J - The Irish Times
CLASSIFICATION SHEET
This document relates to the following request: 12 March 2010
References: DDRH/FOMO/RYWG/Q2710007M-PADA
Ian Livingstone and Richard Livingstone Finco Luxembourg - incorporation in progress
__!_:_!S:ey~pics:
Interest free loan structure 2. Name of the advisor : PwC --~~~~-~~~~-
I
-- - - J
~· Co!:Porate group's na~c:i ~r fund s onsor: lan LJ_vingst'!_ne a~1~ Richard Livingstone .J 4. Name of the e_rnjcct: Financing structure for the Irish Qualifyilll1?'1m~~+ttflti---4--5. Amount intended to be invested: EU R 200 million
For the attention of Mr Marius Kohl Administration des Contributions Directes Bureau d'Imposition Societe VI 18, Rue du Fort Wedell L-2982 Luxembourg
PricewatcrhouscCoopcrs Socictc a rcsponsabilitc limitt'c Rcviscur d'cntrepriscs
400, route d'Esch B.P. 1443 L- 1014 Luxembourg Telephone+352 494848-1 Facsimile 1-352 494848-2900 www.pwc.com/lu [email protected]
BUREAU D'IMPOSITION SOC. 6 . ENTQJ!'E
12 March 2010 References: DDRH/FOMO/RYWG/Q27 l 0007M-PADA
Ian Livingstone and Richard Livingstone Financing structure for the Irish Qualifying Investor Fund Fin Co Luxembourg - incorporation in progress Dear Mr Kohl, In our capacity of tax consultants acting for Ian Livingstone and Richard Livingstone (the "Livingstones"), shareholders of the London & Regional Properties group ("L&R"), we discussed in our meeting on 16 December 2009 the tax treatment applicable to a transaction to be implemented by our client involving a Luxembourg finance company ("FinCo Luxembourg") financed by an interest free loan. This letter seeks to confinn the conclusions reached du1ing this meeting, and will serve as a basis for the preparation of the tax returns of FinCo Luxembourg. We will advise you of the precise name of FinCo Luxembourg, and provide you with a copy of its articles of incorporation, as soon as we have these to hand.
A
Facts
A.J
Irish Qualifying Investor Fund
1.
LuxCo ("LuxCo") is a Luxembourg company established by a vehicle controlled by the Livingstones as a platfonn to invest in real estate properties (the "Properties"), a large proportion of which are expected to be located in the United Kingdom. The Properties are held indirectly by LuxCo through locally incorporated special purpose vehicles (the "SPVs"). LuxCo is held by an Irish Qualifying Investor Fund (the "Irish QIF"). The tax treatment of the Irish QIF was confirmed in our letter dated 29 July 2009 (references: DDRH/RYWG/Q27091 24M-PADA).
R.C'.S. Luxembourg D 65 477 · TV fl LU 17564447
A.2
Implementation of the financing structure
2.
In order to provide additional funds to the Irish QIF structure, the Livingstoncs will incorporate an Irish finance company ("FinCo Ireland") which will hold the shares of FinCo Luxembourg. FinCo Luxembourg will be incorporated as a Sari with SOPARFI objects. FinCo Ireland will also incorporate, as a sister company of FinCo Luxembourg, another Irish private limited company ("Ireland I").
3.
The funds will flow from FinCo Ireland to Ireland 1 via an interest free loan ("lFL I") and then from Ireland 1 to FinCo Luxembourg via another interest free loan ("IFL 2"). At the same time, FinCo Luxembourg will receive an equity contribution of EU R I million from FinCo Ireland. FinCo Luxembourg will then use the funds received under IFL 2 and the equity contribution to grant an interest bearing loan (the "IBL") to LuxCo (i.e. the IBL to LuxCo will be financed by IFL 2 and by EUR l million equity).
4.
The amount of financing flowing through the structure down to LuxCo should rapidly reach EUR 50 million, and can be expected to rise to approximately EUR 200 million over time.
5.
Interest generated each year by the IBL is expected to be reinvested by FinCo Luxembourg at market rates. FinCo Luxembourg may, however, decide to distribute the results of its financing activities to FinCo Ireland.
6.
A chart showing the intended corporate and financing structure is set out in Appendix 1.
8.
Applicable Tax Regime
B. l
Luxembourg tax residency
7.
FinCo Luxembourg will have its statutory scat and place of central administration in Luxembourg given that its shareholders' meetings and its board meetings are to be held in Luxembourg; the main management decisions are to be effectively taken in Luxembourg; and its accounts arc to be kept in Luxembourg.
8.
FinCo Luxembourg will therefore be considered as Luxembourg tax resident within the meaning of article 159 of the Luxembourg Income Tax Law ("LITL") and within the meaning of relevant double tax treaties concluded by Luxembourg. A Luxembourg tax residency certificate may be issued by the Luxembourg tax authorities upon request.
(2)
B.2
IBL I IFL financing activity
B.2.1 Characterization of /FL 2 for Luxembourg tax purposes 9.
IFL 2 will be treated as debt for Luxembourg corporate tax and municipal business tax purposes. IFL 2 will also be treated as debt for Luxembourg net wealth tax purposes. This tax treatment is based on our technical analysis developed in Appendix 2.
B.2.2 Deductibility of deemed interest under I FL 2 and net remuneration for the /BU/FL financing 10.
In computing for tax purposes the profits of FinCo Luxembourg, the "arm's length" principle implicit in the Luxembourg transfer pricing regime will apply. Since a company bo1rnwing funds in the market would nonnally incur interest expenses on its borrowings, FinCo Luxembourg wi ll hence be allowed to deduct deemed interest expenses with respect to IFL 2 for Luxembourg tax purposes. However, this deduction will be limited to an amount that will cause FinCo Luxembourg to report a minimum taxable margin for its IBL I IFL financing activity.
1 I.
Considering the amounts involved (see paragraph 4 above) and the financing risk profile (i.e. intra-group lending involving little risk), FinCo Luxembourg will be required to report a minimum net annual margin (after taking account of all attributable operating expenses) of 12.5 bps (4/32%) in relation to its IBL I IFL financing activity. No foreign exchange risk will arise, as both IFL 2 and the IBL are denominated in EUR. Both the adjustment to the taxable profits, and the resultant margin, will be regarded as appropriate and acceptable within the context of articles 56 and 164(3) of UTL. In the event that there is a significant increase in the amount of funds flowing through the structure, this minimum taxable margin may be revised downwards whilst remaining consistent with the above principles: we would however be likely to consult further with you to seek to agree in advance this revised pricing.
12.
As previously mentioned, interest generated from the IBL may be re-invested by FinCo Luxembourg. This may be effected by making further loans to LuxCo at a suitable interest rate, or by having the funds held on deposit (in both cases in the same currency, i.e. EUR). FinCo Luxembourg will also be allowed to recognise, for tax purposes, a deemed interest expense with respect to any reinvestment of the interest generated from the IBL. FinCo Luxembourg will also report a minimum taxable margin of 12.5 bps (4/32%) on this reinvestment activity, the approach being fully consistent to that outlined above.
(3)
l 3.
Accordingly, the corporate income tax and municipal business tax basis of FinCo Luxembourg should consist of the following elements: (i)
(ii)
(iii)
the interest income related to the minimum net annual margin of 12.5 bps (4/32%) computed on the amount of IBL/IFL financing (as well as on the reinvestment of the proceeds of the JBL); plus the interest income generated by the portion of the IBL financed by the equity base of FinCo Luxembourg, for which no deemed interest deduction will be recognised; less any operational expenses of the company insofar as these are not related to the IB L I IFL arrangements.
B.2.3 Debt-to-equity ratio of FinCo Luxembourg and remuneration for the /BL I !FL financing activity
14.
FinCo Luxembourg will perform a financial on-lending activity with respect to the funds borrowed under IFL 2 and on-lent under the IBL. Therefore, this position will fa] I outside the scope of the calculation of any debt-to-equity ratio.
B.2.4 Net wealth tax
15.
FinCo Luxembourg will be allowed to deduct the par value of the IPL, plus the interest deemed to arise and be accruing in connection with IFL 2, for the purposes of computing its unitary value and its net wealth tax liability. Please refer to Appendix 2 for a detailed analysis in this respect.
16.
The taxable basis of FinCo Luxembourg for NWT purposes should therefore consist of the following elements: (i) (ii)
the clement of the IBL financed by equity (i.e. EUR l million), and the profit aggregate after tax reserves accruing in the tax balance sheet of FinCo Luxembourg as a result of the IBL / IFL financing arrangements.
8.3
Distributions from FinCo Luxembourg to FinCo Ireland
17.
On the basis that FinCo Ireland is a fully taxable entity resident in Ireland and covered by article 2 of the European Parent-Subsidiary Directive, dividends distributed by FinCo Luxembourg to FinCo Ireland will not be subject to withholding tax in Luxembourg, provided that FinCo Ireland holds or commits to hold a participation of at least 10% in FinCo Luxembourg for a period of at least 12 months (article 147(2) LITL).
(4)
18.
Also, upon exit and unwind of the structure, no withholding tax will be due upon a liquidation distribution from FinCo Luxembourg to FinCo Ireland. Under articles 97(3)d, and 101 LITL, these distributions are not assimilated to a dividend (but rather to a capital gain) and, therefore, no dividend withholding tax should be imposed.
Wc remain at your disposal should you need any further information and would like to thank you for the attention that you will give to our request. Yours sincerely,
Lu_
JP!, )/.Mvi,wQ
This document relates to the following request: 12 March 2010
References: DDRH/FOMO/RYWG/Q2710007M-PADA
Ian Livingstone and Richard Livingstone Finco Luxembourg - incorporation in progress
__!_:_!S:ey~pics:
Interest free loan structure 2. Name of the advisor : PwC --~~~~-~~~~-
I
-- - - J
~· Co!:Porate group's na~c:i ~r fund s onsor: lan LJ_vingst'!_ne a~1~ Richard Livingstone .J 4. Name of the e_rnjcct: Financing structure for the Irish Qualifyilll1?'1m~~+ttflti---4--5. Amount intended to be invested: EU R 200 million
For the attention of Mr Marius Kohl Administration des Contributions Directes Bureau d'Imposition Societe VI 18, Rue du Fort Wedell L-2982 Luxembourg
PricewatcrhouscCoopcrs Socictc a rcsponsabilitc limitt'c Rcviscur d'cntrepriscs
400, route d'Esch B.P. 1443 L- 1014 Luxembourg Telephone+352 494848-1 Facsimile 1-352 494848-2900 www.pwc.com/lu [email protected]
BUREAU D'IMPOSITION SOC. 6 . ENTQJ!'E
12 March 2010 References: DDRH/FOMO/RYWG/Q27 l 0007M-PADA
Ian Livingstone and Richard Livingstone Financing structure for the Irish Qualifying Investor Fund Fin Co Luxembourg - incorporation in progress Dear Mr Kohl, In our capacity of tax consultants acting for Ian Livingstone and Richard Livingstone (the "Livingstones"), shareholders of the London & Regional Properties group ("L&R"), we discussed in our meeting on 16 December 2009 the tax treatment applicable to a transaction to be implemented by our client involving a Luxembourg finance company ("FinCo Luxembourg") financed by an interest free loan. This letter seeks to confinn the conclusions reached du1ing this meeting, and will serve as a basis for the preparation of the tax returns of FinCo Luxembourg. We will advise you of the precise name of FinCo Luxembourg, and provide you with a copy of its articles of incorporation, as soon as we have these to hand.
A
Facts
A.J
Irish Qualifying Investor Fund
1.
LuxCo ("LuxCo") is a Luxembourg company established by a vehicle controlled by the Livingstones as a platfonn to invest in real estate properties (the "Properties"), a large proportion of which are expected to be located in the United Kingdom. The Properties are held indirectly by LuxCo through locally incorporated special purpose vehicles (the "SPVs"). LuxCo is held by an Irish Qualifying Investor Fund (the "Irish QIF"). The tax treatment of the Irish QIF was confirmed in our letter dated 29 July 2009 (references: DDRH/RYWG/Q27091 24M-PADA).
R.C'.S. Luxembourg D 65 477 · TV fl LU 17564447
A.2
Implementation of the financing structure
2.
In order to provide additional funds to the Irish QIF structure, the Livingstoncs will incorporate an Irish finance company ("FinCo Ireland") which will hold the shares of FinCo Luxembourg. FinCo Luxembourg will be incorporated as a Sari with SOPARFI objects. FinCo Ireland will also incorporate, as a sister company of FinCo Luxembourg, another Irish private limited company ("Ireland I").
3.
The funds will flow from FinCo Ireland to Ireland 1 via an interest free loan ("lFL I") and then from Ireland 1 to FinCo Luxembourg via another interest free loan ("IFL 2"). At the same time, FinCo Luxembourg will receive an equity contribution of EU R I million from FinCo Ireland. FinCo Luxembourg will then use the funds received under IFL 2 and the equity contribution to grant an interest bearing loan (the "IBL") to LuxCo (i.e. the IBL to LuxCo will be financed by IFL 2 and by EUR l million equity).
4.
The amount of financing flowing through the structure down to LuxCo should rapidly reach EUR 50 million, and can be expected to rise to approximately EUR 200 million over time.
5.
Interest generated each year by the IBL is expected to be reinvested by FinCo Luxembourg at market rates. FinCo Luxembourg may, however, decide to distribute the results of its financing activities to FinCo Ireland.
6.
A chart showing the intended corporate and financing structure is set out in Appendix 1.
8.
Applicable Tax Regime
B. l
Luxembourg tax residency
7.
FinCo Luxembourg will have its statutory scat and place of central administration in Luxembourg given that its shareholders' meetings and its board meetings are to be held in Luxembourg; the main management decisions are to be effectively taken in Luxembourg; and its accounts arc to be kept in Luxembourg.
8.
FinCo Luxembourg will therefore be considered as Luxembourg tax resident within the meaning of article 159 of the Luxembourg Income Tax Law ("LITL") and within the meaning of relevant double tax treaties concluded by Luxembourg. A Luxembourg tax residency certificate may be issued by the Luxembourg tax authorities upon request.
(2)
B.2
IBL I IFL financing activity
B.2.1 Characterization of /FL 2 for Luxembourg tax purposes 9.
IFL 2 will be treated as debt for Luxembourg corporate tax and municipal business tax purposes. IFL 2 will also be treated as debt for Luxembourg net wealth tax purposes. This tax treatment is based on our technical analysis developed in Appendix 2.
B.2.2 Deductibility of deemed interest under I FL 2 and net remuneration for the /BU/FL financing 10.
In computing for tax purposes the profits of FinCo Luxembourg, the "arm's length" principle implicit in the Luxembourg transfer pricing regime will apply. Since a company bo1rnwing funds in the market would nonnally incur interest expenses on its borrowings, FinCo Luxembourg wi ll hence be allowed to deduct deemed interest expenses with respect to IFL 2 for Luxembourg tax purposes. However, this deduction will be limited to an amount that will cause FinCo Luxembourg to report a minimum taxable margin for its IBL I IFL financing activity.
1 I.
Considering the amounts involved (see paragraph 4 above) and the financing risk profile (i.e. intra-group lending involving little risk), FinCo Luxembourg will be required to report a minimum net annual margin (after taking account of all attributable operating expenses) of 12.5 bps (4/32%) in relation to its IBL I IFL financing activity. No foreign exchange risk will arise, as both IFL 2 and the IBL are denominated in EUR. Both the adjustment to the taxable profits, and the resultant margin, will be regarded as appropriate and acceptable within the context of articles 56 and 164(3) of UTL. In the event that there is a significant increase in the amount of funds flowing through the structure, this minimum taxable margin may be revised downwards whilst remaining consistent with the above principles: we would however be likely to consult further with you to seek to agree in advance this revised pricing.
12.
As previously mentioned, interest generated from the IBL may be re-invested by FinCo Luxembourg. This may be effected by making further loans to LuxCo at a suitable interest rate, or by having the funds held on deposit (in both cases in the same currency, i.e. EUR). FinCo Luxembourg will also be allowed to recognise, for tax purposes, a deemed interest expense with respect to any reinvestment of the interest generated from the IBL. FinCo Luxembourg will also report a minimum taxable margin of 12.5 bps (4/32%) on this reinvestment activity, the approach being fully consistent to that outlined above.
(3)
l 3.
Accordingly, the corporate income tax and municipal business tax basis of FinCo Luxembourg should consist of the following elements: (i)
(ii)
(iii)
the interest income related to the minimum net annual margin of 12.5 bps (4/32%) computed on the amount of IBL/IFL financing (as well as on the reinvestment of the proceeds of the JBL); plus the interest income generated by the portion of the IBL financed by the equity base of FinCo Luxembourg, for which no deemed interest deduction will be recognised; less any operational expenses of the company insofar as these are not related to the IB L I IFL arrangements.
B.2.3 Debt-to-equity ratio of FinCo Luxembourg and remuneration for the /BL I !FL financing activity
14.
FinCo Luxembourg will perform a financial on-lending activity with respect to the funds borrowed under IFL 2 and on-lent under the IBL. Therefore, this position will fa] I outside the scope of the calculation of any debt-to-equity ratio.
B.2.4 Net wealth tax
15.
FinCo Luxembourg will be allowed to deduct the par value of the IPL, plus the interest deemed to arise and be accruing in connection with IFL 2, for the purposes of computing its unitary value and its net wealth tax liability. Please refer to Appendix 2 for a detailed analysis in this respect.
16.
The taxable basis of FinCo Luxembourg for NWT purposes should therefore consist of the following elements: (i) (ii)
the clement of the IBL financed by equity (i.e. EUR l million), and the profit aggregate after tax reserves accruing in the tax balance sheet of FinCo Luxembourg as a result of the IBL / IFL financing arrangements.
8.3
Distributions from FinCo Luxembourg to FinCo Ireland
17.
On the basis that FinCo Ireland is a fully taxable entity resident in Ireland and covered by article 2 of the European Parent-Subsidiary Directive, dividends distributed by FinCo Luxembourg to FinCo Ireland will not be subject to withholding tax in Luxembourg, provided that FinCo Ireland holds or commits to hold a participation of at least 10% in FinCo Luxembourg for a period of at least 12 months (article 147(2) LITL).
(4)
18.
Also, upon exit and unwind of the structure, no withholding tax will be due upon a liquidation distribution from FinCo Luxembourg to FinCo Ireland. Under articles 97(3)d, and 101 LITL, these distributions are not assimilated to a dividend (but rather to a capital gain) and, therefore, no dividend withholding tax should be imposed.
Wc remain at your disposal should you need any further information and would like to thank you for the attention that you will give to our request. Yours sincerely,
Lu_
JP!, )/.Mvi,wQ
