactions deemed beneficial.[81] This approach should provide incentives for investors to submit high-quality applications (lest they be declined) and for decision makers to direct resources to assessing applications within the statutory period (lest consent be automatically granted to potentially non-beneficial transactions). Finally, if this option were adopted consideration would also be given to the OIO's resourcing.

257. These options are assessed against the reform criteria in Table 22.

Sub-options: When should timeframes commence?

258. For both options there are three ways of determining when deadlines start and finish:

• Sub-Option A: The timeline would start as soon as an application was received. The decision maker would always be entitled to seek additional information if the application received were incomplete; however, it would not alter the timeline,
• Sub-Option B: The OIO would have a specified period (for example, 15 working days)[82] to determine whether additional information was required. If a determination were made within this period, the timeframe would not start until this was provided. The decision maker would still be entitled to seek additional information at a later stage; however, it would not affect the deadline. This is consistent with the Canadian regime,[83] and
• Sub-Option C: The timeframe would commence when an application was received, but be paused if additional information were required (from either the overseas person or other government agencies). This is broadly consistent with the French regime.

259. These sub-options are assessed against the reform criteria in Table 23. The assessment assumes that statutory timelines would be adopted (rather than comparing options to the status quo).

Appendix A: Terms of Reference#

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The Associate Minister of Finance, the Honourable David Parker, has requested that the Treasury lead a review of the Overseas Investment Act 2005 (the Act) and the associated Overseas Investment Regulations 2005. This review is to build on the Government's recent amendments to the Act to rationalise the screening regime for forestry assets and certain other profits à prendre and generally require overseas persons to obtain consent to acquire residential land.

Purpose#

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The review's aim, having regard to the Act's purpose "that it is a privilege for overseas persons to own or control sensitive New Zealand assets", is to:

• enable the Government to effectively manage overseas investment, while
• ensuring that the Act operates efficiently and effectively, and
• supporting overseas investment in productive assets.

Context and rationale#

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Open capital markets and foreign direct investment can offer a number of economic advantages, including enhanced productivity, greater competition, and stronger and more diverse international relationships. However, they can also present risks and may conflict with both our cultural identity and the view held by some New Zealanders that sensitive New Zealand assets should generally be owned and controlled by New Zealanders.

New Zealand has a number of pieces of legislation in place to mitigate such risks, including the Act. Consistent with the Act's purpose (Section 3) ("that it is a privilege for overseas persons to own or control sensitive New Zealand assets"), the Act provides Ministers with a mechanism to screen investments by overseas persons in sensitive New Zealand assets to ensure that these investments are of benefit to New Zealand.

While the Act is effective in screening investments, there is a perception among some domestic and international stakeholders (particularly the Organisation for Economic Co-Operation and Development) that it is overly restrictive and operates too slowly (particularly in relation to non-controversial transactions). For example, critiques of the Act include that:

• the application process is too complex and that both the criteria for consent and the conditions imposed after receiving consent are more onerous than necessary,
  • the level of discretion in the Act both creates unnecessary uncertainty for investors and for decision makers and can result in significant delays in decision making,
  • the Act could do more to attract investment to productive sectors of the economy, and
  • the Act is not clear enough on the grounds for which a prospective investment in sensitive New Zealand assets would be declined.

Negative perceptions may reduce New Zealand's attractiveness as a foreign investment destination, with potential costs for economic strength and resilience. Given that there was nearly $5 billion in new foreign investment between July 2016 and June 2017 and that processing times for consent applications have considerably reduced over the last 18 months, these risks do not appear to have materialised. However, they are worth monitoring and addressing in light of both: the significant stock of foreign investment in New Zealand ($103.9 billion as at 30 June 2017, including investment in property and other real estate)[84] and the fact that New Zealand receives proportionately lower levels of foreign direct investment than many other small advanced economies.[85]

There is also a counter view that the Act does not sufficiently protect New Zealand's national interest. The Act is much less developed than those in many comparable jurisdictions - including Australia and Canada - in relation to screening investments on a holistic basis to ensure that they are consistent with New Zealand's national interest. For example, under the criteria available under existing consent pathways New Zealand has limited ability to:

• screen investments in infrastructure assets with monopoly characteristics on competition grounds, or
• to consider the importance of New Zealand companies with international distribution systems to New Zealand's broader participation in global value chains.

Reviewing the Act will aim to ensure that it strikes the appropriate balance between the need for high-quality investments to be efficiently approved, against:

• the need to restrict investments that may be unproductive, unbeneficial to New Zealand, or otherwise inconsistent with New Zealand's national interest, and
• the view held by some stakeholders that New Zealanders should retain ownership and control of sensitive domestic assets and the Act's purpose "that it is a privilege for overseas persons to own or control New Zealand assets".

Objectives for the review#

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The review will seek to ensure that New Zealand's screening regime for overseas investment:

• provides a clear pathway for consent for investment that supports a productive, inclusive and sustainable economy and creates opportunities for regions and businesses to grow and connect internationally,
• provides appropriate protection against risks to New Zealand associated with the overseas ownership of sensitive assets, with particular consideration of whether New Zealand's national interest is sufficiently protected, and
• imposes compliance and administrative costs (as distinct from fees and other direct costs of applying for consent) that are proportionate to the risks associated with overseas investments.

Further, any proposed changes to the regime should:

• improve predictability and transparency around the process and decision making (by both Ministers, and where relevant, the Overseas Investment Office) wherever possible, and
• ensure that discretionary powers appropriately balance the need to both create certainty for investors while reserving the ability to decline investments that are not beneficial to New Zealand.

In working to achieve these objectives, the Act is to remain consistent with the Treaty of Waitangi obligations as well as our international obligations, including Free Trade Agreements and commitments at the World Trade Organisation.

Finally, if national interest considerations were to be more explicitly accounted for when screening investments following the conclusion of this review, the intention is that consent would only be refused on national interest grounds rarely, with the goal of supporting confidence in New Zealand as a foreign investment destination.

Scope#

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Consistent with the objectives listed above, the review will consider whether the following are appropriate:

• the definition of 'overseas persons' as it relates to bodies corporate,
• the factors underpinning the existing generic "benefits to New Zealand” test (including whether water extraction, Māori cultural values as they related to the physical and historical characteristics of the relevant sensitive land and tax residency should be among the positive and negative factors considered when assessing applications made under that test),
• the extent that any 'negative benefits' of a prospective investment can be considered under the "benefits to New Zealand” test and, if necessary, whether there needs to be additional legislative guidance on how 'benefits' and 'negative benefits' should be balanced under that test,
• the investor test, with particular regard to whether the requirements are appropriate and provide sufficient certainty to overseas persons,
• existing levels of Ministerial discretion, with particular regard to whether the appropriate balance is struck between:
  • creating certainty for overseas persons, and
  • allowing for adequate consideration of the implications of foreign direct investment on New Zealand's national interest (that is, consideration of the need for a 'national interest' test similar to those in place in Australia and Canada, and under consideration in the United Kingdom),
• the treatment of land adjoining other types of sensitive land (that is, land as described in Table 2 in Schedule 1 of the Act), and
• any minor technical amendments required to resolve unintended consequences associated with the implementation of the Phase One reforms.

Out of scope#

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This is not a 'first principles' review of the Act - whether the Act is required is out of scope.

Further, this review will not reconsider the Crown's right to make final decisions on consents for overseas investments in sensitive New Zealand assets, exercising its sovereignty under Article One of the Treaty of Waitangi.

The review will not revisit substantive issues associated with the recently passed Overseas Investment Amendment Act (for example, requiring purchases of residential land and forestry rights over sensitive land by overseas persons to be screened).

Constraints#

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The review is not intended to result in the screening of investments that are not currently screened (or those that will not be screened following the commencement of the Overseas Investment Amendment Act).

Only policies consistent with New Zealand's international obligations will be developed.

Process#

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Treasury will lead the review. It will be undertaken in two broad, concurrent, workstreams:

1. a stronger OIA, which will consider whether the Act adequately protects New Zealand's national interest, and
2. a better and more efficient OIA, under which all other issues within the scope of the review will be considered.

In conducting the review, Treasury will work collaboratively with other agencies and external stakeholders as appropriate. Key government agencies including the Overseas Investment Office, the Ministry of Foreign Affairs and Trade, the Ministry for Business, Innovation and Employment, New Zealand Trade and Enterprise, Te Puni Kōkiri, the Ministry for the Environment, the Office for Crown-Māori Partnership and the Department of Prime Minister and Cabinet. In addition to consultation within Government, Treasury will consult with users of the regime, Māori and iwi groups, and the general public throughout the review.

It is expected that the Government will commence consultation on options to amend the Act in the first quarter of 2019, with a view to legislating reforms by the middle of 2020.

Appendix B: Overseas jurisdictions' approaches to foreign investment screening#

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This section compares New Zealand's foreign investment screening regime with those of four comparable jurisdictions: Australia, Canada, the United States of America (US) and Japan.

There is no clear 'best practice' screening regime. Each jurisdiction operates a unique regime that reflects its citizens' values and principles.

A summary of these assessments is provided below. Additional detail is in Table 24.

Who is subject to screening?#

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This is the most consistent feature of the assessed screening regimes.

Each regime enables its government to review transactions (either pre- or post-completion) initiated by overseas persons and by non-natural persons controlled by overseas persons. Screening in each regime is generally tied to control; however, some focus on both who controls the assets and who owns them (for example, New Zealand and Canada).

What transactions are or can be subject to screening?#

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Investments in land

New Zealand's screening of sensitive land on the basis of area, rather than value, and inclusion of a range of land types, is unique among these jurisdictions.

The most similar regime in respect of land is Australia's, which requires all residential land and vacant commercial land to be screened before a transaction can be completed. Australia also requires investments in agricultural land to be screened, although generally only if an investor's cumulative holdings exceed $15 million (in New Zealand, each acquisition of at least five hectares of non-urban land requires consent).

Japan does not restrict foreign persons acquiring land. Canada only screens investments in land if they exceed a specific monetary threshold (C$1.5 billion for investors from countries with which Canada has free trade agreements).

The US does not restrict foreign investment in land unless the land is located at US ports or close to military installations or sensitive government facilities. This is consistent with the regime's focus on national security.

Investments in businesses and business assets

Each assessed regime allows its government to screen investments in domestic businesses and business assets. The thresholds for screening differ significantly.

New Zealand's regime is noticeable for its:

• relatively low screening threshold (generally $100 million, compared to AUD$1.1 billion for non-sensitive Australian businesses[86] and C$1.5 billion for Canadian businesses),
• lack of distinction between investments in different sectors. Canada, Australia and Japan impose different screening requirements on different types of business and different types of investor; for example, all investments in Australia's media sector must be screened and Canada imposes a low threshold for investments in cultural businesses, and
• inability to screen other investments in domestic businesses where they may pose national security risks or other risks of substantial harm. The US, Canada and Japan all have the ability to review transactions (pre- or post- completion) that raise such concerns.

How investments are screened#

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There are significant differences in how the assessed regimes screen investments - both in when screening is required, and in the requirements that must be met for a transaction to proceed/not be unwound.

New Zealand, Australia and Canada all generally require transactions to be screened before they can proceed. In contrast, while the scope of the US's, Japan's and Canada's national-security-focused screening mechanisms is wider than those of the other assessed regimes, consent is not normally required in these countries before a transaction can proceed.

Each regime empowers its government to unwind transactions that have not been pre‑approved. This offsets some of the regulatory burden that such widely drawn regimes could impose.

In determining whether transactions will be approved, the regimes broadly apply two models: a benefit-focused model and a harm-focused model.

New Zealand and Canada (for transactions above the relevant screening thresholds) only allow consent to be granted to prospective investments assessed as being of likely benefit according to economic and cultural factors (and additional factors in New Zealand's case).

In contrast, the Australian, Japanese and US regimes only allow their governments to block transactions if they are likely to be 'harmful' in some way. Australia has broad discretion to block investments found to be "contrary to national interest”, while Japan's regime is more targeted, with the government only able to block or unwind investments that pose risks to national security, the economy, public order or safety. The grounds for declining/unwinding transactions in the US are narrower still, limited to transactions found to be injurious to national security.

Appendix C: Glossary#

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