The $150,000 donation to National from a Chinese-owned, but New Zealand based, company was "against the spirit" of electoral donation rules, according to Prime Minister Jacinda Ardern.
But National is pushing back, with leader Simon Bridges saying the donation was completely legal and National's hands are clean.
Although Ardern said the donation appeared to be legal, she said it went against what the electoral donation law tries to limit.
Her comments come after the Greens said the donation was "deeply alarming" and renewed its calls for electoral donation rules to be overhauled.
This morning, the Herald revealed further details about a $150,000 donation National disclosed from a NZ-registered, but Chinese-owned company Inner Mongolia Rider Horse Industry NZ (IMRHINZ).
That company is owned by billionaire racing mogul Lang Lin, who met with then foreign-affairs minister Todd McClay, who former National MP Jami-Lee Ross is accusing of facilitating the donation.
New Zealand electoral law forbids donations above $1500 from foreign nationals but classes New Zealand-registered companies as local even if their control or ownership is foreign.
Although IMRHINZ is a registered New Zealand company, it is 100 per cent owned by Chinese company Inner Mongolia Rider Horse Industry Co Limited.
Ardern told media this morning that New Zealand does have legal protections in place to try and prevent foreign interference in elections through large monetary donations – that includes limits on the size of individual donations.
"Arguably, what happened here was legal but I would argue that it was equally outside the spirit of what our law intends when it comes to foreign donations."
Justice Minister Andrew Little said the $150,000 donation highlighted a problem within the country's election donation rules.
"Our country's regime makes it easy for donations to be channelled through that sort of process and that's something we have to be alert to."
A select committee is currently mulling foreign interference law changes, which will address loopholes allowing donations to flow unchecked through foreign-owned companies.
Any legislative changes proposed by the committee, which was due to wrap up its hearings in coming weeks, could be pushed through "reasonably quickly" next year, Little said.
But he said no party was immune to the risk.
Bridges this morning rejected Ardern's comments that the donation was against the spirit of the law, telling media the issue was "reasonably straight forward".
He said there was a donation disclosure from a New Zealand company and there was no conflict of interest.
When it was pointed out to him IMRHINZ was solely owned by a Chinese company, Bridges said: "The rules are the rules. It is a New Zealand company and we disclosed that – so in a sense, it's old news."
McClay said he had not acted outside the spirit of the law.
Asked what "hat" he was wearing when he asked Ross to call the company, McClay said he was acting as a member of National Party only, not as a minister or an electoral MP.
"I met with him, when it was raised. I didn't have another meeting as a minister," he said.
"[The donation] was made to a National Party bank account ... It was in the Rotorua electorate, but the party declared it fully."
The Green Party have called for an outright ban on foreign donations to New Zealand political parties.
The party's electoral spokeswoman Golriz Ghahraman said this morning this was another example of "powerful vested interests tipping big money into the coffers of the National Party".
"This can be dangerous and we've seen this play out badly for democracy globally."
Ross told the Herald that the donation was "the most obvious example from the last election, where a foreign individual was able to make a donation to a political party using a company. If we don't make the right decision now we're wasting our time".
Meanwhile, former Prime Minister Helen Clark has chipped in to the debate on Twitter saying "money politics is a curse the world over".
"It's corrosive of the democratic process. In NZ people have long decried it [and] feasted on whatever compromising information comes to light, but where are the media calls for public funding [and] tighter donation rules?"