Deloitte. Project Structure Report 14 October 2013 Private and Cmtidenliat This. paper has. been prepared on the D3515 at the matters set nut in the transmittal letter over the page. For convenience. domment may have been made available to you in electronic a5 welt as hard copy format. Multiple copies and 01 this document may Iherefore exist In different media. In Ihe case of any discrepancy the final Signed hard copy shOuId be regarded as de?niwe. This advrce has been prepared for the ante use of Genesm Retail Earl and Genesrs Retail II Sarl in line with our engagement letter of 24 September 2013 and it cannot be railed upon by any other parry. Any person Ihat galns acc?s to and choose-51a rely upon this. report. does so at its own risk and withmt recuurse ta Deloitte LLP. Delutle LLP Athena Place 66 Shoe Lane Lmdon HOME 330 Deloitte. Ddoitte LLP Genesis Retail I Set] ?3235": 2-4: rue Elise-?m? Ruppert London scam sso Luxembourg Tel: +44 to) 20 7936 soon Grand Duch? de Luxembourg Fax: +44 to) 20 7583 1198 Genesis Retail 11 Sarl 2-4. rue Eugene Ruppert L-2453 Luxembourg Grand Duche de Luxembourg l4 October 2013 Dear Sirs Project Genesis Structure Report In accordance with the terms of our engagement letter dated 24 September 2013 (the we enclose our Structure Report (the ?Report"), prepared in connection with the proposed acquisition of the units in the unit trust which holds the St Enoch Shopping Centre, and the shares in a UK management company (the ?Transaction"). The Report is con?dential to the Bene?ciaries {as de?ned in the Contract) and is subject to the restrictions on use speci?ed in the Contract. No party is entitled to rely on the Report for any purpose whatsoever and we accept no responsibility or liability to any party in respect of the contents of this Report. By proceeding to read this report you and any other recipients con?rm their understanding of, and agreement to, these conditions. This Report has been prepared for the exclusive use of you andfor those af?liates identi?ed under the terms of our engagement as Bene?ciaries and solely for the purpose stated by us. We draw your attention to our engagement letter dated 24 September 2013, in which we set out the scope of our work sources of information and the limitations of the work undertaken. We also draw your attention to Section I of this Report which sets out the particulars of our work. Disclosure of all or any part of this Report to any other person is on the basis that. to the ?illest extent permitted by law, neither Deloitte LLP nor any other Deloitte Entity accepts any duty of care or liability of any kind to the recipient, and any reliance on the tax advice is at the recipient?s own risk and without any recourse to any Deloitte Entity. 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"hummus Contents Glossary 1 1 Overview and Assumptions 3 2 Acquisition Steps 5 3 Ongoing UK taxation 11 4 Ongoing Jersey taxation 22 5 Ongoing Luxembourg taxation 24 6 Ongoing US taxation 33 7' Future exit 35 Appendix Tax residence protocols 38 Appendix II Luxembourg participation exemption 42 Appendix Tax Financial Reporting Obligations 45 Appendix IV Engagement Letter dated 24 September 2013 49 Glossary AIA APA ATA Bank Bank Loan Blackstone BREP Funds Annual Investment Allowance. a CA term Advance Pricing Agreement Advance Tax Analysis GE Real Estate Loans Limited Bank loan of ?133 lent by the Bank to the Unit Holders which will be subsequently novated to the JPUT The Blackstone Group International Partners LLP Blackstone Real Estate Partners (Offshore) L.P. Blackstone Real Estate Partners (Offshore) VII.TE.1 LP. Blackstone Real Estate Partners (Offshore) VII.TE.2 Blackstone Real Estate Partners (Offshore) Blackstone Real Estate Partners (Offshore) VILTEA Blackstone Real Estate Partners (Offshore) VII.TE.5 Blackstone Real Estate Partners (Offshore) VILTE. Blackstone Real Estate Partners (Offshore) VILTE. Blackstone Reat Estate Partners (Offshore) VILTE. Blackstone Heal Estate Partners (Offshore) VILF Blackstone Family Real Estate Partnership (Offshore) L.P. Blackstone Real Estate Holdings (Offshore) VII L.P. Blackstone Real Estate Holdings (Offshore) VII ESC LP. (above fourteen entities together the VII Funds") Blackstone Real Estate Holdings Europe ESC L.P. Blackstone Real Estate Partners Europe IV-NO L.P. Blackstone Family Real Estate Partnership Europe L.P. Blackstone Advisers Master Luxco CA (above three entities together the IV Funds") Blackstone Real Estate Associates VII, and Blackstone Real Estate Associates Europe BREr?Europe TNO Sarl Capital allowances CAP chargeable accounting period CFC Controlled Foreign Corporation CGT Capital Gains Tax CIS Collective Investment Scheme for the purposes of section 235 of the Financial Services and Markets Act 2000 CIT Luxembourg Corporate Income Tax CTA 2009 Corporation Tax Act 2009 Double Taxation Treaty Double Tax Treaty Passport, an HMRC scheme Due Diligence Report EUR or GAAR Genesis Holdco Genesis Retail Genesis Retail II Genesis Topco HMRC IBL ISE Project Genesis Due Diligence Report dated 14 October 2013 Euro General anti-abuse rule Genesis Holdco as Genesis Retail as Genesis Retail II as Genesis Topco 3s HM Revenue 3. Customs Interest Bearing Loan Interest Free Loan International Service Entity Ivanhoe Ivanhoe Cam bridge Inc. Vendors 4259050 Canada Inc and 4352769 Canada Inc JPUT St. Enoch Centre Unit Trust WDA writing down altowance. a CA term LITL Luxembourg Income Tax Law WHT Withholding Tax LTA Luxembourg Tax Authorities Luxembourg Companies Master Luxco, Genesis Topco . Genesis Holdco, Genesis Retail and Genesis Retail II Lux Holdcos Genesis Topco and Genesis Holdco Manco Ivanhoe UK Management Services MET Luxembourg Municipal Business Tax NRL Non Resident Landlord NFILS Non Resident Landlord Scheme NWT Luxembourg Net Worth Tax PFIC Passive Foreign Investment Company PPL Profit Participating Loan Properly St. Enoch Shopping Centre PTP Publicly Traded Partnership Section 331 Internal Revenue Code Section 331 (US legislation) TOGC Transfer of a Going Concern. a VAT term Trustee St Enoch Trustee Company UBTI Unrelated Business Taxable Income Unit Holders Genesis Retail I and Genesis Retail VAT value added tax Vendor Debt IBLs totalling ?120m advanced by Ivanhoe to JPUT 1. Overview and Assumptions 1.1 1.1.1 Overview We understand that it is your intention to acquire 100% of the units in the JPUT. which holds the Property. and 100% of the shares in Manco. which provides certain management services to the JPUT. This Report describes the anticipated tax consequences of the proposed acquisition structure and has been prepared in accordance with our engagement letter dated 24 September 2013 (the "Contract?}. We understand that the principal commercial objectives oi the structure are: addressing structural requirements of the Funds and Master Luxco; (ii) facilitating effective security for and servicing of third party bank debt; facilitating the repatriation of excess cash to the BREP Funds; and (iv) facilitating potential future exit possibilities. This Report sets out the UK. Jersey. Luxembourg and US tax analysis of the Transaction. including: i) Tax implications on acquisition; ii) Ongoing taxation of the investment structure during the holding period; Taxation on the repatriation ct surplus cash; and iv) Taxation on the potential future exit. It should be noted that there could be non-tax considerations legal, security. financial assistance etc.) that will affect the optimal structure from a tax perspective. We are not responsible for identifying such issues. but are happy to work with other advisors. 1.1.10 if requested. to overcome any negative tax effects of such issues as may arise. This Report sets out the position as at 14 October 2013 and is subiect to any matters which may arise after this date and may impact the comments set out betow. In particular. it should be noted that all advice is based on legislation and practice of the relevant tax authorities as at 14 October 2013. Such legislation and practice may change in the future and certain aspects of the proposed structure may require negotiation with the relevant tax authorities as to their tax treatment. We have no responsibility, unless separately engaged in due course. to update any of our advice for future changes in law or practice or to carry out such negotiations with the relevant tax authorities. A transfer pricing review of the proposed investment steps is outside the scope of this Report. The taxation of the Trustee is outside the scope of this Report. This Report is solely addressed to and for the benefit of those persons to whom our Contract is addressed and who have agreed in writing the terms of the Contract. It may not be relied upon by any other person or entity without our prior written consent. Such other persons or entities should seek their own independent advice. Similarly. without our prior written consent this Report may not be quoted in whole or in part or otherwise referred to in any documents. copied or delivered to any other person or entity. For the avoidance of doubt it should be noted that it is our responsibility only to advise the signatories to our Contract in respect of the Transaction. 1.2 1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.2.7 1.2.8 Assumptions None of the parties involved in the Transaction has a main purpose of obtaining a tax advantage in entering into the Transaction as a whole or any individual transaction steps. The Property will continue to be held by the JPUT tor long-term investment purposes to benefit from rental income and capital appreciation. This is critical to the tax treatment set out in this report. The entirety of the Property consists of retail property and. in particular. no part of the Property constitutes residential property for UK tax purposes. All entities in this Repon will be tax resident in their jurisdiction of incorporation. Please refer to Appendix I for guidance on maintaining tax residence. All transactions steps contemplated are to be undertaken for commercial purposes and on an arm?s length basis unless it is specifically stated otherwise in this Report. The JPUT is properly constituted as a 'Baker' trust for UK tax purposes. This should be con?rmed by your legai advisers. The JPUT, prior to the Transaction. throughout the investment steps and during the holding period, has and will continue to constitute a valid CIS, as defined under section 235 FSMA 2000. We understand this will be continued by your legal advisors. The IV Funds will invest 30% of the capital committed by the Funds for this acquisition and the VII Funds will invest the remaining 20%. 2 Acquisition Steps 2.1 Steps 1-7: Pre-acquisition and financing steps snap vii Funds Funds ct??tm Master Luxco c.?12.8m PH. 0.9638111 . Genems Topco PPL c_?63_1m GenesisHoldco i . 5 IBL c.2315m - . . ?31 5m . . Genesis Ftetali - Genems it Bannoan 15:11:: -- ?133m 2.1.2 2.1.3 2.1.4 2.1.5 (We understand that initially the structure described below and shown opposite will be established tor the exchange ct contracts and payment of a E25m deposit on 19 September 2013. We understand the E25m deposit will be tunded by way ct an undocumented interest-tree intercompanv loan from the BREP Funds to Master Luxco. which will be on lent as a short-tenn, undocumented Interest-tree intercompany loan from Master Luxco to the Unit Hoiders. The remainder of tunds described in the steps below will be drawn down betore completion when the structure is lullv capitalised, at which point the interest tree loans will ettectivelv be repaid.) Master Luxco incorporates acquisition structure Step 1 - Master Luxco incorporates Genesis Topco, a Luxembourg Sari. with share capital of the GBP equivalent at ?25,000. Step 2 Genesis Topco incorporates Genesis Hoidco, a Luxembourg Sari, with share capital at the GBP equivalent at ?25,000, using the tunds received In Step 1. Step 3 Genesis Holdco incorporates Genesis Ftetall and Genesis Ftetali II, both Luxembourg Saris, each with share capital of the GBP equivalent oi ?12,500, using the lands received in Step 2. Drawdown ct BHEP ?nancing Step 4 - Master Luxco issues PPLs cl c.263.8m to the Funds in accordance with their respective investment percentages. Step 5 - Genesis Tcpco issues PPLs ot c.263.8m to Master Luxco. 2.1.5 2.1.8 2.1.10 2.2 2.2.1 Step 6 Genesis Topco funds Genesis Holdco with c.?63.8m as follows: Genesis Holdco issues PPLs of c.?63.1m; and (ii) Genesis Topco contributes cash of c.EO.65m to Genesis Holdco in exchange for share premium. Step 7' Genesis Holdco advances funds of ?31.5m to each of the Unit Holders in the form of IBLs. Drawdown of Bank ?nancing Step 8 The Bank advances ?133m to the Unit Holders in accordance with the terms of the Bank Loan. (This step is likely to occur immediately prior to completion). Vendors' pre-acquisition steps We understand that there are a number of ore-acquisition steps that will take place in the Vendors? group prior to the acquisition by the Unit Holders. The tax implications of these steps are outside the scope of the Report. Please see the Due Diligence Report for the tax implications of the Vendors? ore-acquisition steps. Tax analysis of Steps 1- 7 Luxembourg tax implications of Steps Registration duty There is a nominal fixed registration duty of payable on incorporation of each of the Luxembourg Companies. A further ?75 will become payable on any subsequent modification to their by- laws (eg. increase of share capital). 2.2.2 2.2.3 2.2.4 2.2.5 2.2.6 Tax residence The Luxemb0urg Companies should be fully taxable LuxembOurg tax resident companies from incorporation. on the basis that their statutory seat and place of effective management will be in Luxembourg. It should therefore be ensured that the Luxembourg Companies are effectively managed in Luxembourg to qualify as Luxembourg tax resident under domestic law and applicable D'l'l's {please refer to Appendix I for further comments on the above}. Specific substance requirements are also laid down by the Transfer Pricing Circular LITL n?1B4i2. dated 23 Jan uary 2011. for companies carrying out ?nancing activities with related parties. Foreign exchange exposures We understand that the share capital of Master Luxco is denominated in EUR and that the functional currency of such company is EUR. As a result, a foreign exchange exposure may be generated by the PPLs denominated in E. To avoid taxable exchange gain movements arising in relation to the PPLs, we recommend that the PPLs issued by Master Luxco track any exchange movements on the underlying PPLs issued by Genesis Topco. Short-term interest free teen The LTA may require that Master Luxco recognises a taxable handiing fee in respect of its back-to-back landing of of ?25m. The handling fee would be determined based on the amounts at stake, the functions performed and the risks incurred by Master Luxco. To the extent that this is the case. the accounting profit of Master Luxco should be adjusted for tax purposes to reflect the gross margin. it may be possible to shelter some of this income with (reasonable) deductible expenses arising in Master Luxco which are related to its financing activity. The arm's length nature of this fee, if required. will be formally agreed with the LTA in the written ATA (see 5.19). In any case. in light of the short period 2.2.7 2.2.8 2.2.9 2.2.10 between exchange and completion, we would expect any taxable income to be minimal. The IFL should be de minimis tor the purposes of the APA rules and theretore no APA should be required in respect at this tee. US tax Implications of Steps Master Luxco has tiled an entity classi?cation election (Le. Form 3332} to be treated as a partnership tor US tederal Income tax purposes? Each oi the Luxembourg Companies should each tile an entity classification election Form 8832} to be treated as a disregarded entity tor US federal income tax purposes. eiteotive as of the date at incorporation. The formation and capitalisation of the Luxembourg Companies should have no adverse US tax consequences. 2.3 Steps 8?13: Acquisition steps BREPE Iv BREP VII 1 Funds Funds c.551m Master Luxco PPL c.E12.Brn PPL c.E63.Bm Genesrs Topco Share pteiTIIilm ?0.65m c.9831m Genesis Holdco IBL IBL Genesis Retail .- 1 Ii Bank Loan E13311 2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 Acquisition of the JPUT and Manco (In practice. we understand that at completion all cash will be transferred directly from the Bank and the Unit Holders to the Vendors and Ivanhoe Cambridge. as such Steps 10-13 below will be by accounting entry only) Step 8 The Unit Holders each acquire 50% ot the units in the JPUT from the Vendors for combined consideration of using ?5?m ot the cash received in Step 7 and ?13m of the cash received in Step 8. Step 9 Genesis Ftetail acquires 100% of the shares in Manco from lvanhoe for a market value consideration ot c.?31k. Step 10 The Unit Holders advance ?120m to the JPUT on intercom pany account. Step 11 - The JPUT uses E120m received in Step 10 to fully repay the Vendor Debt. Step 12 The JPUT repurchases units with a market value of ?13m from the Unit Holders in equal proportions. for consideration at ?13m to be left outstanding. 2.3.6 ix.) 4; 2.4.1 2.4.2 2.4.3 2.4.4 Step 13 - The Unit Holders novate their liability of ?133m under the Bank Loan to the PUT in satisfaction of: i. the intercompany receivable of ?120m created in Step 10: and ii. the consideration of ?13m left outstanding in Step 12. Tax analysis of Steps 8-13 UK tax implications of Steps 8 -13 SDLT In general. SDLT is not chargeable on the transfer ot units in a unit trust as there is no transfer of an interest in UK land. It is irrelevant that the JPUT holds UK real estate assets as a unit trust is treated as opaque for SD LT purposes. Section 101 Finance Act 2003 (?Section 101") deems the trustees of a unit trust scheme to be a company for SDLT purposes and the units to be shares in that company. Section 101 cross refers to section 237 of FSMA 2000 which de?nes a unit trust scheme as a "collective investment scheme". As such. it is essential that the JPUT satislies the requirements to be a 015 as defined in section 235 FSMA 2000. It the JPUT does not qualify as a GIS. the units would represent interests in the underlying property such that the Unit Holders would be treated as acquiring an interest in the Property. In such a case, an acquisition of the units would attract a charge to SDLT at 4% of the VAT inclusive consideration paid or provided for the units. which would include the value of the indebtedness in the JPUT. Based on a headline consideration of c.?190m. the SDLT would be up to c.?7.6m. 2.4.5 2.4.6 2.4.7 2.4.8 2.4.9 We understand that your legal advisers have confirmed that the JPUT is and will continue to be regarded as a CIS and that the proposed steps will not change this analysis. Stamp Duty Stamp duty. which is chargeable on a transfer of shares or marketable securities certain types of loan stock) does not apply to transfers of units in unit trusts. As such, no stamp duty should be payable on the acquisition of the units in the JPUT. The acquisition of Manco should be subiect to stamp duty at 0.5% of the amount or value of the consideration paid for the shares 01 Manco. This would be a liability of Genesis Ftetail I. On the basis that consideration of c.?31k will be paid for the shares in Manco. this would give rise to a stamp duty charge of c.?155. SDHT In general. SDHT is chargeable on an unconditional agreement to transfer chargeable securities. The term ?chargeable securities" does not however incfude units in a unit trust scheme provided that all of the trustees under the scheme are resident outside the UK and the units are not registered in any register kept in the UK by or on behalf of the trustees under the scheme. Accordingly, on the basis that the JPUT is registered in Jersey and the units are not registered on any UK register, no charge to should arise on the transfer of the units. income tax On the basis that the JPUT is a Better? type Trust. the acquisition of the units of the JPUT will result in the Unit Holders coming within the charge to UK income tax in respect of their income from the Property. Each of the Unit Holders should register under the as set out in 3.1.10 below. 2.4.10 2.4.11 2.4.12 2.4.13 Anti-avoidance There is. prime facie. a risk under the UK transactions in land? anti- avoidance legislation that the repurchase of units may give rise to a UK income tax liability in the hands of the Unit Holders. However. on the basis that this repurchase will be at market value and this repurchase will take place immediately following acquisition of units in the JPUT by the Unit Holders. and therefore the Unit Holders should not make a gain on the disposal, the anti- avoidance provisions should not be in point. Please see section 14 for further details of the transactions in land provisions. WHT 0n repayment of the Vendor Debt. to the extent that this includes any accrued interest that has a source? {see 3.4 below), there is a risk that the JPUT may be required to withhold UK tax at the rate of 20% on this interest. We understand that this should not be the case and therefore no WHT obligation should arise, please see the Due Diligence Report for turther details of whether such an obligation will arise. Capital affowances There are alternative views on the CA implications arising on the acquisition'disposal of units in a JPUT hotding UK property and we see differing interpretations applied in practice. We consider that the better view is that the trustees of the JPUT carry on the UK property business for UK tax purposes and. therefore. the disposal of units in the JPUT is not a disposal event for CA purposes. As such. on the acquisition of the JPUT. the Unit Holders should ?step in the shoes' of the Vendors. thereby inheriting their CA position. In this interpretation. as there is no disposal event, CAA 2001 section 198 elections {?5198 election") should not be required to transfer entitlement to claim CAs in respect ot the pooled expenditure. 2.4.14 2.4.15 2.4.16 2.4.1? 2.4.18 2.4.19 However. an alternative view that is also regularly taken by tax payers. is that the unitholders in the JPUT are considered to be carrying on the UK property business for UK tax purposes. We understand the Vendors have followed this alternative analysis and we are not aware of HMRC challenge around this view. Under this interpretation. the sale of units of the JPUT would be a disposal event for CA purposes and. as such. the Unit Holders and the Vendors would need to enter into S193 elections to allow the Unit Holders (and any future owners] to have entitlement to claim CAs in respect of pooled expenditure in relation to the Property. There are provisions in the SPA requiring the Vendors to enter into and submit a 5198 election on the sale of the units in the JPUT. to provide the flexibility to follow this approach, if the first view was to be challenged by We understand that provisions in the SPA set out that up to ?36.0m of CA5 should be available to be claimed by either the Unit Holders or the Trustees post-comptetion. We recommend that the first view is adopted (Le. the GAS claims will be made at the level of the trustees and the Unit Holders will 'step in the shoes? of the Vendors}. In addition to this being our better view of the technical position. there is a risk that c.?6m (being historically pooled capital expenditure and expenditure on tenant contributions} might not transfer to the Unit Holders if the alternative view were adopted. Even adopting the first view. please note that there is still a slight risk in relation to the Unit Holders as we understand the Vendors filed on the basis of the alternative analysis. We understand that the SPA. therefore. provides flexibility for either view to be adopted. VAT The transfer of the units in the JPUT to the Unit Holders should be outside the scope of UK VAT. 2.4.20 2.4.21 2.4.22 2.4.23 2.4.24 2.4.25 However. as referred to in detail in our Due Diligence Report, the way that UK VAT has historically been dealt with in respect of the JPUT is unusual. The Vendors. rather than the Trustee. have registered for UK VAT and acted as if they made supplies in respect of the Property. We understand that it is intended that. prior to completion of the acquisition of the units. the Trustee will have applied to register for UK VAT. opted to tax the Property and provided an anti-avoidance notice under Article of the Value Added Tax Regulations 1995 to the Vendor. Such steps would mean that any such deemed transfer of the Property shoutd be capable of TOGC treatment and therefore outside the scope of UK VAT. Luxembourg tax implications of Steps 8 -13 To the extent these steps are carried out on arm's length terms and are properly documented and booked in the accounts. there should be no adverse Luxembourg direct or indirect tax implications of Steps 8-13. Jersey tax implications of Steps 3 -13 There should be no adverse Jersey indirect or direct tax implications of Steps 8-13. US tax implications of Steps 8 -13 The JPUT should file a ?protective" election (Le. Form 8332) to be treated as a Iflow-through" entity for US tax purposes. effective as of the date of acquisition. There should be no adverse US direct or indirect tax implications of the Steps 8-13. 10 Ongoing UK taxation 3.1.1 3.1.2 3.1.5 UK taxation of the JPUT and its Unit Holders Tax residence of the JPUT and the Trustee The structure outlined in this Report relies on the JPUT. the Unit Holders and the Trustees being managed and controlled outside the UK in order that they are treated as non-resident tor UK tax purposes. There are important establishment and ongoing requirements to achieve and be able to demonstrate this position if queried by HMRC. Additional guidance on maintaining tax residence is set out in Appendix I. Taxable status of the JPUT As set but in 2.4.9 above. on the basis that the JPUT is a ?Baker? trust. it should be treated as transparent for UK income tax purposes. For CGT purposes. the JPUT is treated as a company under UK tax law and hence opaque. Accordingly. it is important that the Trustee manages and controls the JPUT outside the UK such that any investment gains realised on any direct asset disposal by the JPUT would be outside the scope of CGT in the UK. The key strategic decisions relating to the business of the JPUT must therefore be taken by the Trustee outside the UK. Please refer to Appendix I for more detail of tax residence protocols. Trading and investment activity Section 5(2) CTA 2009 provides that a company (in this case the Unit Holders. in light of the JPUT's transparent nature} which is not tax resident in the UK is within the charge to UK corporation tax it. and only if. it carries on a trade in the UK through a UK permanent establishment. therefore distinguishes between assets held for ?investment' purposes and those assets held for ?trading? purposes. There is no statutory definition in UK tax law 01 what constitutes investment activities as opposed to trading activities; this has been developed through case law. The structure outlined in this Fteport assumes the Property is held for long term investment purposes and the JPUT is not deemed to be 'trading in property'. To the extent that it is the intention of JPUT to continue to hoid the Property for the long term yield on investment return. the risk that JPUT could be treated as having a trading motive is low. As set out in the Due Diligence Report, the JPUT has held its interests in the Property since 2005 and 200?. and as such it is our view that the historic risk of this being considered a trading asset is very low. Furthermore, we understand the Property will continue to be held by the JPUT as an investment asset with the objective of benefiting from rental income and long term capital growth. and not with the sets or main objective oi realising a gain from the disposal. On this basis. the JPUT should not be considered to be carrying on a trade in the UK and therefore the Unit Holders should be outside the scope ot UK corporation tax in respect oi their interest in the Property. Please see the Due Diligence Reporttor further details of the historic position in this regard. Notwithstanding the above. it is important to ensure that the continued long-term investment intention for the acquisition is suf?ciently documented. and consideration should be given to whether there are documents indicating any other intention. 11 3.1.10 3.1.11 3.1.12 3.1.13 3.1.14 Non-Resident Landlord scheme Where rental income from UK property is paid to a non-UK tax resident recipient. prima facie. UK income tax must be withheld on the UK source rental income by the tenant or the managing agent. at the basic rate {currently However. under the terms the Taxation of Income from Land (Non- residents) Regulations 1995. SI 199512902). may confirm that such rental income may be paid free from UK WHT where certain conditions are ful?lled. As a consequence of the transparency of the JPUT for UK income tax purposes. the net rental income arising to the JPUT should be treated as income arising to the Unit Holders from an interest in UK property. Therefore. for UK tax purposes. the Unit Holders should be treated as NHLs and should register on the We understand that the Unit Holders will file applications prior to the acquisition of the units in the JPUT in step 8. as such there should be no requirement for any tax to be withheld on rental income from the Property. Furthermore. on the basis that the JPUT is a Baker trust, from a practical perspective the registrations made by the Unit Holders to join the should be sufficient to ensure no filing obligations arise to the Trustee. This approach has been consistently applied by and we consider it to be their settled practice. UK income tax on property rental income The Unit Holders should be subject to UK income tax at the basic rate {currently 20%) on their net UK property rental income. after deducting certain expenses (please see 3.2-3.5 for a discussion of specific deductions). UK income tax is self-assessed in each fiscal year (6 April 5 April) and is payable on acc0un1 in two equal instalments: on 31 January during the relevant fiscal year and on 31 July following the end of the relevant fiscal year. These payments on account are calculated as 50% of the tax payable in the previous fiscal year. 3.1.15 3.2 3.2.1 3.2.2 3.3 3.3.1 Any final balancing payment will be made on 31 January following the end of the relevant fiscal year. No payment on account should be required in respect of the first year in which the Unit Holders are within the charge to UK income tax (Le. year ending 5 April 2014). The Unit Holders should submit their income tax returns by 31 January in the year following the end of the period to which they relate (to. the return for the period ending 5 April 2014 should be filed by 31 January 2015}. Deduction of property costs Deductlbility of management fees To the extent that the JPUT or the Unit Holders incur management fees wholly and exclusively for the purposes of the property rental business. and provided they are on arm's length terms and not of a capital nature. those fees should be tax deductible against the rental income arising from the JPUT. Other costs In addition to management fees. the JPUT and the Unit Holders will also incur a range of administrative and estate management expenses. Where these are incurred wholly and exclusively for the purposes of the property rental business. and provided they are not of a capital nature. they should be tax deductible against rental income arising from the Property unless the expenditure is specifically disallowed. Tax deductions for interest General Interest on funds borrowed for the purposes of a property business is. prime facr'e. deductible against the rental income arising from the Property. Subject to the anti-avoidance provisions noted below, interest should be tax deductible where it has been incurred 3.3.2 3.3.3 3.3.4 wholly and exclusively for the purposes of a UK rental business and is on ?arm's length" terms. On this basis, a deduction should be available in principle for interest on debt drawn down by the Unit Holders to acquire units in the JPUT and for (ii) interest on debt drawn down to refinance existing debt at the JPUT level, subject to complying with the UK transfer pricing provisions. There is a risk that will challenge the deductibility of interest in relation to debt drawn down to fund the acquisition of units in the JPUT on the basis that it is not drawn down to fund the acquisition of the Property directly. However. we are aware that HMRC have permitted deductions for interest in many similar situations (where debt has been drawn down to finance the acquisition of units in a property owning unit trust) and believe this to be their settled practice. As such, it is our view that interest on this debt should be deductible in principle. Furthermore. in relation to the ?13m of the Bank Loan that is to be novated to the JPUT in Step 13, there is a risk that may contend that this debt was not drawn down wholly and exclusively for the purpose of the property rental business. This is on the basis that in the hands of the JPUT the debt was taken on to finance the repurchase of its own units. rather than for the purpose of the property rental business. However. we believe that there are strong technical arguments to support that. whilst this transaction taken in isolation may not have been for the purpose of the property rental business. the repurchase of units was undertaken to effectively refinance part of the Bank Loan at the level of the Unit Holders. in addition. we understand that commercially this step is being undertaken as the Bank requires its debt to be at the JPUT level. Therefore, on the basis that the ?13m of Bank Loan in the hands of the Unit Holders was used to finance the acquisition of the units in the JPUT and therefore should be deductible (as set out in 3.3.2- 3.3.3). it is our view that interest on this debt should also be deductible in principle. 3.3.5 3.3.6 3.3.7 3.3.8 3.3.9 Timing of interest deductions Taxable profits from a UK property rental business are computed under the same principles as for a trading business with interest expense being deductible on an accruals basis in line with UK GAAPIIFHS. to the extent it is incurred wholly and exclusively for the purposes of that rental business. Transfer pricing Interest accrued on related party financing is subject to the UK Transfer Pricing legislation. Interest on the Bank Loan should not be subject to the UK Transfer Pricing legislation on the basis the debt is drawn down from an unrelated lender and is not subject to any related party security {such as a guarantee) that would bring the debt within the transfer pricing rules. interest on the IBLs advanced by Genesis Holdco to the Unit Holders should be tax deductible to the extent that it is advanced on arm's length terms (Le. the interest is not more than would accrue if the debt had been granted by a third party}. This means that the tax deduction available for interest accrued on related party IBLs would be subject to adjustment if successfully determined that the related party debt was not made on arm's length terms. In determining whether related party debt is on arm's length terms, it is necessary to consider: The amount of the loan; (ii) The interest rate; The ranking of each loan within the overall security structure; (iv) The overall security being provided by the borrower; and Any other relevant terms repayment schedule. interest cover. arrangementfexit fees. etc.). would typically consider the related party debt deductible if it would be agreed between the borrower and a wholly unconnected party a third party bank). 13 3.3.10 3.3.11 3.3.12 3.3.13 3.3.14 0n the basis that the acquisition is to be c.100% debt funded. this is unlikely to represent an arm's length quantum of debt. As such. the Unit Holders will need to be able to support the arm's length nature of the related party interest payments for which a UK income tax deduction is taken when the Unit Holders' UK income tax returns are submitted. Furthermore, require entities to maintain documentation to support the transfer pricing of any related party transactions. Appropriate evidence of the arm?s length pricing of a loan could include an otter or quotation for a similar level of debt {under similar terms) from one or more third party banks that has received credit committee approval. This should be obtained contemporaneously with the transaction it possible. Alternatively. a transfer pricing study could be undertaken post- completion with reference to data relevant to the time of the Transaction. Unallowable purpose Section 80926 ITA 200? contains a general disallowance for interest payments made pursuant to a tax avoidance scheme. It provides that relief shall not be given for interest where a scheme has been affected or arrangements made where the sole or main benefit which might be expected to arise for the person paying the interest is a reduction in liability to tax. 0n the basis that the debt drawn down by the JPUT and the Unit Holders is for the main purpose of acquiring an indirect interest in UK property and repaying existing indebtedness, our view is that the risk of this legislation applying is remote. 3.4 3.4.1 3.4.2 3.4.3 3.4.4 3.4.5 Withholding tax on interest General In accordance with Chapter 3 ITA 2007. WHT is, prime tacr'e. due on payments of 'yearly interest? arising in the UK where it has a UK source} at the basic rate of UK income tax (usually For these purposes, yearly interest is interest calculated by reference to a debt which will be. or which is intended to be. outstanding for a period of a year or more. In determining whether an interest payment "arises" in the UK {and is therefore potentially subject to deduction of UK WHT) the case of Westminster Bank Executor Trustee Company (Channel Islands) Limited Nations! Bank of Greece SA sets out the criteria to be considered. Following this case. HMRC guidance stated that the factors set out below would support the existence of a UK source for interest. The most important factor was identified as being: The residence of the debtor and the location of histher assets. Other factors to take into account are: (ii) The place of performance of the contract and the method of payment; The competent jurisdiction for legal action and the proper law of contract: and (iv) The residence of the guarantor and the location of the security for the debt. HMRC guidance states that if all of the above mentioned factors are present then ?it is likely" that the interest will have a UK source and thus be subject to UK WHT. As explained in 3.4.3. view the residence of the debtor as the most important factor in determining whether it has a UK source. Therefore. on the basis of being non-UK resident. any 14 3.4.6 3.4.8 3.4.9 interest paid by the Unit Holders on the drawn down from Genesis Holdco should be outside the scope of UK WHT. Subject to the limitations below. However the location of the Property (being the UK). and the fact the interest will be paid out of rental income derived from UK property. coutd indicate a UK source. Furthermore. if the debt was secured on the underlying UK property. this would also indicate a UK source. Bank Loan We understand that the Bank Loan will be secured on the Property. and governed by English law. As such. the Bank Loan may be considered to have a UK source, and in our experience such loans are often treated as having a UK scurce. We understand that the Bank is a UK company but is not a bank for the purpose of s.8?9 ITA 200?. and therefore is not able to benefit from the exemption on interest payments made to banks. However. in order for UK WHT to apply to UK source interest payments. under 5.8?4 ITA 2007. the payments must be made by one of the following: a company (excluding payments made in a fiduciary or representative capacity); (ii) a local authority (excluding payments made in a fiduciary or representative capacity); a partnership of which a company is a member: or (iv) any person to another person whose usual place of abode is outside the UK. In this instance. the payments of interest will be made by the Trustees acting in their capacity as trustees of the JPUT. which we would consider to be a fiduciary capacity. As such. WHT should only apply it the payment is made to a person whose usual place of abode is outside the UK. We understand that the Bank is a UK 3.4.10 3.4.11 3.4.12 3.4.13 company and therefore there should be no requirement to withhold tax from interest payments from the JPUT to the Bank. If were to contend that interest payments from the JPUT to the Bank should be subject to withholding tax. this would necessarily mean that they consider that the payment is being made by the Trustees in a non-fiduciary capacity. As such. it would follow that an exemption would be available under 5.930 ITA 200? such that no UK WHT would apply to payments of interest to the Bank {as it is a UK resident company) provided that it is beneficially entitled to the interest payment. As set out in 3.4.3. an exemption trom UK WHT applies on interest payments made to a UK bank or a UK branch of an overseas bank (section 879 ITA 2007}. As such. to the extent that a future lender to the JPUT is a UK bank or a UK branch ot an overseas bank. no UK WHT should apply to interest payments to that lender provided that it is beneficially entitled to the interest payment. Furthermore. to the extent that a future lender to the JPUT lends from outside the UK. trom a iurisdiction that has concluded a DTT with the UK. any WHT liability may potentially be reduced under the relevant clause of the applicable DTT. subject to the meeting the relevant conditions of the applicable DTT. Related party financing Based on UK case law. in respect of the IBLs advanced by Genesis Holdco to the Unit Holders. assuming these are not governed by UK law. the interest will be paid from a Luxembourg rather than a UK bank account. and the debt is not secured on the UK property. it is our view that the risk that interest payments are deemed to have a UK source should be low. However the case law [and guidance) does not provide a bright line test and therefore there cannot be absolute certainty. From a practical perspective in our experience it is extremely rare for Hlv'lFtC to enquire into the WHT status of interest on loans with the above characteristics and we have no recent experience of successfully challenging this point. 15 3.4.14 3.4.15 3.4.16 3.4.1? If interest paid by the Unit Holders was considered to be UK source. prima facie. UK WHT of 20% would apply to the interest payment. If no tax were withheld and were subsequently successfully able to demonstrate a UK source exists then interest and penalties may be due on top of the WHT. Notwithstanding the above, even if WHT were considered to apply. a claim may be able to be made under the UK - Luxembourg However. this would require consideration of whether Genesis Holdco was the beneficial owner of the interest. The meaning of beneficial ownership is a complex area defined by case law. The most relevant case on the subject is [2006} believe that this case supports an ?international fiscal meaning" of beneficial ownership for UK domestic taw purposes Le. a test which requires the recipient of interest to I'enjoy the full privilege to directly benefit from the income". Moreover the granting of treaty benefits should be consistent with the purpose of double tax treaties. Granting reduced WHT to a company in a treaty country with limited powers. which in reality is acting as agent or fiduciary for the ultimate beneficiaries of the income. is not likely to be consistent with such purpose where a reduced rate would not otherwise be available. Ultimately. whether Genesis Holdco is the beneficial owner of the interest income is a question of fact. In our experience do not seek to treat interest paid by a non-resident landlord under similarly structured loans as having a UK source. To the extent that did seek to treat the interest income as having a UK source. we would not expect to challenge any treaty claim made by Genesis Holdco to receive interest without UK WHT to the extent of the proportion of the ultimate investors in the Funds that are resident in jurisdictions which provide for 0% WHT on interest paid from the UK. However. it is worth noting that in such a scenario HMHC may seek to recover interest and possibly penalties for any interest paid gross prior to any treaty clearance being made. 3.4.13 3.4.19 3.5 3.5.1 3.5.2 3.5.3 PPLs There should be no UK WHT liability in respect of payments under the PPLs by the Luxembourg Companies on the basis that we understand none of the features set out in 3.4.3 should be present {and in particular that the instruments are subject to Luxembourg law and the jurisdiction of the Luxembourg courts and are not secured on the underlying UK property). Repayment of loan principal There should be no UK WHT on the repayment of loan principal by any of the entities in the structure. Capital allowances General In calculating the property rental profits chargeable to UK income tax. although no deduction is available for accounting depreciation. a deduction is sometimes available for notionaf depreciation of capital expenditure on the Property. This notional tax depreciation is known as a ?capital allowance?. Different rates of CA3 apply to different types of capital expenditure. No CAs are available for expenditure incurred on land. Section 2.4.12 et seq. outlines the CA5 position of the Unit Holders on acquisition of the units in the JPUT. For completeness. we note that it is anticipated that the Unit Holders should be able to benefit from capital allowances in respect of the following qualifying expenditure (please see our Due Diligence Fteport for further details and associated risks): i) General pool allowances c.218.9rn ii) Special rate poof allowances - ?17.1m To the extent that the JPUT incurs additional capital expenditure post completion on refurbishing andfor enhancing the 15 3.5.4 3.5.5 3.5.6 3.5.8 Property). and the expenditure meets two basic conditions. which are: i) the claimant must have incurred qualifying expenditure; and ii) the claimant must carry on a qualifying activity, this expenditure should qualify for CAs. To the extent the JPUT incurs expenditure on assets that qualify for CAs, to ascertain the timing of the tax relief, it will be necessary to determine whether the expenditure falls into the category of plant and machinery or integral features, as described below. CA5 should be available on qualifying expenditure incurred by the JPUT to reduce the Unit Holders net taxable income on the basis that the JPUT carries on the qualifying activity for capital allowances purposes. Plant and machinery Plant and machinery allowances are available on expenditure on ?plant and machinery? used in respect of the property business. The term ?plant and machinery' is not defined by statute. Apart from a few types of expenditure specifically treated as plant by statute, the eligibility of expenditure on individual assets is a question of fact decided by reference to established precedent or case law. depending on the nature and context of the expenditure. Typical examples of qualifying machinery or plant might include canteen equipment, fire alarms and protection systems, sanitary installations and carpets. Such expenditure is pooled. and each year a WDA is available on the balance of the pool. For plant and machinery. that does not constitute an integral feature, WDA are currently available at the rate of 18% per annum on a reducing-balance basis. 3.5.9 3.5.1 0 3.5.1 1 3.5.12 3.5.13 integral features For expenditure incurred after April 2008. a new classification and tax treatment for 'integral features? within buildings was introduced (as a subset of pfant and machinery). Allowances are available, currently at a rate of and typical assets included within this classification include: i} Electrical systems [including lighting systems) ii) Cold water systems Lifts, escalators and moving walkways iv) External solar shading Contribution allowances Expenditure incurred by the JPUT in respect of contribution payments towards plant and machinery installed by tenants at the Property. may be eligible for capital allowances. Any qualifying contribution payments should be separately pooled in the JPUTs tax returns and is given at the rates discussed above (dependant on the nature of the underlying assets). Other capital allowances An AIA. providing 100% WDA, is available in respect of ?250,000 per annum of a group's expenditure on plant and machinery. The availability of the AIA depends on the date the expenditure has been incurred and must be claimed in the year of expenditure. In broad terms, a group may be defined for these purposes as a parent and subsidiary undertaking, or as companies under common control (generally a 51% shareholding). Expenditure incurred in excess of the AIA will be subject to the normal CA rules dependent upon on the type of asset (see above). 1? 3.6 3.6.1 3.7 3.711 3.7.2 General Anti-Abuse Rule On 1? July 2013 the received Ftoya! Assent as part of the Finance Bill 2013. As such. there is now an overriding statutory limit on the extent to which taxpayers can go in trying to reduce their tax bill. For the purposes of the GAAH. this limit is reached when the arrangements go beyond anything which could be reasonably regarded as a reasonable caurse of action (known as the ?double reasonableness" test}. Nohrrithstanding the lack of precedent in how may seek to apply the it is our view that the Transaction should be seen as a reasonable c0urse of action and therefore the GAAR should not be in point. UK VAT VAT registration From our due diligence we understand that the Vendors are currently registered for VAT in the UK and have opted to tax the Property. As referred to at 2.4.21. we understand that it is intended that the Trustee will apply to register for UK VAT and opt to tax the Property prior to completion. Accordingly. the JPUT should charge UK VAT at the standard rate {currently 20%) on rent and service charges. Provided that UK VAT is charged on all the income or capital proceeds received by the JPUT, the JPUT should be entitled to recover all of UK VAT incurred by it on related costs. subject to normal rules concerning recovery. 3.7.3 3.7.4 3.7.6 3.7.7 3.7.8 Please note that there are anti-avoidance rules that can disapply an option to tax. The anti-avoidance legislation needs to be addressed each time there is a grant of an interest in the Property (including the grant of an occupational lease and a lease variation). It the option to tax is disapptied in respect of a grant then supplies to the relevant tenant would be exempt from UK VAT, which would impact the JPUT's ability to fully recover VAT incurred on costs. Broadly, provided that there is no connection (including a financial connection) between the Trustee and any of the tenants. such anti- avoidance rules would not be in point. The Capital Goods Scheme applies to all capital expenditure the acquisition of a property. redevelopment, refurbishment, etc.) where VAT exclusive costs exceed ?250k. Where the Capital Goods Scheme applies. the use of the asset needs to be monitored over a period of ten years from the date the input VAT was incurred. If there is a change in the use of the asset within this period because an option to tax is disapplied under the anti-avoidance legislation or because a charity tenant seeks to disapply the option) then a proportion of the VAT previously recovered will need to be repaid to HMHC. We would expect that the Trustee on behalf of the JPUT will continue to submit UK VAT returns on a quarterly basis. Please see the Due Diligence Report for further details of the historic UK VAT position. VAT on acquisition costs Provided that the Unit Holders are the proper recipients of the services invoiced as part of the transaction advisory costs and the services are not directly related to UK land, no UK VAT should be chargeable. This should apply, for example. to tax and corporate law advisory services. 18 3.7.9 3.7.10 3.7.11 3.8 3.8.1 3.3.2 Where the services are related to UK land. then UK VAT at 20% will be chargeable. Examples of land related services on which UK VAT would be due include the services of surveyors, engineers and similar professionals relating to UK land or buildings. This includes the management. conveyance, survey or valuation of property by a solicitor or surveyor (including for insurance or lending purposes). If UK VAT is charged on services relating to UK land. then this is unlikely to be recoverable by the Unit Holders, unless these are correctly recharged to the JPUT. Consideration should therefore be given as to whether such costs could properly be borne by the JPUT by invoicing the Trustee on behalf of the JPUT. e.g. valuation tees relating to a subsequent refinancing. It the JPUT is the recipient of the services from a UK VAT perspective and the facts support this the engagement letter and invoice are addressed to the Trustee on behalf of the JPUT) then the Trustee on behalf of the JPUT should be able to recover the associated UK VAT. Please see 5.20 for details of the Luxembourg VAT analysis of acquisition costs. Construction Industry Scheme The Construction industry Scheme is an arrangement which sets out the rules for how payments to subcontractors for construction work must be handled by their engager. Under the scheme. a contractor has a reporting obligation for payments made for construction operations undertaken by a third party. There may also be an obligation to deduct tax. dependent Upon whether the subcontractor has gross payment status. Broadly speaking. after the JPUT has incurred an average annual cost of 21m or more over a three year period it should register with Hlv'lFiC under the Construction Industry Scheme regime from the start of the accounting period after the accounting period during which it breached the threshold. 3.3.3 3.8.4 3.8.5 3.9 3.9.1 3.9.2 On breaching the threshold the JPUT may need to withhold a portion of the payments made to sub-contractors carrying out any construction activity. To determine whether any withholding is necessary. provides the JPUT with access to a list of registered subcontractors. To the extent that the subcontractors are present on the list. the JPUT will be able to make payments either with no withholding or with a 20% withholding {depending on the status of the subcontractor}. If the subcontractor does not appear on the list. then the withholding will be 30%. The JPUT will be able to deregister from the Construction Industry Scheme at the end of the accounting period during which less than an average of ?1m has been spent on construction over that and the preceding two accounting periods (is. where there has been an average annual cost of less than 21m over a three year period). To the extent that it is probable that the JPUT will not incur signi?cant construction costs in the future then it may be possible to de-register sooner. by concession from HMFIC. As stated above. whilst registered under the scheme the JPUT is required to submit returns. failure to submit these returns during the period of significant spend could lead to significant penalties. UK Taxation of Manco Corporation tax A company resident in the UK is subject to UK corporation tax on its worldwide income and gains. Manco should be tax resident in the UK by virtue of being incorporated in the UK. The current main rate of corporation tax is 23%. reducing to 21% from 1 April 2014. Furthermore. as announced in the Chancellor's Budget on 20 March 2013. this is expected to reduce to 20% from 1 April 2015. 19 3.9.3 3.9.4 3.9.5 3.9.5 3.9.7 3.9.8 3.9.9 3.9.10 If pro?ts are less than the 'lower limit'. the small companies? rate will be applied (currently If profits fall between the 'lower limit? and the 'upper limit?, marginal relief will be available. The ?lower limit' and 'upper limit? are currently ?300k and ?1.5m respectively. However this limit is divided equally between all worldwide associated companies. such that the main rate is likely to apply. Chargeabie accounting periods The period for which a company prepares its financial statements is known as the period of account. This is usually for a period of twelve months. Corporation tax is assessed in respect of a CAP which must not exceed twelve months. Historically. Manco has prepared its accounts to 31 December each year. To the extent that this continues. Manco should continue to file its corporation tax return for each year to 31 December. Computation of trading profit Trading profit is computed primarily from the company's financiat statements. which are prepared in accordance with the statutory requirements under the Companies Acts. The net profit (or loss) as per the financial statements is then adjusted to arrive at taxable trading profit. Only expenses incurred wholly and exclusively for the purposes of the trade are allowable for tax purposes, provided they are not of a capital nature. or specifically disallowed by statute. Costs incurred as a result of having company status are generally allowed. even though these are not specifically incurred ?for the purposes of the trade', e.g. audit costs, company administration fees. etc. 3.9.11 3.9.12 3.9.13 3.9.14 3.9.15 3.9.16 3.9.17 We understand that the majority of Manco's expenses will relate to staff salaries. which should be deductible for corporation tax purposes. Transfer pricing The UK Transfer Pricing legislation, as set out in Part 4 TIOPA 2010. requires that any transactions with relevant related parties. and in some instances third parties acting together with related parties in relation to the provision of finance arrangements. must be on arm's length terms. We understand that the majority of Manco's income witl come from the JPUT and as such will be within the scope of the transfer pricing provisions. As such, it is important that that sufficient documentation is retained that provides contemporaneous evidence to support the arm?s length nature of these fees. Trading tosses To the extent that Manco realises trading tosses for corporation tax purposes. these can be offset against total profits in the current year andior in the prior year. or can be surrendered for group relief. Any unrelieved trading loss is carried forward indefinitely. and available for use against the first available trading profits of the same trade. Please see the Due Diligence Fleporf for details of Manco?s historic trading toss position. Taxation of other profits Manco will be subject to corporation tax on any interest income under the loan relationship rules. as accounted for on an accruals basis in accordance with UK GAAP. Manco will be subject to corporation tax on its chargeable gains. as computed under capital gains tax law (mainly TCGA 1992). 20 3.9.18 VAT Manco is VAT registered and should charge VAT on the services it provides. Please see the Due Diligence Report tor lurther details of Manco's historic VAT position. 21 Ongoing Jersey taxation 4.1 4.1.1 4.1.4 Taxation of the JPUT Prima facie. under Jersey tax law the trustees of a Jersey resident trust are subject to Jersey tax on all of the income of the JPUT which arises to them in their capacity as trustees. However. under Concession M1 (formerly Concession 2) published by the Jersey Tax Office. those trustees are exempted from the liability to Jersey tax where none of the unit holdersr'settlor oi the trust are Jersey tax resident; and (ii) none of the income of the trust is Jersey source (excluding Jersey bank interest). Furthermore, in the context of a Jersey unit trustI full exemption from tax on non-Jersey source income may be available notwithstanding the existence of Jersey resident unit-holders provided that the trustees do the following: i. submit a formal application for exemption to the Jersey Tax Office; ii. undertake to deduct Jersey income tax from any distributions to such Jersey residents; and make potential Jersey resident investors aware. by means of a warning in the Prospectus, that Article 134A (the anti- avoidance provision) may be invoked in the case of an investment in an accumulation fund. Where there are no Jersey-resident unit holders in the trust. the exemption of the trustees from tax on the income arising in the trust is automatic and notification does not need to be provided to the Jersey Tax Office. On the basis that the Unit Holders will be non-Jersey resident, the exemption of the Trustee from tax on the income arising in the trust as mentioned above is automatic and notification does not need to be provided to the Jersey Tax Office. 4.2 4.2.1 4.2.2 4.2.3 Jersey GST Jersey introduced GST with effect from 6 May 2008 which imposed a 3% rate of tax on the supply of a broad range of goods and services in Jersey by entities whose taxable turnover exceeds ?300,000 (subject to a voluntary registration facility}. This rate was subsequently increased to 5% with effect from 1 June 2011. However. it also introduced a special regime for certain entities which meet the criteria to be an whereby in exchange for an annual fee these entities are taken outside the scope of GST. Where an entity qualifies as an ISE. it should not be charged GST on its purchases and should not themselves charge GST on their supplies. To qualify as an ISE a company must satisfy the requirements of Article 59 of the Goods and Services (Jersey) Law 2007, unless the company is regulated in Jersey (in which case the necessary conditions may differ). Article 59 requires that: i. either the company makes a direct application to the Jersey Controller of Taxes or the name of the company is entered onto the list of International Service Entities maintained by another international service entity which is: a. authorised by the Jersey Comptroller of Taxes to maintain such a list: and b. registered under the Financial Services (Jersey) Law 1998 to carry on trust company business: ii. the prescribed tee has been paid to the Jersey Controller of Taxes; and 4.2.4 4.2.5 the following conditions are satisfied: a. no more than 10% in value of all supplies of goods and services made by or to the company are made to individuals who belong in Jersey or. to the extent that the supplies of goods or services made by the company in Jersey exceed 10% of the value of all supplies of goods and services made by it. the supplies in Jersey are made only to an International Service Entity; b. no individual who belongs in Jersey has the effective use. or the effective enjoyment. of any asset owned or administered by the company; and o. no individual who belongs in Jersey has the effective use. or the effective enjoyment. of any goods or services. suppiied to or by the company. For Jersey tax purposes. JPUTs are not recognised as legal entities and therefore cannot be charged GST nor register for GST as an ISE. Any charges associated with the JPUT should be invoiced to the Trustees. To the extent that significant GST is likely to be incurred on behalf of the JPUT. consideration should be given as to whether the Trustees. on behalf of the JPUT may qualify as ISEs under one of the specific conditions or. atternatively. whether a separate application to the Jersey Comptrolfer of Taxes could be made. As noted above. if the Trustees quatify as ISEs the only requirement is to make an annual decfaration and pay the appropriate annual fee. If they do not qualify as lSEs. but have an obligation to be registered for GST. prima facie quarterly returns will need to be completed and ?led. but any GST incurred by the Trustees of the JPUT and the Unit Holders on its purchases should be reclaimable. 4.2.6 In our experience the Trustees acting on behalf of a JPUT can typically be registered as an ISE for an annual fee so GST should not be a cost to the Trustees of the JPUT. The annual ISE fee ranges from nil for trusts and trustees to 950.000 for banks. Most non-regulated vehicles. inciuding we would expect the Unit Holders. will pay a standard annual fee of ?200. It the JPUT only makes Supplies outside of Jersey but the Trustees do not register as an ISE on behalf of the JPUT. then the Trustees may not be eligible to register for GST on behatf of the JPUT. even under the voluntary facility. In this case. any GST incurred on purchases will be a real cost. 23 Ongoing Luxembourg taxation 5.1 5.1.1 5.2 5.2.1 5.2.2 linil Direct taxation (CIT and MBT) As Luxembourg tax resident companies. the Unit Holders should be subject to Luxembourg direct taxation on their worldwide income excluding certain items that benefit from an exemption under Luxembourg domestic law or a relevant The aggregate effective CIT and MBT rate in Luxembourg is 29.22% {for financial year 2013). Le. 21% CIT. (ii) T96 contribution to the unemployment fund computed based on the corporate income tax due and 6.75% MBT rate for companies operating in Luxembourg city {after an allowance of ?11500 granted for MET purposes only). Thin capitalisation rules There are no specific provisions in Luxembourg tax law that require a specific debt to equity ratio for a Luxembourg company holding real estate located outside of Luxembourg. However, pursuant to our experience of the administrative tax practice. the debt to equity ratio applicable is the ratio required by the country where the real estate asset is located. In the case at hand the UK tax legislation does not include thin capitalisation provisions, therefore no debt to equity ratio should be required for Luxembourg tax purposes. This should be confirmed in the written ATA {see 5.9 below). In addition. with respect to Genesis Fletail I's interest in Manco. please see 5.12 below for the Luxembourg technical thin capitalisation requirements with regards to this shareholding activity. in practice. given the nominal value of this shareholding. a 5.3 5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 material increase in the share capital of Genesis Retail 1 should not be required. Rental Income The Unit Holders should be subiect to Luxembourg taxation on their worldwide income. unless the income is exempt under Luxembourg domestic tax law or a DTT. The JPUT should be considered as tax transparent for Luxembourg tax purposes to the extent that it has the same characteristics as a Luxembourg based FCP (Le. no legal personality. managed by a third party. not subject to income tax. etc). To the extent that this is the case. from a Luxembourg tax perspective. the Unit Holders should be deemed to hold the Property directly. We recommend that the tax transparency of the JPUT is agreed with the LTA in the ATA. The Unit Holders should prepare a tax balance sheet to evidence the tax transparency of the JPUT and the deemed direct holding of the Property. In accordance with the UKfLuxembourg income and gains derived from immovable property situated in the UK is exempt from taxation in Luxembourg. Accordingly. income derived from the Property (Le. distributions from the JPUT) should be exempt from Luxembourg CIT and MBT. We recommend that this is agreed with the LTA in the written ATA. Article 45 (2) of the LITL provides that expenses economically linked to exempt income (notably interest expenses on the IBLs. depreciation of the Property and any other expense incurred by the Unit Holders due to the holding of the Property) are not deductible for Luxembourg tax purposes. 24 5.3.5 5.3.7 5.4 5.4.1 5.4.2 5.4.3 To the extent that the Unit Holders have non-property related income (such as interest income on bank accounts) i expenses (such as general operating expenses incurred in relation to the conduct ot the business of a Luxembourg company}, these may be subject to taxation tax deductible in Luxembourg. The Luxembourg taxation of dividends received from Manco in the hands on Genesis Ftetail I should be as set out in 5.14 below. We note that to the extent that Manco is to be disposed of shortly after acquisition, it is unlikely that the conditions of the participation exemption will be met and. as such. any dividends or disposal proceeds would be taxable in the hands of Genesis Holdco as set out in 5.1 above. However. in this case we understand that proceeds from such a disposalfiiquidation should be negligible. Payments under the SPA We understand, that to the extent any payments are made under the SPA in respect of the acquisition of the units in the JPUT, the shares in Manco. or the Trustee, these will be made by the Vendors to the Unit Holders. On the basis that the JPUT should be considered transparent for Luxembourg direct tax purposes {see 5.3.2 above). payments in respect of the units in the JPUT should be considered an adjustment to purchase price of the Property in the hands of the Unit Holders and, as such, exempt from CIT and MBT in Luxembourg in accordance with the UKILUXembourg With regard to any payments under the SPA in respect of Manco and the Trustee. on the basis that minimal consideration will be paid in respect ot these entities (and Genesis Fletail will not hold the shares in the Trustee}. such receipts are unlikely to be considered an adjustment to purchase price in the hands of the Unit Holders. To the extent this is the case, these payments may be fully taxable in the hands of the Unit Holders. In practice. we understand that any such payments should be immaterial and theretore should not give rise to a significant tax charge. 5.5 5.5.1 5.5.2 5.5.3 5.6 5.6.1 5.6.2 Functional currency We understand that the share capital 01 the Unit Holders may be denominated in GBP and that the majority of the other assets and liabilities of the company will be denominated in GBP. To mitigate potential tax exposures arising from toreign exchange movements, the Unit Holders should apply to use GBP as their functional currency for Luxembourg tax purposes (CIT, MBT. and As a consequence, the Unit Holders should prepare their Luxembourg tax returns on the basis of their balance sheets in GBP converted into in accordance with the GBPIEUH exchange rate applicable at year end. We recommend that this is agreed with the LTA in an ATA. Please note that the Unit Holders may be requested by the LTA to commit themselves to this functional currency for the preparation of their Luxembourg tax returns for a minimum period of 5 years (unless they are liquidated). NWT The Unit Holders should be subject to an annual NWT at a rate of 0.5% on their "unitary value" which in practice should equal the net value of all assets (including cash and receivables) and liabilities held by the company. NWT is calculated based on this value at 1 January each year. Prima facie. foreign (Le. non-Luxembourg} real estate is taken into consideration at its market value. However. based on Article 23 and Article 25(2)(a) of the Luxembourg-UK real estate located in the UK should be exempt from NWT in Luxembourg. This treatment should equally apply to the Unit Holders' investment in the JPUT on the basis that this will be deemed to be a direct holding of UK real estate. Similarly. any debts that finance such tax exempt assets should not be deductible for Luxembourg NWT 25 5.6.3 5.6.4 5.7 5.11 512 5.7.3 purposes. We recommend that this is agreed with the LTA in an ATA. The NWT implications of Genesis Fietail l?s shareholding in l'vlanco should be as set out in 5.15 below, albeit in practice we understand this holding should have only nominal value. Any excess cash held by the Unit Holders andfor upstream loans advanced by them should be taxable assets fer NWT purposes to the extent they are financed with equity. It should be noted that, there is a minimum NWT liability of ?25 per annum for Luxembourg tax resident companies (with the legal form of a sa which is payable even in case of a negative taxable basis. Annual Minimum Flat Income Tax On the basis that the Unit Holders have their legal seat and place of eftective management in Luxembourg and that their balance sheet is composed of less than 90% of ?financial? items, i.e. financial assets (account 23 of the Luxembourg Standard Chart of Accounts amounts owned by affiliated undertakings and by companies with participating interests (account 41 of the SCA), transferable securities (account 50 of the SCA) and cash (account 51 ot the SCA), they should be subject to the annual minimum flat tax based on a progressive scale ?535 to ?21,400 each inclusive of unemployment contribution for the financial year 2013). However, the net accounting value of assets producing income exclusively taxable in another State by application of a D'l'l' (which is the case for the Unit Holders) should be excluded trom the total of the balance sheet. As such, depending on their other assets. the Unit Holders may then be subject to the flat tax of ?3,210 or the progressive minimum tax based on the scale of ?535 to ?21,400. This should be contirmed on a case by case basis. In practice, the minimum flat tax should be viewed as an advance payment 01 CIT when the Unit Holders are in a tax loss position or paying less than the minimum flat tax In those cases, the amount 5.8 5.3.1 5.3.2 5.8.3 5.8.4 5.9 5.9.1 5.9.2 paid should be creditable against future CIT without time limitation (however any excess is non-refundable}. Chamber of Commerce contribution All Luxembourg taxpayers that carry on commercial, financial or industrial activities in Luxembourg are in principle subject to an annual contribution payable to the Chamber of Commerce. This contribution is levied on the taxpayer?s profits as determined for tax purposes (excluding any tax losses carried forward) at a rate fluctuating between 0.025% and 0.2% with a minimum of ?270 for an 8.63 Companies whose main activities consist in holding activities are excluded from the application of the general system of calculation. These companies will instead be subject to an annual ?350 lump sum contribution (Le. tlat contribution), irrespective of their taxable profits. The Luxembourg companies which should benefit from such lump sum contribution are: companies which mainly hold participations; and (ii) companies which are regarded as such according to the general nomenclature of economic activities in the European Community (Le. NACE code). as implemented in Luxembourg. ATA process A written continuation should be filed with the LTA in the form of an ATA to confirm the Luxembourg direct tax treatment of the proposed transactions at the level of Unit Holders (as described herein). A sign off of the ATA is usually received within one month. Once received. the final ATA should be retained in Luxembourg and not circulated outside this jurisdiction. 26 5.10 5.10.1 5.10.2 5.10.3 5.10.4 5.10.5 5.10.6 Luxembourg VAT From a VAT perspective. the JPUT should not be considered as transparent to the extent that tor accounting purposes, the Property is not booked as an asset in the balance sheet of the Unit Holders and that the rental income deriving from the Property is not booked as income in the Unit Hoiders' accounts (which we expect to be the case). The Unit Holders should accordingly be seen as only holding units in the JPUT for VAT purposes. A pure sharehoiding activity is not an economic activity for Luxembourg VAT purposes. Therefore. the Unit Holders should not be able to recover input VAT in relation to the shareholding activity. to the extent that this is not recharged. However please see below in relation to input VAT incurred on costs subsequently recharged to the Unit Holders. Unit Holders and transaction costs We understand that the Unit Holders have contracted with third party suppliers {who are predominantly UK based) in respect of all services relating to the acquisition of the units in the JPUT. and will recharge these costs to the JPUT. On the basis that the Unit Hoiders will be making taxabie supplies (being the recharge of taxable costs to the JPUT) the Unit Holders will have to VAT register in Luxembourg under the normal regime. The Luxembourg VAT treatment of these recharged costs is considered further below. Financing fees The financing services received by Unit Holders should be outside the scope of UK VAT and should benefit from a VAT exemption in Luxembourg (to be confirmed based on a detailed analysis of the actual services rendered). 5.10.7 5.10.3 5.10.9 5.10.10 5.10.11 5.10.12 5.10.13 If the exempt services are recharged by the Unit Holders they should not be subject to Luxembourg VAT. Other advisory fees not directly reiateo? to UK property These advisory services received by the Unit Holders should be outside the territorial scope of UK VAT and subject to reverse charge VAT in Luxembourg at the standard rate of 15%. If these services are recharged to the JPUT they should be outside the scope of Luxembourg VAT and outside the scope of UK VAT. The Unit Holders should be entitled to fully recover the Luxembourg reverse charge VAT as a result of being able to directly attribute the expense incurred to the corresponding recharge. The amount of recoverable input VAT incurred by the Unit Holders on the services received is limited to the proportion of the amount actually recharged. Therefore. it the advisory services are recharged in full. the full amount oi input VAT incurred on the advisory services recharged should be recoverable. However. the input VAT incurred on services received by Unit Holders in relation to their shareholding activity and overhead costs remains non-recoverable, it these services are not recharged. Other advisory fees directly related to UK property These advisory services received by the Unit Holders will be subject to UK VAT at the standard rate of 20%. It the services are not recharged then this VAT will be irrecoverable. it the services are recharged to the JPUT they may be subject to UK VAT at the standard rate. In this case. the Unit Hoiders may need to register for UK VAT in order to recover the VAT incurred on the initial supply. 2? 5.11 5.11.1 5.12 5.12.1 5.12.2 5.12.3 5.12.4 Lux Holdcos h-?itlSiCl' Luxco Direct taxation (CIT and MBT) The Lox Holdcos and Master Luxco should be Luxembourg tax resident entities. considering they have their statutory seat and place of effective management in Luxembourg. and therefore should be subject to CIT and MST on their worldwide income as set out in 5.1.1 et seq. above. Thin capitalisation rules Based on Luxembourg tax administrative practice. Luxembourg companies performing a shareholding activity should comply with a maximum debt to equity ratio of 35:15. At the level of the Lux Holdcos. the financing of the respective participations held should therefore. prima facie. include an additional small part of equity {equal to 15% of the shareholding held). However. subject to confirmation with the LTA. we have good arguments to agree that the holding activities carried out by the Lux Holdcos should fall outside the scope of the 35r15 debt-to- equity ratio to the extent it is demonstrated to the tax authorities that the overall level of interest (tixedfvariable) arising on the PPL financing will not exceed the level of interest that would have arisen had the relevant companies only financed their shareholding activities with 55% debt. This argument is based on the understanding that the 1% fixed interest on the PPL is significantly tower than the interest rate on certain 3rd party debt with mediumr?long maturity. (ii) economically speaking the PPL is linked to the issued by the Unit Holders and ultimately to the immovable property so that no variable interest on the PPL will be recognized if no return is effectively 5.12.5 5.12.6 5.12.7 5.13 5.13.1 5.13.2 generated on the immovable property and the variable component of the PPL will never result in Lux Holdcos being in a loss situation. On this basis. it should be possible to finance the holding activities carried out by the Lux Holdcos and Master Luxco using PPLs and nominal equity (subject to Genesis Holdco retaining 1% equity at risk in respect of its financing activities in accordance with the transfer pricing circular see 5.13 below). To the extent that interest expense arising on the PPLs is in accordance with the Luxembomg thin capitalisation rules. interest expenses incurred on the PPLs should in principle be tax deductible at the level of the relevant entity (unless connected with exempt income] and should not be subject to withholding tax in Luxembourg. Careful consideration should be given to the drafting of the PPLs to ensure that this is the case. In any case. with respect to interest payments by Genesis Holden and Genesis Topco. no WHT should apply on any deemed dividends on the basis that the conditions of the participation exemption for WHT should be met. The exemption from the standard 55:15 debt to equity ratio and the tax treatment of the PPLs should be secured through a written ATA concluded with the LTA. Financing activities Since Master Luxco and the Lux Holdcos will provide debt financing. each company performs a financing activity for Luxembourg tax purposes. As companies performing a financing activity. Master Luxco and the Lux Holdcos would generally be expected to retain a taxable margin in accordance with Luxembourg transfer pricing principles. In particular. since the total financing of the Lux Holdcos and Master LuxCo will exceed ?25m. Lux Holdcos and Master Luxco would, primal facfe. be required to comply with the provisions of the transfer pricing circular n?id~412 of 28 January 2011. as 28 5.13.3 5.13.4 5.13.5 completed by the Transfer Pricing Circular LITL n?154f2bis dated 3 April 201 1. However, it should be possible to agree with the LTA in the written ATA {see 5.19) that. given the same funds are flowing from Master Luxco down to its Luxembourg subsidiaries. the financing activities carried out by those entities will be considered as being peeled at the level of Genesis Holdco and hence will be considered as a single transaction from a tax perspective. As a result: Master Luxco and Genesis Topco should be considered as agents from a transfer pricing circular perSpective (is. they do not bear any risk with respect to their back-to-back position and they are acting as passive vehicles with respect to the financing activity); Master Luxco and Genesis Topco should not have to recognise any remuneration on their back to back financing activity; Only Genesis Holdco should have to recognise any remuneration on its financing activity: and A single arm?s length commercial remuneration margin should be recognised at the level of Genesis Holdco. Subject to the above. under the provisions of the transfer pricing circulars as interpreted and applied by the LTA. Genesis Holdco would be required to comply with certain economic and organisational substance requirements {additional detail in Appendix I). and the margin earned in respect of the financing activity would have to be arm?s length. in line with the OECD's general guidelines and the Luxembourg Transfer Pricing Circulars. In respect of economic substance, Genesis Holdco would need to have equity at risk amounting to at least 1% of the aggregate nominal amount of the infra-group loans (Le. IBLs) granted by Genesis Holdco (up to a maximum of the GBP equivalent of ?2mi. and (ii) to perform a transfer pricing analysis in accordance with the above circular to evidence that the margin retained on the total financing activities of Genesis Holdco is supportable as being 5.13.6 5.13.7 5.14 5.14.1 5.14.2 5.14.3 arm's length. The margin should be agreed with the LTA through an APA provided that the above requirements are met. The arm's length commercial remuneration should be properly reflected in the legal documentation and shoutd be taxable at the level of Genesis Holdco at the aggregate corporate income tax rate of 29.22% (for the financial year 2013). When calculating Genesis Holdco's taxable income for Luxembourg tax purposes, operating expenses incurred by Genesis Holdco in relation to its financing activity should be deductible from its income on the taxable margin (limited to the amounts forecast when calculating the margin). As part of the APA process consideration will be given to reducing the spread at the level of Genesis Holdco by a de minimis amount and instead applying this de minimis amount as a spread at the level of Genesis Topco. The APA should be binding for a five-year period, and should be subject to the principle of good faith and compliance with the rules in matters of substance. An extension of the term of the agreement may be requested if the substantive characteristics of the transaction are unchanged at the end of the first five-year period. Holding activities For Luxembourg tax purposes, the Lux Holdcos will be performing a holding activity in respect of their shareholdings in their respective subsidiaries. Dividends, liquidation proceeds and capital gains received by Lux Holdcos from their direct Luxembourg subsidiaries should be exempt from Luxembourg CIT and MBT in the hands of the parent company to the extent that the conditions of the Luxembourg participation exemption are met (see Appendix ll). Expenses in direct economic connection with such exempt dividendsi'liquidation proceeds. as well as any subsequent write- down of the shareholding. should not be deductible up to the amount of these exempt dividendsi'liquidation proceeds. 29 5.14.4 5.14.5 5.15 5.15.1 5.15.2 5.16 5.16.1 5.16.2 5.16.3 Any excess over exempt dividendfliquidation proceeds should remain deductible but subject to a ciaw back upon realisation of an exempt capital gain. The claw back should not have any adverse tax implications (due to the fact that tax losses resulting from the recaptured expenses can be carried fonlvardj provided that the recaptured expenses have not been used to offset other taxable income of the relevant company {in which case the end result would be a tax deferral]. This should be confirmed in the written ATA (see 5.19}. Functional currency We understand that the share capital of the Lux Holdcos may be denominated in GBP and that the majority of the other assets and liabilities of the companies may also be denominated in GBP. and therefore the Lux Holdcos may use GBP as their functional currency. Please see 5.4 above for the implications of having a GBP functional currency. NWT The Lox Holdcos should be subject to NWT as set out in 5.6 above. This tax is not deductible for income tax purposes. Shareholdings for each of the Lux Holdcos in their respective subsidiaries should be exempt assets for NWT purposes to the extent that the conditions of the Luxembourg participation exemption are met. Any debts IBL, IFL andr'or PPLs) that finance such tax exempt assets should not be deductible for Luxembourg NWT purposes. This shouid be agreed with the LTA in the written ATA {see 5.19). The IBLs advanced by Genesis Holdco should be considered as taxable assets for NWT purposes. They will however be offset by 5.17 5.17.1 5.18 5.13.1 5.19 5.19.1 5.19.2 5.19.3 5.20 5.20.1 tax deductible PPL liabilities. with the exception of the small portion of the receivables that are financed by equity. Annual Minimum Flat Income Tax Master Luxco and the Lux Holdcos should be Subject to the annual minimum flat tax as set out in 5.7 above. In particular. they should be subject to the annual minimum flat tax of ?3210 (for the financial year 2013} for companies which have at least 90% of their assets being ?financial' items, which should be the case. Chamber of Commerce contribution All Luxembourg taxpayers that carry on commercial, financial or industrial activities in Luxembourg are in principle subject to an annual contribution payable to the Chamber of Commerce. Please refer to Section 5.8 above for more details. ATA and APA process An ATA should be sought from the LTA to confirm the Luxembourg as set out in 5.9 above. Genesis Holdco would also need to agree an APA and related transfer pricing documentation with the LTA in order to confirm that the margin to be realised on its intra-group financing activities is at arm?s length. Once received, the final ATA and APA should be retained in Luxembourg and not circulated outside thisjurisdiction. Luxembourg VAT The granting of PPLs and IBLs is generally considered to be an economic activity in Luxembourg, giving the Lux Holdcos and 30 5.21 5.21.1 5.21.2 5.21.3 5.21.4 Master Luxco the status of taxable persons for VAT purposes. Therefore the Lux Holdcos and Master Luxco will need to register for Luxembourg VAT under the simplified regime to the extent that they receive services from outside of Luxembourg on which they are required to reverse charge Luxembourg VAT. Furthermore, granting of loans to EU established entities, being a VAT exempt activity. does not give the Lux Holdcos and Master Luxco the right to recover input VAT. Thus, any input VAT incurred by the Lux Holdcos and Master Luxco (either charged by Luxembourg suppliers or self-assessed on services received from foreign suppliers) should constitute a final cost. Cash repatriation Payments of interest In accordance with Luxembourg domestic legislation, there should be no Luxembourg WHT on the payments ot interest on the IBL by the Unit Holders to Genesis Holdco. Repayment of loan principal In accordance with Luxembourg domestic legislation, there should be no Luxembourg WHT on the repayment of the IBL principal by the Unit Holders. Dividend payments Luxembourg levies WHT on dividend payments at the rate of 15% on the gross amount (116596 on the net amount). unless reduced under a DTT or if the Luxembourg domestic withholding tax exemption is applicable. It is anticipated that dividend payments made by the Unit Holders and Lux Holdcos should qualify for the domestic Luxembourg WHT exemption and therefore no WHT should be levied on dividend 5.21.5 5.21 .6 5.21 5.21.3 payments made by them provided all conditions of the Luxembourg participation exemption regime are met. Any dividend distributions made by Master Luxco to the Funds would be subject to Luxembourg WHT at a rate of 15%. It may be possible to reduce the rate of WHT to the extent that the tax transparency of the Funds can be applied and the investors in the Funds are resident in a jurisdiction with a D'l'l' with Luxembourg and both parties can access the treaty. However, we understand profits of Master Luxco arising from this investment after the payment of interest under the PPLs are expected to be minimal fie. likely the not spread realised by Genesis Holdco after tax and distributed to Master Luxoo}. Additionally, these residual profits are likely be repatriated on final liquidation of Master Luxco in which case no Luxembourg WHT should apply. Payments via PPLs On the basis that the PPLs are treated as debt instruments for Luxembourg tax purposes (subject to confirmation from the LTA). in accordance with Luxembourg domestic legislation, PPL payments made by the Lux Holdcos should not be subject to WHT in Luxembourg, as set out above. This should be confirmed in an ATA with the LTA. Careful consideration should be given to the drafting of the PPLs to ensure that it is deemed to be debt for Luxembourg tax purposes and that an arm's length margin remains at the level of Genesis Holdco on an aggregate basis. Typically, the PPLs should be considered as debt for Luxembourg tax purposes if they have the following characteristics: Maturity date of maximum 30 years; {ii} Fixed yield rate of 31 5.21.9 Variable yield depending on net income (before tax) derived trom the assets being tracked (less an appropriate margin for the PPL granted by Genesis Topco to Genesis Heldcc and including any foreign exchange movements at the level of Master Luxco); (iv) Reimbursement at par value plus accrued and unpaid yield, if any; Flank prior to ordinary shares but Subordinated to all present and future obligations ot the issuer; and (vi) No right to the liquidation proceeds at the issuer. In accordance with Luxembourg domestic legislation, there should be no Luxembourg WHT on the repayment of PPL principal by the Lux Holdcos. 32 6 Ongoing US taxation 6.1 Investment structure for US tax purposes seep vii Funds Funds IBL I "1 yr. nest: Reta: i I 6.2 6.2.1 6.2.2 6.3. 1 6.3.2 6.4 6.4.1 Check the Box Elections Please see 2.2.8 et seq. and 2.4.24 et seq. above tor a discussion oi the elections to be made by the Luxembourg Companies and the JPUT. Because Manco is a management company and likely generates ?active? Income (Le. bad income tor FTP and US tax exempt purposes). Manon will remain a regarded entity tor US tax purposes until its activities are moved to emitter entity. At that time, Manco will most likely be liquidated. Unrelated Business Taxable Income Ftental income generated by the JPUT should not be viewed as UBTI tor US tax purposes and theretore, should not need to be ?blocked" trom US tax exempt investors in the BREP Funds. Because Manco will remain a regarded entity, any distributions from Manco will be considered a dividend to the extent ot Manco?s see which should be ?good? income tor UBTI purposes. Ongoing taxation US Taxable Investors We understand all income generated by this Investment over the investment period will consist of passive income (Le. rental income). Therefore, a ?total tiow-ttvough" structure will be utilised (since the JPUT (or the JPUT unit holders) would likely be a PFIC it rental income generated from the Property did not ?lbw-through? and be subject to current US taxation}. 6.4.2 6.4.3 6.4.4 6.4.5 6.4.6 6.4.7 Rental income generated over the investment period will "flow- through" to the US taxable investOrs and will be subjected to US taxation at US ordinary income rates. in addition. US individuals. estates and trusts will likely also be subjected to the newly enacted US net investment income tax of 3.8% (in addition to their respective ordinary income tax rate). Any underlying UK andi'or Luxembourg taxes paid will through" to the US taxable investors and will be available as a fereign tax credit against the US taxable investor?s US tax liability on such income. Because a ?total flow-through" structure will be utilised and all income generated from the investment will be subject to current US taxation, there is no need to consider subpart andi'or PFIC rules (Le. no need to make certain PFIC elections). Because Manco will remain a regarded entity. any distributions from Manco will be considered a dividend to the extent of Manco?s US taxable investors should likely be subject to tax at the fav0urable US qualified dividend rates. In addition. US individuals, estates and trusts will likely also be subjected to the newly enacted US net investment income tax of PTP Investors FTP Investors can invest in the ?total flow-through" structure (Le. a non-blocked structure) provided all income generated over the investment period is passive income (Le. rental income. interest income. dividend income. etc}. Based on our review ot the inform ation provided. it appears that all income generated from the Property over the investment period will consist of ?passive" rental income. Since the JPUT will pay a management fee to a third party to manage the property. it appears JPUT will hold the property assets as a "passive" investor and therefore such income should likely not be considered ?active" income (which would be undesirable for FTP purposes). However, in order to conclude on this item. we would need to obtain more 6.4.8 6.4.9 6.4.10 6.4.11 detailed financial information with respect to the projected income the JPUT will earn with respect to the investment. With respect to any income generated from underlying property, it is critical that no fees are received for services (eg. parking garage or other similar services). If there is a significant risk of this. then those investments should be put into a "blocked" silo ol the investment structure. Any underlying Luxembourg andjor UK taxes paid will ?flow- through" to the US taxable investors and will be available as a toreign tax credit against the US taxable investor's US tax liability on such income. Because a "total flow-through" structure will be utilised and all income generated from the investment will be subject to current US taxation, there is no need to consider subpart andfor rules (is. no need to make certain PFIC elections). Because Manco will remain a regarded entity. any distributions from Manco will be considered a dividend to the extent of Manco's which should be "good" income for FTP purposes. Future exit 7.1 7.1.1 7.1.3 The structure outlined in this Report allows flexibility on exit options, which may depend on eventual buyer preferences and potential law changes. The key options are outlined below. Asset sale by the JPUT UK taxation The JPUT is treated as a company for the purposes of UK tax on capital gains. Therefore on the basis that JPUT is tax resident in Jersey (and not the UK) and the Property is being held for investment purposes. the JPUT should not be liable to UK tax on capital gains realised on the sale of the Property. This is subject to the UK anti-avoidance provisions set out in below. The sale of the Property by the JPUT would be subject to UK SDLT at 4% of the VAT inclusive consideration provided by the purchaser. This would be a liability of the purchaser. rather than the JPUT. but may be factored into purchaser pricing. On the basis that the Property has been (or will have been) opted to tax. a sale of it by the JPUT would potentially be subject to UK VAT. However, provided that the Property continues to be let, it should be possible tor a disposal of it to qualify for UK VAT-tree TOGC treatment - this should be considered at the time. On the future disposal of the Property. a s.198 CAA 2001 election should be agreed with the purchaser to prevent a clawback of capital allowances andr'or to enable capital altowances to pass to the buyer. It the disposal takes place after April 2014, then any qualifying expenditure incurred must be Pooled prior to the sale to enable entitlement to pass to the buyer. 7.1.9 Jersey taxation There should be no tax payable in Jersey on any gains realised by JPUT on the disposal of the Property. on the basis that the JPUT should not be subject to tax in Jersey on non-Jersey source income [see 4.1). Luxembourg taxation In accordance with the UKr'Luxembourg D'l'l' (see 5.3.4 above], there should be no tax payable in Luxembourg on any gains realised by JPUT on the disposal of the Property. US taxation US Taxable Investors Any gain generated on exit from the investment likely will be treated as a capital gain and, since a "total flow-through" structure is being utilised. such capital gains will flow-through to the US taxable investors and will be subject to US taxation at the US capital gains tax rates. In addition. US individuals, estates and trusts will iikeiy be subjected to the US not investment tax rate of 3.8% (in addition to their ordinary federal income tax rate). PTP Investors The US tax treatment of any gain generated on exit from the investment for FTP investors will be similar to the US tax treatment for US taxable investors. Any gains on exit should be treated as passive income and should not jeopardise PTP status. 35 7.2 12.1 7'22 12.3 7.2.5 7.2.6 Sale of units in the JPUT by the Unit Holders UK taxation As the Unit Holders are non-UK tax resident. no UK tax on capital gains should arise on the sale of units in the JPUT provided that the Property and the units are held for investment purposes. This is subject to the application of the UK anti-avoidance provisions set out in 7.4 below. The disposal of units in the JPUT should be outside the scope of UK SDLT provided that the JPUT is a CIS at that time. The disposal should also be outside the scope of UK on the basis that the Trustee is not UK resident. the unit register tor the JPUT is not maintained within the UK and the JPUT qualities as a valid CIS. Any stamp tax liability would. in any case. be a liability for the purchaser. The sale of units in the JPUT by the Unit Holders should be outside the scope of UK VAT. As per section 2.4.1232 above, there are alternative views on the capital allowances position on the sale of units oi a JPUT. It is likely a future buyer will want to enter into a 5198 election to guarantee entitlement to any CA5. Jersey taxation There should be no tax payable in Jersey on any gains realised by the Unit Holders on the disposal of units in the JPUT in accordance with Jersey domestic legislation. Luxembourg taxation The disposal of the units in the JPUT should be treated as a direct disposal of the Property for Luxembourg direct tax purposes. As 12.? 7.3 7.3.2 7.3.4 such. there should be no tax payable in Luxembourg on any gains realised by the Unit Holders on the disposal of the units in the JPUT. as set out in 5.1.6 above. US taxation The US taxation of a sale of the units in the JPUT should be the same as for a direct asset sale. as set out in 11.7-11.9 above. Sale of the shares in the Unit Holders by Genesis Holdeo UK taxation As Genesis Holdco and the Unit Holders are non-UK tax resident. the disposal of the shares in the Unit Holders should be outside the scope of UK tax. This is subject to the applications of the UK anti- avoidance provisions set out in below. The disposal of the shares would be outside the scope of UK SDLT. The disposal should also be outside the scope of UK on the basis that the Unit Holders are not UK incorporated companies, the shares are not registered on any share register located in the UK and are not paired with UK shares at the time of transfer. Any stamp tax liability would. in any case. be a liability for the purchaser. The sale of the shares in the Unit Holders should be outside the scope oi UK VAT. Jersey taxation There should be no adverse Jersey tax consequences as a result of the sale. 36 7.3.5 7.3.6 7.3.7 7.4 7.4.1 7.4.2 7.4.3 Luxembourg taxation Any gain on the sale of the shares in the Unit Holders should be exempt from tax under the Luxembourg participation exemption provided all conditions are met. Please see Appendix II for details of the Luxembourg participation exemption. The Luxembourg recapture rule should also be considered. Please refer to section 5.14 for further details. US taxation The US taxation of a sale of the shares in the Unit Holders should be the same as for a direct asset sale. as set out in above. Anti-avoidance provisions UK Transactions in Land Sections 752 et seq. ITA 200? are widely drawn anti-avoidance provisions in UK legislation which apply where a gain of a capital nature is realised on the disposal of land. the land having been, inter alia. acquired or developed with the sole or main objective of realising a gain from its disposal. For these purposes "land" includes assets deriving their value from UK land such as shares in companies owning UK property. These anti-avoidance provisions are directed specifically at property transactions. Their purpose is to prevent taxable property-dealing profits being disguised as tax-free capital gains. The main defence against the application of these provisions is where an investor can demonstrate that the motive for the acquisition and i or development of UK land is to retain the asset for investment purposes and to generate rental income. 7.4.4 7.4.5 7.4.6 7.4.7 7.4.8 We understand that the JPUT has held an interest in the Property for 8 years. and throughout this period has held it as an investment asset. and will continue to do so. Furthermore. we understand that none of the Luxembourg Companies or the Funds is acquiring an indirect interest in the Property with the sole or main objective of realising a gain from disposing of the Property (directly or indirectly). On that basis, these provisions should not apply to any gain realised on a direct or indirect disposal of the Property. In practice. HMHC rarely seek to apply the transactions in land provisions to non-UK resident companies and. in our experience we have seen very few instances where they have done so. Jersey anti-avoidance provisions Jersey does not have any specific anti-avoidance provisions relevant to this transaction. However Jersey tax law does include a general anti-avoidance provision that allows for raising additional tax assessments if the Jersey Tax Office considers that the main purpose or one of the main purposes of a transaction. or a series of transactions. is the avoidance or reduction of an entity's liability to income tax. 0n the basis that the JPUT is treated as tax transparent in Jersey. it is considered highly unlikely that the Jersey Tax Office would seek to apply the general anti-avoidance provisions in these circumstances. General Anti?Abuse Fiule As set out in 3.6 above. on 17 July 2013 the GAAR received Ftoyal Assent as part of the Finance Bill 2013 and. as such. there is now an overriding statutory limit on the Notwithstanding that lack of precedent in how may seek to apply the GAAH. it is our view that the should not be in point in the context of the Transaction. 37 Appendix I Tax residence protocols An entity that is incorporated in the UK. Jersey or Luxembourg is considered tax resident in that jurisdiction by virtue of its incorporation. However, if the entity is centrally managed and controlled outside of its jurisdiction of incorpOration. there is a risk that the company may be deemed tax resident in two countries. The practical steps below set out measures that should be taken to reduce the risk oi the entities in the investment structure not being solely tax resident in their jurisdiction of incorporation. The recommendations listed below are of a general nature and should be adapted on a case by case basis depending on the source countries at stake. in each case the ?retevant jurisdiction? is the jurisdiction of incorporation. 1 . Board meetings 1.1 Board meetings should be initiated. held and chaired on a regular basis (at least annually and in all cases when strategic decisions are to be made) in the relevant jurisdiction. 1.2 A majority (both in terms of voting power and headcount) of directors who are to attend these meetings should attend physically in the relevant jurisdiction. A minority may occasionally join by conference call but the meetings should be convened from the relevant jurisdiction. 1.3 Discussions at board meetings should be substantial. The directors should not merely "rubber stamp" decisions taken elsewhere. 2. Board of Directors 2.1 Although the board may include some directors that are tax resident in alternative jurisdictions. the majority oi directors should be tax resident 2the relevant jurisdiction. In any event the articles of association should state a majority of directors that are tax resident in an alternative jurisdiction cannot torm a quorum at board meetings. It is important that the composition of the board is in place from the formation of any company (or from the moment it is purchased "off the she to avoid the entity being resident in an alternative at its point of incorporation, as this could give rise to greater problems later in demonstrating that the company is tax resident in the relevant jurisdiction. The Board?s members should have the appropriate skills and experience to competently manage and control the business oi the relevant company. Authority of the individual directors The Board of Directors must take all strategic decisions collectively in the relevant jurisdiction rather than merely "rubber-stamping" decisions made elsewhere. For this purpose, the directors should have the proper qualifications to take such decisions. No single director that is tax resident in an alternative jurisdiction should be able to bind the board of directors in decision making. Document signing All material contracts and documents should be signed in the relevant jurisdiction by an authorised director. The signatories tor the company's bank accounts (which ideally should be in the relevant jurisdiction) should be members oi the board and have appropriate power to authorise payments without the approval of any directors located outside of the relevant jurisdiction. 38 5.1 5.2 6.1 6.2 6.3 6.4 Strategic decision making 7. The management of the entity should consider proposals and make It strategic decisions at board meetings. Accordingly. where the company is say. considering the sale of any of its material assets or considering re-financing arrangements, although the board may take advice from third parties under advisory agreements and take any 72 such recommendations into account. any proposed transaction should be considered fully by the board of directors at a meeting in the relevant jurisdiction and it is the board that should make the decision. Any recommendations proposed to the board (and any other documentation to be reviewed at the board meeting} should be presented to the directors sufficiently in advance of the meeting so that the directors have time to properly consider the relevant facts in advance of the meeting. 8.1 Evrdence 32 Compliance with all the above must be supported with documentary evidence. Books and records, files and correspondence should be maintained in the relevant jurisdiction at offices rented or owned for the company?s business; accounts should be produced and filed in the relevant jurisdiction; AGMs should be hetd in the relevant jurisdiction. All board meetings should be documented and the documentation should be drawn up in the relevant jurisdiction. Full minutes should be produced and should include starting and ending times. location. names of those attending and a summary of matters discussed. Bank accounts should be maintained in the relevant jurisdiction. 9. 9.1 Tax residence certificates For many purposes, notably to gain access to treaty benefits. it can be necessary to be able to demonstrate that an entity is tax resident in the relevant jurisdiction. The tax authorities generally issue certificates of tax residence upon request, provided that the relevant company is up to date with its tax reporting obligations. Substance requirements in addition to the general residence requirements. in order to be able to apply the EU Parent-Subsidiary Directive and relevant double taxation treaties in some jurisdictions it is necessary for entities to be able to demonstrate sufficient substance. It is recommended that the entities should have the following in order to demonstrate their substance in the relevant jurisdiction: . Bank accounts should be located in the relevant jurisdiction; . Registration should occur in the relevantjurisdiclion; . A fully-equipped operating address and telephone extension should be maintained in the relevant jurisdiction; and I The management of shareholdings and financing, book-keeping and reconciliation of accounts should be performed in the relevant jurisdiction. Tangible business activity In order to demonstrate sufficient substance. entities may also be required to have tangible business in the relevant jurisdiction. This means that the company should be operating using its own resources 39 9.2 9.3 9.4 10. 10.1 10.2 and it will usually be expected to bear an element of risk in carrying on its activities. This requirement is expected to become even more important in future as jurisdictions implement stricter anti-abuse rules relating to the application of Double Tax Treaties. in order to ensure that the entities have sufficient business activity they should each have the following: . its own business premises with direct line telephone and facsimile; and In Its own personnel. Where entities use the same business address (such as shared office space) they must be in a position to demonstrate that they rent all or part of the office space and that a lease agreement is in place. This significantly strengthens the substance claims of the company. Employee responsibilities With regard to the activity of full time employees based in the relevant jurisdiction. consideration should be given to the nature of the work which they are responsible for. The activities and responsibilities of full time employees will need to be clearly defined as part of the recruitment process. If the majority of the responsibilities relate to administrative work. the evidence that the business is acting on its own account is significantly weaker. All reasonable endeavours should be made in maximising the decision making competence the employee has in negotiating and executing contracts and in negotiation with third parties. This will significantly increase the probability that the substance requirements are met. A description of the suggested additional responsibilities of the persons to be employed is set out below: . Drafting or commissioning up internal ioan documentation; 11. 11.3 0 Managing interest on internal loans and checking compliance with capitalisation requirements: - Accountingi?book-keeping fOr the Management Company; . Managing cashflows in incorporations; respect of new acquisitions and . Initiating incorporation of new subsidiaries: - Arranging company meetings including the I: Input into decision-making with regards to the corporate structure; and - Assisting with the reconciliation of the consolidated accounts. Luxembourg Transfer pricing circular In January 2011, the LTA released a circular (?the Circular") governing the application of transfer pricing requirements to Luxembourg entities carrying on a financing activity. The Circular requires certain economic and organisational substance in Luxembourg in order to be eligible for a binding pricing agreement on the level of taxable spread to be retained in Luxembourg. The Circular requires that: The majority of the board of managers members who are able to bind the company should be resident in Luxembourg or non-resident but performing their professional activity in Luxembourg and being taxable on at least 50% of their revenues. The company should have qualified employees able to execute the transactions done by the company. The company should be able to verify the work executed by their employees. - Key decisions concerning the entity?s management must be taken in Luxembourg. . The company retains the use of a bank account located in Luxembourg. - Before sending a request binding the Luxembourg tax administration. the company should comply with the requirements regarding the tax returns filing. a The company should not be viewed as tax resident in another State. - The entity engaged in intra-group financing transactions must own sufficient equity (at least 1% of the nominal value of the credit granted. but without exceeding ?2m) to hedge transaction risks. 11.4 For the purposes of this Transaction. we consider that Genesis Holdco will be within the scope of the Circular. 41 Appendix II Luxembourg participation exemption 1. 1.1 1.2 1.3 Participation exemption on dividends and liquidation proceeds received by a Luxembourg company Dividends and liquidation proceeds received by a Luxembourg company are in principle subject to CIT and MBT on profits at the overall standard rate of 29.22% if the company is located in LuxembOurg City. However, the LITL provides for special rules for parent companies and subsidiaries referred to as the ?participation exemption". Under this article, the proceeds are exempt trom tax in Luxembourg if all the following conditions are met: i. At the date the proceeds are placed at the disposal of the recipient company. it holds or commits itselt to hold a direct and continuous shareholding in the company paying the dividendi'liquidation proceeds, for at least 12 months. This shareholding must represent at least 10% ot the capitat oi the subsidiary, or its acquisition price must amount to at least EUR 1.2 million; The distributing company is: - An entity with a collective character listed in Article 2 oi the Directive 2011f96i?UE enacted on November 2011; or - A fully taxable joint-stock company which is a resident of Luxembourg and which is not listed in the Annex of Article 166 (10) or - A non-resident joint-stock company which is fully liable to a tax corresponding to Luxembourg corporate income tax. Regarding this condition, the Luxembourg tax 1.5 2.1 2.2 authorities generally apply a rule that the foreign effective tax rate must be at least 10.5% (in 2010) with the tax basis determined in a manner similar to that employed by Luxembourg. As noted above, a qualifying shareholding means at least 10% of the distributing company's capital or a shareholding whose acquisition price is at least EUR 1.2 million. Please also note that operating expenses that are in direct economic connection with such exempt dividend income?iquidation proceeds, as well as any value adjustment applied to the participation following the distribution of such income, are not deductible up to the amount of this exempt dividend incomei'liquidation proceeds. For example, if a Luxembourg company has tinanced the acquisition of the shareholding by debt, the proceeds received will be exempt and the interest expense on the debt will not be deductible to the extent of the dividendr'liquidalion proceeds received. Participation exemption on capital gains realised by 3 Luxembourg company According to Grand Ducal Decree of December 21 st, 2001, the conditions for exemption of capital gains are in line with those appticable to dividendsr?liquidation proceeds, is. the conditions are the same as those described above for the dividendfliquidation proceeds exemption. except that the figure of EUR 1.2Mio mentioned above is EUR 6Mic in the case of the capital gains exemption. Astor the participation exemption on dividendatiquidation proceeds. there is a recapture rule is. the exemption of the capital gain realized upon disposal of a participation will be reduced by the amount of the expenses previously booked and deducted by the company and which directly relate to the qualifying participation. 42 2.3 2.4 3.1 3.2 3.3 In other words. part of the capital gain [which will be equal to the sum of all related depreciation. interest and other related expenses that have reduced the taxable basis of the company in the previous accounting years} would not be exempt. For instance. if the Luxembourg company acquires all or part of a shareholding by means of debt. or if other expenses in relation to the shares are tax deductible, the capital gains on the disposal of the shareholding can only be tax exempt for the part exceeding these deductible expenses. These expenses include any interest and value adjustments in connection with the shares that have been deducted for tax purposes in the Current and any prior years. it should be noted that the recapture rule should not have adverse tax implications provided that the expenses have not been used to offset other taxable income of the Luxembourg company. The tax losses due to the deduction of expenses in connection with the shareholding can be carried forward indefinitely and be offset towards the portion of capital gain which is taxable based on the recapture rule. For instance. in case interest expenses on the debt in connection with the participation are used to offset other taxable income. no tax on the other taxable income will in principle be payable on an annuat basis. However. upon disposal of the shareholding by the Luxembourg company. the cumulative amount of the other taxable income will become taxable during the year of disposal under the recapture rule. This offers a tax deferral opportunity for the Luxembourg company. Participation exemption for NWT purposes For NWT purposes. shares in subsidiaries are not taken into consideration as "assets" when determining the ?Unitary Value? tie. NWT basis] provided that all the conditions outlined under section 1 above are met. The 12 month holding period requirement does not apply for NWT purposes. Debts related to exempt assets are not deductible. However. this is only to the extent that the value of the debt does not exceed the value of the asset. If the debt exceeds the value of the asset. it is deemed not to be related to the asset. but to be a general debt. The amount in excess of the value of the exempt asset is therefore deductible for NWT purposes. 4.1 4.2 Participation exemption for WHT purposes Dividends paid by a Luxembourg company are in principle subject to WHT at the overall standard rate of 15% on the gross payment {17.65% on the net payment). However. article 147 LITL provides for special exemption rules. Under this article. the dividends are exempt from WHT it all the following conditions are met: i. At the date the dividends are placed at the disposal of the recipient company. it holds or commits itself to hold a direct and continuous shareholding in the company paying the dividend. for at least 12 months. This shareholding must represent at least 10% of the capital of the subsidiary. or its acquisition price must amount to at least EUR 1.2 million; ii. The dividend is distributed by: A fully taxable entity with a collective character which is a resident of Luxembourg and which takes one of the forms listed in the annex of article 166 (10) or A tutly taxable joint-stock company which is a resident of Luxembourg and which is not listed in the annex of article 166 (1D) The dividend is received by: - An entity with a collective character listed in Article 2 of the Directive 2011f96fUE enacted on November 2011'. or . A fully taxable joint-stock company which is a resident of Luxembourg and which is not listed in the annex of article 166 (10) or a A joint-stock company or a cooperative company which is resident in a State being part of the European Economic Area (EEA) but other than a member state of the EU (Le. Iceland. Liechtenstein and Nomay) and which is fully liable to a tax corresponding to Luxembourg corporate income tax; or A Luxembourg or foreign permanent establishment of one of the above mentioned entities: or An entity with a collective character which is resident in a State with which Luxembourg has concluded a double tax treaty and which is fully liable to a tax corresponding to Luxembourg corporate income tax. Regarding this condition. the Luxembourg tax authorities generatly apply a rule that the foreign effective tax rate must be at least 10.5%, with the tax basis determined in a manner similar to that employed by Luxembowg; or A Luxembourg permanent establishment of an entity with a collective character which is resident in a State with which Luxembourg has concluded a double tax treaty and which is fully liable to a tax corresponding to Luxembourg corporate income tax; or A joint stock company which is resident in Switzerland and which is subject to corporate income tax in Switzerland without benefiting from an exemption. Appendix Tax Financial Reporting Obligations Unit Holders (Luxembourg) Form 8858 lntorrnatlon Return ol US Person with Respect to Foreign Disregarded Entities may be required and attached to Master Luxco's Form 8865 Return of US Persons with Respect to Certain Foreign Partnerships if such Form 8865 is required {will depend on the level of US investors in Funds) Luaentwm File Luxembourg corporate income tax return together with ?nancial statements annually. File Luxembourg net worth tax calculation annually {net worth tax retum every 3 years) File Luxembourg municipal business tax return annually. Periodical or quarterly) and annual VAT returns (in case of recharge of costs). LJJS. File NRL2 application form before the receipt oi ?rst rental income alter the acquisition oi the units. NHL returns to be tiled by 31 January tor the previous ?scal year MFA Preparation of financial statements annuaily. Apply tor a US employer identi?cation number and ?le check- the-box election Form 8832. Luxembourg WHT return should be tiled following distributions Genesis Form 8858 Information File Luxembourg corporate Income MIA Preparation of Apply tor a US Luxembourg Holdco Retum oi US Person with tax return together with ?nancial financial employer WHT return [Luxembourg] Raped to Foreign statements amuaily. statements identification should be Disregarded Entities may annually. number (EIN), tiled loitowing be required and attached File Luxembourg net worth tax and We check- to ??03 Form calculation annually (net wonh tax the?box 3865 Return at US retum every 3 years) election Form Persons with Respect to 8832. Form File Luxembourg municipal 8855 is required will busmess tax return annually depend on the level ot Simpli?ed annual VAT returns. it US investors in BREP receives services irom foreign Funds) established suppliers. for which Luxembourg VAT needs to be sell- assessed. Genesis Forrn 8853 Information File Luxembourg corporate income MIA Preparation oi Apply tor a US Luxembourg T0900 Return oi us Person with tax return together with ?nancial ?nancial enployer WHT return (Luxembourg) Respect to Foreign statements annually. statements identification should be Disregarded Entities may annually. El?ggk riled tollowing be required and attached Luxembou'g 13" them: distributions to Master mets Form calculation annually (net worth tax election Form 8865 Relum oi us we? 3 Years) 3332. Persons with Respect to Certain Foreign Partnerships it such Form 8865 is required (will depend on the level of US Investors in BREP Funds) File Luxembourg municipal business tax return annually Simpli?ed annual VAT returns, it receives services from foreign established suppliers, for which Luxembourg VAT needs to be self- assessed. 46 month following the end of the month alter the end of the period . Treaty clearance to be applied for and obtained prior to payments of Interest to any third party tenders relying on a speci?c treaty clearance to be paid gross oi UK WHT. CIS registration to the extent required as per section 3.3 Master Luxco - Form 3865 - Return of File Luxembourg corporate income Preparation of NM Luxembowg (Lumnbourg) us Persons with Respect tax return together with financial ?nancial WHT return to Certain Foreign statements annually- statements should be Partnerships may be annua'w' tiled lollowing required depending on File Luxembourg net worth tax distributions the level of US investors calculation annuatl',l (net worth tax in BFIEP Funds) "am ever? 3 Years) File Luxembourg municipal business tax return annually. Simpli?ed annual VAT returns. it receives services from foreign established suppliers, tor which Luxembourg VAT needs to be sell- assessed. Trustee (on - NIA mg Preparation of NM behalt of the ?nancial JPUT) UK VAT returns to bellied. and UK statements VAT paid. quarterly. by the oi the annually, 4T NJA LBS Annual corporation tax returns within one year of the end of Its period- UK VAT returns to be tiled, and UK VAT paid, quarterty, by the 7th of the month foltowtng the end of the month after the end of the period . MFA Preparation of tlnanctat statements annually. NM MIA Appendix IV Engagement Letter dated 24 September 201 3 Ola?=0. All '55: Fl using..- E333 if grill?.9 ill?ril?lp .i IE 1113:: II I?lgli?trltiq?lilr2ir in! Elli-Ila?! ?iI-illiltitin i. It?ll! - [Eligili Ir It?l- ?.illiill?.zitti Iii-l! i?tll'i'ltl ll 0.2050. arr?i I Shaw?! 1.. ill. xi. at. I. 53 ?71.13}. at: 3:11.41 liq-II rt!) .il. 1:59:35! {32:1 ?13.:qu Ira-ll; {filling-Er: Elite-Ii; ailing-ill.- Ilrl: iililIlliRII'illEI?lligl_ (Halon-?5. Elli-Hula? II.-.- nliigililI?IIl?Iii?fl liltiv marl-tin . .I It ~3Il-ll:ll liliivnla. . 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