Luxembourg tax opportunities for US investors

1 International Corporate TaxLuxembourg tax opportunities for US investorsHouston, 4 November 2010 Luc AlexandreSenior Manager, KPMG Tax Luxembourg2 Today s Overview4 OverviewLuxembourg country facts Atthe heartof Europe and foundingmemberof the EuropeanUnion (membersince1951) A renownedinternational financialcentre5 OverviewLuxembourg country facts6 Statutory tax in in 2011 Possible to maintain the ETR to a minimum for any type of activity through tax planning Favorable IP tax regime: Effective tax rate of for royalty income A tax ruling is in principle not required Advance tax ruling system to secure upfront the tax treatment of transactions (prompt and flexible tax authorities written confirmation is obtained within 2 to 6 weeks): pragmatic approach No capital / stamp duties Extensive network of tax treaties that helps reduce/eliminate withholding taxes on foreign income receipts Almost 60 treaties currently in force incl.

2 Mexico, Brazil, HK, etc. 14 treatiescurrentlyin negotiationOverviewA favourabletax environment7 No withholding tax on royalties, interest & liquidation proceeds (in principle) No withholding tax on dividends paid to US corporations (subject to conditions) Luxembourg participation exemption (incoming dividend and capital gain exempt) No or minor taxation upon exit or refinancing strategy Access to EU Directives (Parent/Subsidiary, Interest/Royalties, and Merger Directives) No CFC rules BilateralInvestmentTreatiesOverviewA favourabletax environment (Cont d)8 OverviewHot topics in Luxembourg Increase in aggregate corporate tax rate: from (2010) to (2011) Transfer pricing studies for newly established back-to-back financing entities Minimum flat tax of EUR 1,500 for corporate entities (SOPARFIs) Of which financial assets (including transferable securities, receivables, bank deposit etc.)

3 Exceed 90% of their total assets; That do not perform activities subject to a business license or approval of supervisory authority; in fiscal unity cases only applicable once at the level of the integrating Luxembourg parent company or permanent establishment; But not before 20129II. Typical structuresUSCoDividendsLuxCoEU / non-EUTypical structures : HoldingEU subsidiaries or high-taxed non-EU subsidiariesDividends Capital gainsBenefits Full exemption on incoming dividends and capital gains (participation exemption regime): 10% ownership or acquisition price of EUR (dividends) / EUR 6m (capital gains) 12 months holding period Subject to tax requirement (except for EU subsidiairies) No Luxembourg withholding tax on dividends paid to USCounder domestic rules In principle, no foreign withholding tax on incoming dividends from EU/non-EU subsidiaries pursuant to EU Directive and tax treatiesOther Considerations Luxembourg tax clearance Luxembourg substance requirements11 Typical structures.

4 HoldingUtilisationof tax losses in LuxembourgUSCoLuxCo1 OpCosBenefits Upon disposal of participations in OpCos to LuxCo2, crystallisation of write-downs into permanent tax losses at the level of LuxCo1 The tax losses of LuxCo1 becoming permanent, may be used against income deriving from financing, activities Losses at the level of OpCos remain tax deductibleOther Considerations Luxembourg tax clearance Change of control at OpCos levelLuxCo2 OpCosUSCoDividendsLuxCoLow-taxed non-EUTypical structures : Holding Low-taxed non-EU subsidiaries (tax havens)Dividends Capital gainsBenefits No or low taxation on incoming dividends and capital gains from low-taxed subsidiaries ( Tax havens) that do not benefit from the Luxembourg participation exemption regime No Luxembourg withholding tax on the accrual (or payment) of yield on TPECs (Tracking Preferred Equity Certificates)Tax analysis TPECs are a hybrid and are treated as debt for Luxembourg tax purposes accrual yield treated as tax deductible interest expense TPECs bear (i) a fixed interest rate equal to of the nominal value of the TPECs and (ii)

5 A variable interest rate calculated as 99% of LuxCo s net income LuxCo taxed on margin between the dividends/capital gains and the yield on TPECs effective taxation can be as low as Considerations Luxembourg tax clearance For US purposes, TPECs are treated as equity under certain conditions as long as the yield is accrued but not paid there is no taxation in the US (no Luxembourg requirement to pay the yield before exit)TPECs13 Typical structures : HoldingUtilisationof foreign tax treaty PE lossesUSCoBackground The tax rateapplicable to income realised by a LuxCoin Luxembourg , should be determined as if LuxCo sworldwide ( domestic & foreign) income were subject to tax in Luxembourg (Circular on article 134 of Luxembourg Income Tax Law).

6 This applies to the extent that foreign income is realised in a tax treatycountryLuxCoForeigntax treaty PE14 Typical structures : HoldingUtilisationof foreign tax treaty PE losses (Cont d)USCoLuxCoForeigntax treaty PEExample (simplified)AssumptionsLuxembourg profit/(loss):100 millionForeign PE profit/(loss):(120 million)Step 1 Worldwide profit/(loss):(20 million)Tax rate computed thereon:0% (due to negative result)Step 2 Luxembourg income:100 millionStep 3 Luxembourg income:100 millionApplicable tax rate (see step 1):0% Luxembourg corporate tax due:-15 Typical structures : Holding US Foreign tax creditUSCoPECsLuxCoOpCosBenefits USCo is in excess of FTC carry forward and incurs an important annual interest expense. USCo apportions interest expense using an asset method (Treas.)

7 Reg. 9T) USCosubscribes to PECs issued by LuxCo and contributes its foreign subsidiaries to LuxCo (Sect 351) Reductionof interest expense to be apportioned to foreign source and increasing USCo s FTC limitation From US tax point of view, PECs treated as equity, not subject to US tax until repatriation Luxembourgparticipation exemption on OpCos dividends, capital gains, liquidation proceeds at the level of Considerations Luxembourg tax clearance Terms/conditions of PEC (term of years, fixed interest, etc.) to confirm hybrid treatment (US: equity / Lux: debt)16 Typical structures : Holding HavenCoBackground ExistingHavenCowillre-domicile to LuxembourgBenefits Access to EU Directives, extensive taxplanning opportunities , absence of CFC rules Ta xcapital for dividenddistribution free of Luxembourg withholdingtaxLuxCoGroupCosGroupCosUSCoL uxCoForeignSubsTypical structures.

8 Holding & FinancingLuxembourg holding/financing company (CPECs)Benefits Taxation on a small margin in Luxembourg No Luxembourg withholding tax on accrual (or payment) of yield on CPECs (Convertible Preferred Equity Certificates) Due to the hybrid nature of CPECs, USCo can push debt down to the ForeignSubs to obtain local country interest expense deduction without incurring any additional US taxable incomeTax analysis CPECs are a hybrid and are treated as debt for Luxembourg tax purposes accrual yield treated as tax deductible interest expense Taxable margin between 3bp and 25bpOther Considerations Luxembourg tax clearance For US purposes, CPECs are treated as equity under certain conditions as long as the yield is accrued but not paid there is no taxation in the US When financing activities are combined with holding activities in Luxembourg .

9 There is no effective taxation in most cases as the interest expenses on the tranche of CPECs relating to the acquisition of shares (CPECs A) allows to offset the taxable margin left on the back-to-back financing activity. In this case, recapture should apply except in case of liquidation (disposal) of ForeignSubsCPECs ALoansCPECs BShares18 Typical structures : FinancingLuxembourg back-to-back hybridUSCoPECsOpCosBenefits Luxembourg participation exemption on OpCos dividends, capital gains and liquidation proceeds at the level of LuxCo FromUS point of view, PECstreatedas equity, not subjectto US taxuntilrepatriation Interestincometaxes on a marginin Luxembourg No Luxembourg withholdingtaxon dividends(subjectto conditions) paidto USCoOther Considerations Luxembourg tax clearance Terms/conditions of PEC (term of years, fixed interest, etc.)

10 To confirm hybrid treatment (US: equity / Lux: debt)LuxCoLoan19 Typical structures : FinancingOpCosfinancing using reverse hybrid entitiesUSCoLoanLuxCoOpCosLux SNC/SCSLoanBenefits Interest deduction in OpCoswith no corresponding pick up in the US (deferral) or in Luxembourg No withholding tax on interest (i) paid by OpCosto LuxCo(tax treaty, EU Directive) and (ii) from LuxCoto LuxSNC/SCS Small net margin left in LuxCoon financing activity No withholding tax on dividends paid to LuxCo(tax treaty, EU Directive) Participation exemption on dividends, capital gains, liquidation proceeds from OpCos No withholding tax on dividends paid by LuxCoand LuxSNC/SCS (subject to conditions) Dividends and interest received by LuxSNC/SCS can be lent through LuxCo(facility agreement)