OUTBOUND ACQUISITIONS :

EUROPEAN HOLDING COMPANY STRUCTURES

Ewout van Asbeck Nauta Dutilh Amsterdam Nikolaj Bjørnholm Bech-Bruun Dragsted Copenhagen Werner Heyvaert Nauta Dutilh Brussels Emer Hunt Matheson Ormsby Prentice London

Guillermo Canalejo Lasarte Uria & Menendez Madrid Stephan Neidhardt Prager Dreifuss Zurich Jonathan S. Schwarz 3 Temple Gardens, Tax Chambers, London Stanley C. Ruchelman The Ruchelman Law Firm New York City

-2-

INTRODUCTION............................................................................................................................................................................2

1. LUXEMBOURG.....................................................................................................................................................................5

2. DENMARK...........................................................................................................................................................................14

3. SWITZERLAND.................................................................................................................................................................18

4. BELGIUM.............................................................................................................................................................................24

5. THE NETHERLANDS ........................................................................................................................................................37

6. SPAIN ...................................................................................................................................................................................41

7. IRELAND..............................................................................................................................................................................50

8. UNITED KINGDOM............................................................................................................................................................56

9. CONCLUSION....................................................................................................................................................................64

INTRODUCTION

When a U.S. company begins to acquire foreign targets, the use of a holding company structure abroad may provide certain global tax benefits. The emphasis is on “global” because standard U.S. benefits such as deferral of income while funds remain off-shore may not be available once a holding company derives dividends and capital gains without further planning.

If we assume the income of the foreign targets consist of manufacturing and sales activities which take place in a single foreign country, no U.S. tax will be imposed until the profits of the target are distributed in the form of a dividend or the shares of the target are sold. This is known as “deferral” of tax. Once dividends are distributed, U.S. tax may be due whether the profits are distributed directly to the U.S. parent company or to a holding company located in a different jurisdiction offshore. Without advance planning to take advantage of the entity characterization rules known as “check-the-box,” the dividends paid by the manufacturing company will be taxable in the U.S. whether paid directly to the parent or paid to the holding company located in the third country. In the latter case, the dividend income in the hands of the holding

-3-

company would be viewed to be an item of Foreign Personal Holding Company Income which generally will be taxed to the U.S. parent company under Subpart F of the Internal Revenue Code, which is applicable to all U.S. taxpayers, or the Foreign Personal Holding Company provisions of Section 551-555 of the Internal Revenue Code, which is applicable to closely held groups of companies controlled by a small group of U.S. individuals.

Nonetheless, the use of a holding company can provide valuable tax savings when profits of the target company are distributed. That is because the use of a holding company may reduce foreign withholding taxes that may be claimed as a foreign tax credit by the U.S. parent. This can be an attractive tax savings if the operating and tax costs of maintaining the holding company are significantly less than the saved withholding taxes.

Although the foreign tax credit is often described as a “dollar-for-dollar reduction of U.S. tax” when foreign taxes are paid or deemed to be paid by a U.S. parent company, the reality is quite different. Only taxes that are imposed on items of “foreign source taxable income” may be claimed as a credit. This rule, known as “the foreign tax credit limitation” is intended to prevent foreign income taxes from being claimed as a credit against U.S. tax on U.S. taxable income. As a result, a U.S. based group must determine the portion of its overall taxable income that is derived from foreign sources and the portion derived from domestic sources in the U.S. This is not an easy task and in some respects the rules do not provide an equitable result from management’s viewpoint.

U.S. income tax regulations require expenses of the U.S. parent company to be allocated and apportioned to all income, including foreign dividend income. The allocation and apportionment procedures set forth in the regulations are exhaustive and tend to maximize the apportionment of expenses to foreign source income. For example, all interest expense of the U.S. parent corporation and the U.S. members of its affiliated group must be allocated and apportioned under a set of rules that allocates all interest expense on an asset-based basis to all income of the group. Direct tracing of interest expense to income derived from a particular asset is permitted in only limited circumstances. Research and development expenses, stewardship expenses, charitable deductions, and state franchise taxes also must be allocated and apportioned. These rules tend to reduce the amount of foreign source taxable income and may even eliminate that category of income. The problem is worsened by carryovers of overall foreign loss accounts. This is an “off-book” account that arises when expenses incurred in a particular prior year are allocable and apportionable to foreign source income and those expenses exceed the amount of foreign source gross income of the year. Where that occurs, the loss is carried over to future years and reduces the foreign source taxable income of the subsequent year.

The problem is further exacerbated by the “basket” rules of the foreign tax credit. Under these rules, income and taxes from certain types of activities are separated from the income and taxes of general business activity. The intent is to prevent taxpayers from “averaging down” the effective rate of foreign income tax by

-4-

combining certain low-taxed income – frequently of an investment nature – with high-taxed income attributable to business activities.

The pressure that has been placed on full use of the foreign tax credit by a U.S.-based group has resulted in many public companies undergoing inversion transactions. In these transactions, shares of the U.S. parent company that are held by the public are exchanged for comparable shares of a newly formed offshore company to which foreign subsidiaries are eventually transferred. While the share exchange and the transfer of assets may be taxable events, the identity of the shareholder group (i.e., foreign persons or pension plans) or the market value of the shares (i.e., shares trading at relatively low values) may eliminate tax in the U.S. Thereafter, the foreign subsidiaries are owned directly or indirectly by a foreign parent corporation organized in a tax-favored jurisdiction and the foreign tax credit problems disappear.

In this universe, the combination of foreign taxes imposed on the income earned by a subsidiary and the withholding taxes imposed on the distribution of dividends may generate foreign tax credits in excess of the foreign tax credit limitation. Even if an inversion transaction has taken place, withholding taxes represent true costs for the offshore parent company, because of its location in a tax-favored jurisdiction. Intelligent use of a holding company structure may eliminate or reduce the withholding tax imposed on the distribution of foreign profits. To illustrate, most countries impose a withholding tax on dividends paid to foreign persons. The rate is often in the range of 25% to 30%. The rate is often reduced by treaty to as little as 5% when a subsidiary pays a dividend to its parent. Other dividends are often subject to withholding tax of 15% under a treaty. Dividend withholding tax is eliminated entirely in the case of dividends paid from a subsidiary resident in the European Union to a parent company that is also resident in the European Union. If the U.S. does not have in place an income tax treaty with a particular foreign country, dividends paid by a subsidiary resident in that country may be reduced or eliminated if the dividend is paid to a holding company located in a favorable jurisdiction. A jurisdiction is favorable if the withholding tax paid on dividends received by the holding company and paid by the withholding company are low or nil, and relatively little income tax is paid on the receipt of intercompany dividends or on gains from the disposition of shares of a subsidiary.

In the European context, many countries have favorable income tax treatment of intercompany dividends paid across borders. Among these countries are Luxembourg, Denmark, Switzerland, England, Belgium, Spain and the Netherlands. In certain circumstances, the tax rate in Ireland is extremely low. The rules in place cause these jurisdictions to be popular locations for the formation of a holding company by a U.S. based group. Often, however, these countries have other provisions that may be considered less favorable to a holding company. Capital tax imposed on the issuance of shares is an example of an unfavorable provision.

The balance of this paper examines the tax treatment of holding companies in each of the foregoing jurisdictions. The goal is to determine whether the country provides tax treatment – alone or in conjunction with a second jurisdiction – that makes the formation of a holding company attractive to a U.S.-based group of companies.

-5-

1. Luxembourg

A Luxembourg company may offer tax advantages if it is used to channel certain types of income, such as dividends and interest through "a taxable holding company." A Luxembourg taxable holding company, which in French is often referred to as "société de participation financière" or, with an acronym, "SOPARFI" is an attractive form of entity to use as a holding company. Among international tax practitioners, the acronym "SOPARFI" is often used to distinguish a regular Luxembourg company that is used as a holding company from a so-called 1929 Holding Company, which is entirely exempt from Luxembourg corporate income and withholding taxes but is not eligible for protection under the Luxembourg bilateral tax treaties or the E.U. direct tax directives.

On December 21, 2001, the Luxembourg parliament enacted new legislation relaxing, inter alia, the participation exemption regime for dividends and capital gains. The changes entered into force per January 1, 2002.

1.1. Participation Exemption

A SOPARFI is entitled, in principle, to the benefits of the Participation Exemption. This is the functional equivalent of an intercompany dividends received deduction for qualifying dividends. The exemption also applies to capital gains, for which the tax regime is, pursuant to the revisions of 2001, substantially relaxed and made consistent with the exemption regime for dividends received.

Under the 2001 revisions to Luxembourg law, the participation exemption equally applies to a SOPARFI, governmental bodies, permanent establishments in Luxembourg of companies qualifying for the EU Parent/Subsidiary directive or permanent establishments in Luxembourg of companies resident in an country that has a bilateral tax treaty in effect with Luxembourg (hereinafter, collectively referred to as SOPARFI).

1.1.1. Dividends

According to Article 166 of the Luxembourg Income Tax Act ("ITA"), dividends (including liquidation dividends) received by a SOPARFI, are exempt from Luxembourg corporate income tax if the following requirements are met:

(1) The SOPARFI is fully subject to Luxembourg tax (i.e, it is not a 1929 Holding Company under the Act of July 31, 1929);

(2) The SOPARFI holds 10% or more of the issued capital of the subsidiary (which may be held via a tax transparent entity), or the participation has an acquisition price of at least € 1.2 million (i.e., approximately US $ 1,068,600);

-6-

(3) The subsidiary is (i) a resident of Luxembourg and fully subject to Luxembourg tax, or (ii) subject in its country of residence to an income tax that is comparable to the Luxembourg corporate income tax, or (iii) benefits from Article 2 of the E.U. Parent/Subsidiary Directive; and

(4) At the time of distribution, the SOPARFI must have held, or must commit itself to continue to hold, the participation for an uninterrupted period of at least 12 months; and during this period the shareholding may not drop below the threshold of 10 percent / € 1.2 million.

Since the 1998 revisions to Luxembourg law, the Participation Exemption applies on a per-shareholding basis rather than a per-share basis as under prior legislation. Consequently, dividends from newly acquired shares will immediately qualify for the Participation Exemption, provided the existing shareholding qualifies.

Under the 2001 Luxembourg Tax Reform, specific rules have been introduced for pre-acquisition dividends and dividends after a share exchange (see below). Also, the 2001 Luxembourg Tax Reform opened up the Participation Exemption for dividends derived through certain tax transparent entities; before 1.1.2002, the problem was that participations held through such tax transparent entities did not qualify as “participations directes,” meaning that the dividends were not eligible for the participation exemption, even if such dividends stemmed from fully taxed profits.

1.1.2. Capital Gains

According to the Grand Ducal Decree of December 21, 2001, to the Luxembourg Income Tax Act ("ITA"), capital gains realized by a SOPARFI (as defined above) upon the disposition of the shares in a qualifying subsidiary, are exempt from Luxembourg corporate income tax if the following requirements are met:

(1) The SOPARFI holds 10% or more of the issued capital of the subsidiary, or the participation has an acquisition price of at least € 6 million (i.e, approximately US $ 5,340,000) or more;

(2) The subsidiary is (i) a resident of Luxembourg and fully subject to Luxembourg tax, or (ii) subject in its country of residence to an income tax that is comparable to the Luxembourg corporate income tax, or (iii) benefits from Article 2 of the E.U. Parent/Subsidiary Directive; and

(3) The SOPARFI must have held, or must commit itself to continue to hold, a minimum participation for an uninterrupted period of at least 12 months. The requirement of holding is maintained but amended by the 2001 Luxembourg Tax Reform in two respects:

-7-

(i) The Luxembourg holding company is no longer compelled to hold the shares since (a) the beginning of the fiscal year in which the disposition occurs plus (b) during the uninterrupted period of 12 months immediately preceding the beginning of the fiscal year of realization. Per January 1, 2002 it suffices that the shares are held during an uninterrupted period of 12 months immediately preceding the realization (disposition).

(ii) The minimum holding period is no longer computed on a share-by-share basis. It now suffices to hold on for 12 months to a participation representing the minimum required shareholding (either 10 percent, or with an acquisition cost of no less than € 6 million). Any shares acquired less than 12 months prior to disposition and in addition to such minimum shareholding, can be disposed of free of corporate income tax.

Following the 2001 Luxembourg Tax Reform, capital gains realized on shares held through certain tax transparent entities are also eligible for the Participation Exemption.

1.1.3. Subject to Tax

As outlined above, in order to qualify for the Luxembourg Participation Exemption on dividends and capital gains, nonresident subsidiaries that do not qualify under Article 2 of the E.U. Parent/Subsidiary Directive must be subject to a comparable tax in their country of residence.

The Luxembourg tax authorities take the position that a foreign tax is comparable if it is levied at a rate of at least 15% and is computed on a basis that is similar to that applied in Luxembourg. No list exists of countries whose corporate tax qualifies for these purposes. For subsidiaries established in treaty countries, the 15% requirement is generally deemed to be fulfilled automatically.

Most treaties concluded by Luxembourg contain a Participation Exemption for dividends in the treaty itself, even if no tax or limited tax is actually imposed. Therefore, by virtue of the treaty, dividends received from, e.g., an Irish IFSC company, a Belgian Coordination Center, or a lowly taxed Swiss finance company are tax exempt at the SOPARFI-level. Also the minimum ownership period on basis of the treaty is generally shorter than the minimum ownership period required under Luxembourg law.

1.1.4. Pre-Acquisition Retained Earnings

A particular problem under Luxembourg tax law is the treatment of dividends stemming from so-called pre-acquisition retained earnings. A pre-acquisition dividend is a distribution out of the subsidiary’s retained earnings built up prior to the acquisition of the subsidiary’s shares by the holding company. Such a dividend is normally included in the acquisition price of the shares. Under Luxembourg tax rules, a pre-acquisition

-8-

dividend (which is often distributed immediately after the acquisition to enable the new parent company to pay off the acquisition debt) does not qualify for the participation exemption: Luxembourg tax law disallows the participation exemption if a value adjustment on the acquisition price is booked pursuant to the dividend distribution. However, such dividend is not effectively taxed at the level of the Luxembourg holding company, as the latter must reduce the tax book value of its participation, thereby deducting an amount equal to the (pre-acquisition) dividend received. Under Luxembourg law, a participation must be re-valued when its fair market value is higher (or lower, as the case may be) than its current book value. Yet, the adjusted value cannot be higher than the (historic) acquisition price. Consequently, if after the distribution of the pre-acquisition dividend, the subsidiary rebuilds its retained earnings, the depreciation of the participation in the holding company’s tax books must be reversed. Prior to January 1, 2002, such reversal was not eligible for either an exemption or deferred taxation and, thus, constituted an effective tax burden for the holding or parent company. The 2001 Luxembourg Tax Reform has inserted a new paragraph in Article 166 LITC holding that the subsequent reversal constitutes a deemed dividend, which is eligible for the participation exemption if and to the extent that a pre-acquisition dividend was paid and a tax deductible depreciation of the book value of the shares was booked pursuant thereto.

1.1.5. Dividends Or Capital Gains After Share Exchange

For the application of the participation exemption, a distinction must be made between qualifying participations (participations qualifiées) and non-qualifying participations (participations non-qualifiées).

(1) Non-qualifying participations are participations in companies that are partially or fully exempt from Luxembourg corporate income tax or, as the case may be, a similar foreign tax. Those participations are excluded from the participation exemption. Dividends received from such non-qualifying participations may nevertheless be eligible for a 50 percent exemption, provided the participation is in (i) a domestic corporation, (ii) a corporation resident in a treaty country, or (iii) a corporation resident in an E.U. Member State. With an effective standard corporate tax rate of 30.88%, the effective tax on income and gain from non-qualifying participations amounts to 15.44%, which is substantially less than a holding company in a “traditional” holding company jurisdiction, such as the Netherlands, would pay.

(2) Qualifying participations are participations in (a) Luxembourg or foreign share capital companies that are subject to (either Luxembourg or, as the case may be, similar foreign) corporate income tax, or (b) companies qualifying as “subsidiaries” under the E.U. Parent/Subsidiary Directive.

The 2001 Luxembourg Tax Reform enables a so-called tax neutral share exchange. After a non-qualifying participation has been transformed into a qualifying participation through such a tax neutral share exchange (e.g., pursuant to a merger), the participation will continue to be deemed a non-qualifying participation for

-9-

five fiscal years following the year in which the share exchange occurred.

1.1.6. Luxembourg Permanent Establishment

As stated above under point 1.1., the Participation Exemption also applies to income from shares earned by, or attributed to, a Luxembourg permanent establishment of a nonresident taxpayer who is a resident of an E.U. Member State or a treaty country. Effective January 1, 2002, qualifying capital gains realized on the disposition of shares by a Luxembourg permanent establishment are also exempt from tax by virtue of the Participation Exemption. Previously, only dividends were eligible for the Participation Exemption). Since Luxembourg does not levy (withholding) tax on the remittance of branch profits, this may be an interesting planning tool. It is not entirely clear what level of substance the Luxembourg authorities will require in order to allocate participations to such permanent establishment, but in a given situation, an advance tax ruling may be obtained in order to ascertain the allocation.

1.2. Deduction Of Costs

1.2.1. Write-offs

The value of a participation may be written down and a deduction may be claimed. If the participation is written down, a tax-deductible reserve may be created. The reserve must be offset against any exempt capital gain arising from a subsequent disposition of the shares (so-called recapture). The same applies to the writing down of a receivable on the subsidiary, and to negative income from the subsidiary that has been deducted from taxable income derived from other sources.

1.2.2. Financial Costs

Financing expenses connected with a participation are tax deductible to the extent that they exceed exempt income from the participation concerned in a given year. The amount deducted must be offset against any exempt capital gain resulting from a subsequent alienation of the shares.

Expenses are allocated on a direct-tracing basis, to the extent possible. Where direct tracing is not possible, expenses are allocated on a pro rata basis (e.g., divided over the number or the value of the participations).

Currency gains and losses on loans to finance the acquisition of subsidiaries or operating loans are taxable or deductible, as the case may be. Therefore currency exposure should be avoided, preferably by denominating such loans in euros. General hedging agreements are not accepted. Currency gains on the investment itself are exempt by virtue of the participation exemption.

-10-

1.2.3. Liquidation Losses

A loss realized upon the liquidation of a foreign subsidiary is deductible.

1.3. Withholding Tax On Outbound Dividends/Capital Gains

1.3.1. Dividend Payment

Pursuant to the 2001 Luxembourg Tax Reform, dividends paid by a SOPARFI are subject to Luxembourg dividend withholding tax at the rate of 20%, unless a lower treaty rate applies. From 1998, dividends paid by a Luxembourg company to its E.U. resident parent company are exempt from Luxembourg dividend withholding tax, provided the dividend is paid in respect of shares forming part of at least a 10%-shareholding which has been held continuously for a period of at least twelve months immediately prior to the dividend payment, or which the recipient commits itself to continue to hold for at least twelve months.

Following the Denkavit ruling from the E.U. Court of Justice, the exemption from Luxembourg dividend withholding tax can be effectuated as follows. If, at the time of the dividend payment, the recipient has not yet held the qualifying participation during the above-mentioned minimum ownership period, he can make a commitment to the Luxembourg Revenue that he will continue to hold the participation until this period will have elapsed. In order to secure the Revenue’s claim against noncompliance, the recipient must provide a bank guarantee for the amount of the exempted withholding tax. Alternatively, the recipient need not make the commitment. In that case, the withholding tax will be withheld at the applicable rate, but the recipient will be entitled to a refund once the minimum ownership period is met.

Following the 2001 Luxembourg Tax Reform, the rate of dividend withholding tax takes into consideration the “beneficial” owner of the dividend, thereby disregarding certain tax transparent entities interposed between such “beneficial” owners and the Luxembourg company.

1.3.2. Capital Gains

Resident shareholders are taxable on the disposition of shares in a SOPARFI if (i) the disposition takes place within six months after acquisition (a so-called "speculation gain"), or (ii) the shareholder holds a "substantial interest" in the SOPARFI. In very broad terms a "substantial interest" exists if a shareholder either alone or together with certain close relatives has held a shareholding of more than a 10% in a Luxembourg company at any time during the five-year period preceding the disposition. Prior to January 1, 2002, the threshold for a “substantial interest” was 25% and certain transition rules apply for shareholders who owned more than 10% on that date.

Nonresident shareholders, however, are subject to Luxembourg tax only if (i) they hold a substantial interest and the disposition takes place within six months after acquisition, or (ii) they hold a substantial interest and

-11-

have been a Luxembourg resident taxpayer for more than fifteen years and became a non-Luxembourg taxpayer less than five years before the disposition takes place. Nonetheless, Luxembourg will in general not be entitled to tax this gain under applicable tax treaties.

1.3.3. Liquidation of a SOPARFI

Under Luxembourg law, a liquidation distribution by a SOPARFI is considered to be a capital gain and therefore is not subject to dividend withholding tax. Such capital gain is, arguably, taxable pursuant to the above paragraph. For nonresidents, this entails that only holders of a substantial interest are subject to Luxembourg capital gain tax on such liquidation distribution if they have been a Luxembourg resident taxpayer for more than fifteen years and became a non-Luxembourg taxpayer less than five years before the liquidation distribution is paid or in speculation gain cases. However, Luxembourg will in general not be entitled to tax this gain under applicable tax treaties.

1.3.4. Repurchase of Shares in a SOPARFI

In principle a repurchase of shares in a SOPARFI is subject to Luxembourg dividend tax insofar as there are retained earnings available in the SOPARFI. However, a repurchase by the company of all shares from one or a group of shareholders, who thereby cease to be shareholders, is considered to be a capital gain and therefore is not subject to Luxembourg dividend tax (so-called “partial liquidation”). For nonresidents this entails that holders of a substantial interest are subject to Luxembourg capital gain tax on such repurchase only if they have realized the gain within six months after the acquisition of the shares or if they have been a Luxembourg resident taxpayer for more than fifteen years and became a non-Luxembourg taxpayer less than five years before the gain is realized.

1.4. Other Income Tax Issues

1.4.1. Corporate Income Tax Rate

A SOPARFI established in the city of Luxembourg is subject to Luxembourg corporate income tax at a combined top rate of 30.38% as of January 1, 2002.

1.4.2. Debt-Equity Ratio

Unlike for the 1929 Holding Company, there are no prescribed debt-equity ratios. Based on discussions with the Luxembourg tax authorities, one should generally avoid a debt-equity ratio in excess of 85:15. If a higher ratio is maintained, part of the interest payments may be considered a constructive dividend, which will result in such part not being deductible for Luxembourg corporate income tax purposes and, depending

-12-

on the case, Luxembourg dividend withholding tax becoming due. Interest-free debt in general qualifies as equity for purposes of the 85:15 test.

1.5. Capital Duty

Under Luxembourg tax law, contributions to the share capital of Luxembourg resident companies (including SAs and SARLs) are generally subject to a non-recurrent capital tax. Luxembourg resident entities that are subject to Luxembourg capital tax are hereinafter referred to as "Companies", or "Luxembourg Companies."

The tax is levied at a rate of one per cent1 on the fair market value of the contribution. If both assets and liabilities are contributed at the same time, the net amount will form the taxable basis.

Capital tax is levied on all types of capital contributions to Companies, irrespective of whether such contributions are in cash or in kind. In addition, certain transactions are deemed to constitute capital contributions and are therefore (in principle) subject to capital tax. An example of such a transaction is the transfer of the registered seat or principal office of a company to Luxembourg, unless such company has previously been subject to capital tax in the E.U. The capital tax borne by the Luxembourg Company constitutes a deductible expense for corporate income tax purposes.

The following exemptions from capital tax apply, based on E.U. directives.

1.5.1. Share Merger Exemption

When a Company acquires, in return for the issuance of shares, exclusively shares in an E.U. resident entity with a capital divided into shares, the acquisition is exempt from capital tax if at least 65 % of the shares in such E.U. resident entity (or an existing participation of 65% or more in a such an E.U.-resident entity is increased under such a transaction) is acquired. The percentage of 65% was brought down from 75% by the 2001 Luxembourg Tax Reform. Previously, the minimum percentage ownership was 75%. The change applies as of January 1, 2002.

The shares of the target that are acquired and any shares previously acquired must continue to be held for a period of at least five years after the date of the transaction. In any event, at least 65% of the shares in the E.U. resident company must continue to be held. This limits the ability of the target to issue additional shares to another shareholder.

1 A rate of one half of a per cent applies under certain conditions to contributions to a "family company.”

-13-

The five-year holding requirement is waived if (i) the shares in the E.U. target are disposed of in a transaction that qualifies for the Share Merger Exemption or the Business Merger Exemption, or (ii) the acquiring Company is dissolved and liquidated, or (iii) the target company is dissolved and liquidated.

If the five-year holding requirement applies, and it is no longer met at a certain moment, capital tax becomes due at that time. The capital tax then due is the full amount of capital tax that was not levied at the moment of the contribution because the Share Merger Exemption applied. However, no penalty or interest for late payment will be due.

The residence of the contributor is irrelevant for purposes of this exemption, but the shares that are contributed must have been issued by an E.U.-resident company with its capital divided into shares.

1.5.2. Business Merger Exemption

The capital tax does not apply when a Company acquires, in return for the issuance of shares, from an E.U.-resident company exclusively (i) all assets and liabilities of the enterprise, or (ii) the entire enterprise, or (iii) one or more independent parts of the enterprise.

The nature of the assets and liabilities is not relevant.2 It is possible to contribute cash as long as the cash constitutes the only asset of the contributor and the contributor does not have any liabilities. If the contributor already holds shares in the Company prior to the contribution, these shares should also be contributed, although Luxembourg corporate law provides some limitations in respect of a company holding its own shares.

The entire "enterprise" implies that the assets and liabilities contributed must form a business enterprise from an economic perspective. The term "enterprise" is not defined under Luxembourg tax law. However, the legislative history provides for some guidance as to the interpretation of the term.

In comparison to the Share Merger Exemption, the contributor must be resident in the E.U.

Under both exemptions, the acquisition must generally be effected exclusively in return for the issuance of shares by the Company. However, a de minimis rule applies and the acquisition may be effected for a cash payment (boot) of up to 10% of the nominal value of the issued shares with the remainder effected for the issuance of shares. If nominal value does not exist, the value for accounting purposes may be used.

2 It should be noted that the tax collector has raised the issue that the contribution of a loan taken out by the Company from the contributor can frustrate the exemption. Whether this position will actually be taken in practice remains to be seen.

-14-

In practice, the exemptions are subject to the approval of the capital tax collector. In the absence of his or her approval, the notary public will not execute the notarial deed necessary to enter into the transactions without imposing the capital tax unless a guarantee of payment is provided.

1.6. Annual Net Worth Tax

A SOPARFI is subject to the net worth tax, which is levied at the rate of 0.5% of the company's worldwide net worth.

A Participation Exemption is provided to the net worth tax. From1998, the exemption applies if the Corporate Tax Participation Exemption is applicable to the receipt of dividends. For the exception to apply, the subsidiary must be a company that is a resident in the E.U. and whose dividend payments qualify for benefits under the E.U. Parent/Subsidiary Directive. Alternatively, the subsidiary must be a company that is subject to a tax in its country of residence that is comparable to the Luxembourg net worth tax.

Prior to the 2001 Luxembourg Tax Reform, the net worth tax was creditable against the corporate income tax although the credit was limited to the amount of the corporate income tax after other credits were applied. The 2001 Luxembourg Tax Reform reverses the situation so that the net worth tax is reduced by the corporate income tax, limited to the corporate income tax before other credits. This is a considerable improvement for the foreign parent company of a Luxembourg subsidiary that is tax resident in a country allowing a credit for foreign income taxes but not for foreign net worth taxes (such as the United States). When Luxembourg corporate income tax was reduced by the credit for the net worth tax, such parent companies saw the creditable amount of their foreign taxes being cut under the multiple levies rule of Regs. §1.901-2(e)(4)(i).

2. Denmark

Over the past few years, Denmark has become an attractive location for holding companies. The reasons for the Danish attraction include the absence of dividend withholding tax for certain investors, lenient conditions for application of the participation exemption, and the absence of a capital tax, share-transfer duties, notarial approvals and net wealth tax.

2.1. Corporate Income Tax.

Danish companies are subject to corporate income tax at a rate of 30%. However, Danish law contains a participation exemption that exempts qualifying dividends and capital gains from corporate income tax.

-15-

2.2. Participation Exemption.

Danish law contains a participation exemption that exempts qualifying dividends and capital gains from corporate income tax.

2.2.1. Dividends.

The participation exemption applies to dividends if the following tests are satisfied:

(1) The Danish company directly holds at least 20% of the nominal share capital of a company ("the subsidiary");

(2) The Danish company holds the shares in the subsidiary for an uninterrupted period of one year at the time of the dividend distribution. Dividends declared before the one-year holding period is met also qualify for the participation exemption, provided that the holding period requirement is subsequently satisfied; and

(3) The subsidiary's activities are not primarily of a financial nature, unless its profits are subject to a tax regime that does not substantially deviate from Danish taxation.

A look-through to indirect subsidiaries is effectuated by the Danish C.F.C. legislation that sets similar conditions for the indirect subsidiaries. Under the C.F.C. legislation, the income of a C.F.C. may be taxed in Denmark if the C.F.C.’s activities are of a financial nature and the profits are subject to a tax regime that deviates substantially from Danish tax rules. That will occur where the foreign tax paid is less than three-quarters of the Danish taxes that would have been paid had the C.F.C. been a tax resident in Denmark.

2.2.2 Capital Gains.

The participation exemption applies to capital gains from the disposition of shares in a subsidiary, if the following tests are satisfied:

(1) The Danish company holds the shares of the subsidiary for an uninterrupted period of three years as of the time of the disposition. It is anticipated that the holding period requirement will be reduced or abolished as part of a tax reform expected in 2004; and

(2) The subsidiary's activities are not of a financial nature, unless its profits are subject to a tax regime that does not substantially deviate from Danish taxation under the standard mentioned above.

There is no minimum shareholding requirement. Capital gains are subject to tax if the seller is actively engaged in the business of selling and buying securities. Capital losses on shares held for less than three

-16-

years may be set off only against gains on shares also held for less than three years. Capital losses on shares held for three years or more are not deductible.

2.3. Deduction Of Costs And Expenses.

Costs and expenses relating to a shareholding are deductible. Interest expense relating to the acquisition of a shareholding (whether or not qualifying for the participation exemption for dividends or capital gains) is deductible. Such expenses create a taxable loss at the level of the Danish holding company which can be off set against taxable interest income. However, the deduction of interest expense can be denied if certain thin capitalization rules are not met. The rules on thin capitalization apply to a resident company having a debt to a nonresident controlling shareholder when the company’s debt-equity ratio exceeds 4:1 as of the end of a tax year. Interest expenses relating to debts in excess of the 4:1 ratio are not deductible unless it can be demonstrated that the company could have obtained a loan on similar terms and conditions from an unrelated party.

2.4. C.F.C. Legislation

The C.F.C. legislation applies to a C.F.C. that (i) mainly derives income of a financial nature and (ii) is subject to taxation that substantially deviates from the corresponding Danish tax which would have been levied, if that corporation were a resident in Denmark. Again, this would occur if the foreign tax paid by the C.F.C. is less than three-quarters of the Danish taxes. If the C.F.C. legislation applies, the income of the C.F.C. will be deemed to be earned by the Danish holding company and taxed accordingly.

2.4.1. Financial Activities.

A C.F.C.’s income is considered to be mainly of a financial nature if (1) more than one-third of its gross income is financial income. C.F.C. income items are explicitly defined and include, inter alia, (i) interest income, (ii) gains on receivables, debts and financial instruments, (iii) dividends and capital gains on shares, to the extent they are taxable under Danish law, (iv) payment for intellectual property rights, except where those rights result from the C.F.C.’s own research and development activities, (v) leasing income, except where the assets are leased for use in the jurisdiction in which the C.F.C. is resident and (vi) insurance, banking and other financial activities, except when an exemption from the C.F.C. regime has been obtained from the National Assessment Board.

2.4.2. Taxes That Deviate From Corresponding Danish Tax.

As a general rule, the taxes paid by a C.F.C. will be deemed to deviate substantially from corresponding Danish taxes where the tax paid is less than three-quarters of the corresponding Danish tax that would have been levied if the foreign company were resident in Denmark. In addition, C.F.C. taxation is triggered if any of the following facts exist:

-17-

(1) The C.F.C. has made an agreement with the tax authorities with respect to the applicable

tax rate; (2) The C.F.C. has made an agreement with the tax authorities with respect to the applicable

tax rate; (3) The calculation of the tax base of the subsidiary is determined by reference to the tax

domicile of the Danish holding company; or (3) The calculation of the applicable tax rate of the subsidiary . is determined by reference to the

tax domicile of the Danish holding company.

2.4.3. Lower Tier Subsidiaries.

In some circumstances, uncontrolled foreign subsidiaries may become subject to the Danish C.F.C. legislation. This will occur if all the following factors are present:

(1) The Danish holding company holds, directly or indirectly, 25% or more of the share capital of a foreign company or more than 50% of the foreign company’s voting rights;

(2) The foreign company is engaged in the conduct of financial activities; and

(1) The foreign company is subject to a tax that deviates from Danish taxation, the Subsidiary will be considered a controlled foreign corporation (CFC).

2.5. Dividend Withholding Tax

In general, Denmark imposes dividend withholding tax at the rate of 28%. However, dividends are exempt from dividend withholding tax if:

(1) The recipient is a company;

(2) The recipient holds at least 20% of the share capital in its Danish resident subsidiary;

(3) The recipient has held the shareholding or will hold onto the shareholding for an uninter-rupted period of at least one year; and

-18-

(4) The recipient qualifies for an elimination or reduction of the Danish withholding tax by virtue of the E.U. Parent /Subsidiary Directive or a tax treaty with the state in which the corporate recipient is resident.

In determining whether the exemption applies, the recipient need not be subject to any form of taxation in its jurisdiction of residence.

Liquidation proceeds distributed in the final year of liquidation are not deemed dividends but deemed capital gains. Foreign investors are not subject to any Danish tax liability on capital gains derived from Danish investments (unless the investment is held through a permanent establishment in Denmark)

2.6. Capital Tax

Denmark does not levy any capital tax, transfer tax and net wealth tax.

3. Switzerland

3.2. In General

In Switzerland, companies are generally taxed on the federal and the cantonal/communal levels. Certain aspects of the Swiss system are often viewed to be unique for Americans. For example, the taxes are deductible in computing taxable income. This effects the tax rate. Also, the cantonal taxes, which are the functional equivalent of state taxes in the U.S. can be imposed at a rate that exceeds the Federal rate.

The general federal income tax for ordinary taxed companies is 8.5%, computed before tax expense, and approximately 7.8%, computed on an after tax basis. The cantonal/communal income taxes depend on the company’s location: the rates vary between approximately 11% in Zug, before deduction of taxes, to approximately 20% in Zurich and 21% in Geneva, both before deduction of taxes.

In addition to the income tax, wealth taxes must be considered. On the cantonal/communal level, holding companies have to pay a wealth tax in the range of 0.01 %-0.18 %, i.e. CHF 115 up to CHF 1,755 per CHF 1 million taxable capital. The respective tax rates have been reduced dramatically in the last two years. The federal wealth tax was abolished as of January 1, 1998.

3.3. Taxation of Holding Companies

3.3.1. Income Tax

If a company qualifies as a holding company for tax purposes, it will be fully exempt from cantonal/communal income taxes. To qualify as a holding company, one of two tests has to be met. Either

-19-

two-thirds of the company’s total income must be derived from qualifying participations3 or two-thirds of the assets reported on the company’s balance sheet must be qualifying participations (at book values, or, if the test can be fulfilled at fair market values, at those higher values).

On the federal level, the general income tax is 8.5% (before taxes) and, generally speaking, only income other than dividend income from qualifying participations will be taxable. In other words, the Participation Exemption applies for dividends from qualifying participations and reduces the taxation of dividends income to almost zero. However, the tax on dividends can be somewhat higher than zero if the participations have been financed with loans by the holding company and the holding company receives interest payments from its participation. The effective income tax rate on dividend income is in many cases virtually nil and almost never greater than 2%.

3.3.2. Wealth tax

As already described, there is no federal wealth tax since such tax has been abolished as per January 1, 1998. In most cantons holding companies have to pay a substantially reduced wealth tax, i.e. in the canton of St. Gallen the wealth tax for holding company’s amounts up tp only 0.02% of the company’s total wealth (at book values). Most of the cantons have already reduced their wealth tax or intend to do so in the near future.

3.3.3. Stamp Duty at Formation

An incorporation which entails a cash contribution to a Swiss company (company limited by shares, "Aktiengesellschaft") or a limited liability company ("GmbH") is subject to a 1% stamp duty on the amount of share capital or equity contributed. The first CHF 250,000 (hopefully to be increased to CHF 1,0 million in the near future) of share capital are tax free.

However, Swiss holding companies are frequently incorporated by way of reorganization, which is free of the 1% stamp duty. To qualify as a reorganization for stamp duty purposes certain conditions must be met. First, at least two-thirds of each of two active companies has to be contributed in kind to a new holding corporation. Second, at least 50% of the fair market value of the contributed companies must be contributed to the holding company in return for the issuance of equity. Finally, the nominal share capital of the new holding company must not exceed the total nominal share capital of the contributed companies.

3 A qualifying participation is either at least 20% of the capital rights in another company or the fair market value of such participation is at least CHF 2million.

-20-

3.3.4. Capital Gains Tax

Until December 31, 1997 capital gains realized upon the disposition of participations were subject to the federal income tax of 9.8% (8.5% as from January 1, 1998). For a Swiss holding company, capital gains have been exempt from cantonal and communal taxes. Beginning after 1997, Switzerland revised its tax law regarding capital gains. Now capital gains realized by a corporation, whether or not a holding company, are subject to the participation exemption on the federal level. To qualify for the exemption, the selling corporation must dispose of at least a 20% participation and the participation must have been held for at least one year. In contrast to the dividend exemption, the alternative market value test of CHF 2m is not applicable. Holding companies continue to be exempt from cantonal and communal taxes on capital gains.

The federal exemption for capital gains applies currently for new participations, i.e., those acquired after 1996. For old participations that were acquired prior to that time, the exemption first becomes applicable on January 1, 2007.

For intra-group reorganizations, another exemption applies to the capital gains tax. No gain will be recognized upon transfers of participations from a Swiss company to a foreign group company, if the transferred company will not be sold or transferred by the foreign acquiring company outside the group before January 1, 2007,and based on the opinion of the Swiss Federal tax administration, the transferee is under the control of a Swiss company. Under this reading, the exemption applies to Swiss-based groups or subgroups. Thus, if the participation is transferred upstream within a group and no Swiss company exists above the transferee, the transfer will not qualify for exemption.

If the conditions are fulfilled at the time of the reorganization but the participation is disposed of before January 1, 2007, gain will be recognized retroactively for tax purposes.

3.3.5. Value-Added Tax ("VAT")

A Swiss holding company might be subject to VAT at the present rate of 7.6% if it provides services and receives management fees from affiliates in excess of CHF 75,000 per year. On the other hand, the input VAT could in these cases be recovered partially or completely.

3.3.6. Securities Turnover Tax

Swiss companies holding securities with a value of at least CHF 10m will be categorized as a securities dealer for securities turnover tax purposes. Once categorized, the acquisition and disposition of securities will be taxable at a total rate of 0.15% for Swiss securities and 0.30% for foreign securities(normally born each 50% by seller and acquirer).

-21-

3.3.7. Swiss Withholding Tax

Dividend distributions by Swiss companies are generally subject to a 35% Swiss withholding tax. However, dividend payments from Swiss companies to other Swiss companies can be carried out in a declaration procedure without cash payments, if the Swiss beneficiary company owns at least 20% in its Swiss subsidiary.

Moreover, special rules apply when the dividends are paid to a parent company resident in a treaty jurisdiction. If the parent is based in the U.S., dividend payments are subject to a direct withholding tax of only 5%. To obtain this beneficial rate, the shareholding in the Swiss company must be at least 10% of all voting rights and an advance agreement must be obtained from the Swiss tax authorities. No refund system applies.

Currently, dividend payments to a foreign parent company other than a U.S. company are subject to the 35% Swiss withholding tax. Thereafter and, a refund will be granted to the extent provided by an applicable income tax treaties. In many cases, the ultimate Swiss tax liability will be reduced to either 0% or 5% in a Parent/Subsidiary-relationship. With regard to German parent companies, an immediate 0% Swiss withholding tax rate (neither withholding is collected nor refund paid) is presently under discussion and may come into effect beginning January 1, 2003. Comparable discussions are under way with several other EU countries.

3.3.8. Tax Credit for foreign Withholding Taxes

For non-refundable foreign withholding taxes, Switzerland provides a limited tax credit (“pauschale Steueranrechnung”). However, since Swiss holding companies are only subject to the federal income tax, only one-third, at most, of the foreign tax can be credited. Moreover, the tax credit is limited to the federal tax payable in a certain tax period, unless steps are taken in advance to counteract this limitation.

3.3.9. Swiss Tax Treaty Network

Switzerland has income tax treaties with 65 countries, including all E.U. and Eastern European countries and with most of the important trading partners of Switzerland.

3.3.10. 1962 Decree on Misuse of Treaties

Since 1962, Switzerland had in effect internal law measures designed to prevent misuse of income tax treaties. The internal law was revised at the end of 1998.

In general terms, the 1962 decree characterized certain transactions as misuse of treaties because withholding tax in foreign countries was reduced and Swiss tax was also reduced by certain transactions that

-22-

minimized the tax base. Thus, the 1962 decree provided that tax deductible payments by a Swiss entity had to be capped at 50% of its gross income which received withholding tax benefits under an income tax treaty. The 1962 decree also mandated an annual minimum dividend distribution of at least 25% of the gross amount of its treaty benefit income.

To illustrate the working of the 1962 agree, assume that a Swiss holding company owned by foreign shareholders, receives dividends, interest and royalties from third treaty countries with which Switzerland has income tax treaties in effect. Assume further that the total of those items of gross income is CHF 100. In these circumstances, a maximum of CHF 50 may be booked as a deductible expense paid to third parties outside Switzerland. In addition, a minimum dividend of CHF 25 must be distributed to the Swiss company’s shareholders.

3.3.11. 1998 Circular Letter

The new 1998 circular letter limits the application of the old rule. Active Swiss companies, listed companies, and pure holding companies may transfer more than 50% of the gross treaty benefit income in the form of deductible payments if such payments are commercially justified . In addition, these companies are no longer forced to pay out a dividend of at least 25% of their gross treaty benefit income, if at the level of the Swiss company payment of Swiss withholding tax on the undistributed or hidden reserves is not endangered in the future.

The payment of Swiss withholding tax could be in danger if the Swiss company is 80% or more foreign controlled and more than 50% of the assets of the Swiss company are situated outside Switzerland (or are composed of claims against companies or individuals abroad), and the company does not pay an annual dividend of at least 6% of its net equity. All three conditions must exist for qualifying the withholding tax to be deemed in danger. In applying the asset test, shares in foreign companies may be viewed to be domestic assets. If this test is met,Swiss holding companies can avoid the minimum dividend distribution rule.

3.3.12. Special Rule for Companies with Contacts in the U.S.

Neither the 1962 decree nor the amending circular letter of 1998 are applicable in the context of a company having contacts with the U.S. The new US-Switzerland treaty of 1996 has overruled the application with its extensive limitation on benefits provisions. Consequently, Swiss companies investing in the U.S. must look exclusively to the tax treaty to determine whether the treaty is being misused.

3.3.13. Holding Company Activities

A Swiss holding company might generally be attractive, because its activities are not strictly limited to holding activities. Thus, as long as (i) the main purposes of the holding company are holding activities

-23-

(reflected in the articles and in fact) and (ii) either the income or the asset test as described above in Section 3.2.1 are met, the holding company can perform additional functions as follows:

(1) Financing of subsidiaries and other group companies;

(2) Holding and management of intellectual property; and

(3) Performance of management services within the group.

As a consequence, a Swiss holding company can employ personnel and it may rent office space. Due to the tax exemption on the cantonal/communal level, income derived from the foregoing activities (i.e. interest, royalty and management income) is only taxable on the federal level, i.e. 8.5% (before taxes) or approximately 7.9% after taxes. Nonetheless, because the law does not contain total clarity, it is viewed to be prudent to obtain a ruling from the tax authorities with regard to substantially other than holding company functions.

3.4. Additional Tax Related Issues

3.4.1. U.S. Check-the Box-Rules

In Switzerland, companies are in most cases incorporated either as an Aktiengesellschaft or as a GmbH. Since the Swiss Aktiengesellschaft qualifies as a per se corporation for the U.S. check-the-box-rules, these rules can only be used in connection with a Swiss GmbH. Swiss holding companies can be set up in form of a Swiss GmbH; however, the present limitation of a GmbH’s share capital of CHF 2 m is an issue which has to be overcome when using the legal form of a GmbH. In this context it should be noted that the existing GmbH law is under revision and the revised law foresees an unlimited share capital. Up to know it is still not known when the new law will come into force.

3.4.2. Swiss Ruling Policy

Switzerland is well known for a general cooperative and taxpayer friendly ruling policy of its tax authorities. Advanced rulings can be obtained from the cantonal tax authorities with respect to cantonal/communal and federal income taxes and form the federal tax authorities with respect to withholding taxes, treaty benefits and limitations, stamp duties and security turnover taxes.

All cases which are not clearly in line with the tax codes or which are not based on a well known government practice will generally be ruled in advanced.

3.4.3. Swiss Debt-Equity Rules

-24-

In 1997, the Swiss federal tax administration issued new and detailed rules regarding the debt-equity-ratios of Swiss companies. Based on these rules, the underlying equity of participations and immovable property must be 30%, based on the fair market value of the assets. For other assets, the respective underlying equity is in the range between 0% (cash), 15% (claims) and 50% (non-listed minority shareholdings).

If the above mentioned rules are not fulfilled, the missing equity portion will nevertheless be taxed as equity and, if interest payments to related parties exceed (in combination with an interest rate fixed annually) the so calculated maximum deductible interest expense, the excess portion of such payments would not be tax deductible and recharacterized into a hidden dividend distribution.

3.4.4. Use of Swiss Holding Companies

Compared to various E.U. Member States, a Swiss company has certain advantages:

4. No activity clause is requested for investments, i.e. participations owned by a Swiss holding company can also be qualified as a portfolio investment;

5. No "subject to tax clause" exists for underlying participations;

6. No holding period is requested for investments in connection with dividend distributions;

7. Income other than dividend income is only subject to the 8.5% federal income tax (7.9% after taxes), whereas such income is fully taxable at rates between 30-40% in other E.U. Member States, and

8. Switzerland does not have any C.F.C. legislation.

4. Belgium

Requirements have changed for utilizing the Belgian Participation Exemption for intercompany dividends and capital gains realized on shares, as a result of the 1997 Belgium Budget and the ruling by the E.U. Court of Justice in the Denkavit Case.4 At the time of going to press, Belgium was again in the process of revising its corporate income tax legislation relating to the dividends received regime. The proposals that comprise the 2002 Belgian corporate tax reform are described below. Readers are urged to double-check the status of the legislation prior to implementing any corporate tax planning scheme in or through Belgium.

4 E.U. Court of Justice, October 17, 1996, cases C-283/94, C-291/94 and C-292/94 in re Denkavit

International BV, VITIC Amsterdam BV and Voormeer BV vs. Bundesamt für Finanzen.

-25-

Belgium does not provide a privileged tax regime for holding activities (such as the 1929 Luxembourg holding company). However, a Belgian company that is subject to Belgian corporate income tax or a Belgian branch of a foreign company is eligible, under appropriate circumstances, for benefits of the Belgian participation exemption, which provides a favorable tax regime for dividends and capital gains from the disposition of shares of stock in subsidiary corporations.

This portion of the paper focuses on the Belgian company as a holding, but under certain circumstances, a Belgian branch of a foreign company could be a valuable alternative.

4.1. Corporate Income Tax

4.1.1. General Regime

A Belgian company is subject to corporate income tax on its world-wide profit. For corporate income tax purposes the taxable profit is in principle determined on the basis of the commercial accounts. The general corporate income tax rate in Belgium amounts to 40.17%, which includes a 3% crisis surcharge.

The 2002 Belgian corporate tax reform proposals reduce the statutory rate for corporate income tax to 33.99%, consisting of a base rate of 33% plus a crisis surcharge of 3%.

4.1.2. Participation Exemption – General

Under the Participation Exemption, qualifying dividends received by a Belgian company are eligible for a 95% deduction and capital gains realized on the disposition of qualifying shares of stock are eligible for a 100% exemption.

-26-

4.1.3. Dividends Received Deduction

The full amount of all dividends received --net of foreign withholding tax-- is first included in taxable income with the other taxable income items of the Belgian company. Ninety-five percent of qualifying dividends are subsequently deducted, but only in case and to the extent that the initial computation results in a positive balance. In principle, the remaining 5% of dividends received is added to the taxable income of the Belgian company. If the net result of the Belgian company's other activities in the current year is negative, none or only part of the qualifying dividends can be deducted. Moreover, any negative result of the Belgian company deriving from other activities is wholly or partially "absorbed" by dividends qualifying for the participation exemption. The absorbed portion of operating losses is not eligible for carryover to subsequent tax years. The "unused" portion of the dividends received deduction is permanently lost, as no carryforward or carryback is available.

4.1.3.1. Minimum Value of Participation

Dividends distributed by a subsidiary are eligible for the dividends received deduction if the corporate recipient owns at least 5% of the nominal share capital of the subsidiary or, alternatively, the acquisition price (value) for the holding in the subsidiary was at least €1.2 million. This condition does not apply if the Belgian company receiving the dividends is, inter alia, a bank, insurance company, or a so-called investment company.

Under the pending 2002 Belgian corporate tax reform, the threshold of 5% will be increased to 10%; however, the alternative threshold of €1.2 million (acquisition price) will remain unchanged. In addition, the shares generating the dividend income will have to be booked as a “financial fixed asset.”

4.1.3.2. Subject to Comparable Tax

To qualify for the dividends received deduction, the subsidiary paying the dividend must meet a "subject-to-tax requirement." If the subject-tax-requirement is not met, the dividends are not exempt in the hands of the corporate shareholder. Consequently, the dividend deduction is not available for dividends distributed by a company that (i) is not subject to Belgian corporate income tax or to a foreign tax similar to the Belgian corporate income tax or (ii) is resident for tax purposes in a country that has in effect a normal tax regime which is substantially more advantageous than the Belgian normal tax regime. A foreign tax is considered similar to Belgian corporate income tax if it is essentially a tax on profit. It is not required that the tax base and/or tax rate should be similar to Belgian corporate income tax. However if the tax base or tax rate (or a combination of each) result in a tax regime that is substantially more advantageous, dividends stemming from the company will not qualify for the deduction. In this regard, the Belgian Revenue has published a non-exhaustive list of companies not subject to a tax similar to Belgian corporate income tax and of countries whose corporate income tax regime is considered to be substantially more advantageous than that of

-27-

Belgium. Jurisdictions where companies are subject to a tax system that is not similar to the Belgian corporate income tax include Andorra, Anguilla, Bahamas, Bahrain, Bermuda, Campione, Cayman Islands, Ciskei, Grenada, Nauru, Saint-Pierre-et-Miquelon, Sark, Tonga, Turks and Caicos-Islands and Vanuatu.

Jurisdictions where certain types of companies are subject to a tax system that is not similar to the Belgian corporate income tax include those on the following list:

Antigua International business companies and companies that manufacture approved products.

Aruba New industries companies; companies that construct, equip, develop or renovate hotels, and Aruban exempt companies (A.V.V.)

Barbados International business companies for which more than 90% of the equity and loan is held by nonresidents and which operate exclusively abroad; insurance companies that carry out their insurance activities abroad.

British Virgin Islands Companies that are managed and supervised from abroad and that do not realize their profits on the Islands; international business companies that do not transact business with residents of the Islands, do not hold any real estate situated on the Islands, and do not function as bank or insurance company.

Cook Islands Companies that are owned by nonresidents, do not invest in local companies, do not acquire assets from residents of the Cook Islands and do not carry on any activities on the Islands.

Costa Rica Companies that receive exclusively foreign-source income; new industry enterprises.

Cyprus Foreign investors that are established in the tax-free zone of Larnaca; companies operating vessels under Cypriot flag.

Djibouti

Companies that receive exclusively foreign-source income; companies that carry on their activities outside of Djibouti and that have their

-28-

statutory seat in the tax-free zone of Djibouti.

Gibraltar Exempt companies; companies that have obtained an exemption certificate and do not derive their profits from the local commerce.

Hong Kong Companies that receive exclusively foreign source income.

-29-

Isle of Man Companies incorporated on the Island that are managed and supervised from abroad and receive exclusively foreign-source income; exempt companies; foreign-owned companies that receive exclusively foreign-source income and that are engaged in investment, trading in shares, insurance or real estate, investment in the production or the purchase of food products, shipping activities.

Jamaica International business companies that carry on their activities exclusively abroad.

Liberia Companies, for which the majority of shares are held by non-citizens or nonresidents, and that carry on their activities exclusively abroad; Liberian companies, for which more than 25% of the authorized capital is held by nonresident foreigners, and that derive their income from activities carried out abroad.

Liechtenstein Holding companies; companies domiciled in Liechtenstein that do not carry on any profitable or commercial activities in Liechtenstein.

Luxembourg Holding companies.

Macau Companies that derive their income exclusively from abroad.

Malaysia Malaysian companies, other than banks, that receive exclusively foreign-source income that is not collected in Malaysia; companies managed and supervised from abroad that receive exclusively foreign-source income, if such income is collected in Malaysia.

Malta Noncommercial companies, incorporated in the form of nominees. companies, that do not carry on any activities in Malta

Netherlands Antilles New industries companies; companies that construct, equip, develop or renovate hotels.

Nevis Companies that receive exclusively foreign-source income; companies established in accordance with the Nevis Business Corporation Ordinance 1984.

Oman Companies that receive exclusively foreign-source income; companies that are granted an exemption by the Sultan.

-30-

Panama Companies that receive exclusively foreign-source income.

Portugal Companies that are established in the tax-free zone of Madeira or the island of Santa Maria and that do not carry on any activities in Portugal; venture capital companies; regional development companies; companies that stimulate the economic initiative.

Saint-Vincent International companies incorporated in Saint-Vincent that distribute not more than 10% of the value of the assets, the authorized capital, interest or dividends to residents of Saint-Vincent, and that do not carry on any activities in Saint-Vincent.

Seychelles Companies that do not carry on any activities in the Seychelles.

Singapore Companies that receive exclusively foreign-source income that is not collected in (remitted to) Singapore.

United Arab Emirates Companies for which the industrial projects were approved companies established in the tax-free zone of the port of Djebel Ali.

From legislative history as well as from the answers the Minister of Finance has given to certain questions in Parliament, it can be concluded that an effective rate of 15% to 18% of corporate or profit tax should suffice for a subsidiary corporation to be viewed to be subject to a tax that is not substantially more advantageous than the Belgian corporate income tax.

Under the pending 2002 Belgian corporate tax reform proposals, a rebuttable presumption will exist based on the nominal rate of federal tax in a foreign country. If the nominal rate of federal tax is 15% or more, the tax will be presumed to be substantially similar to the Belgian corporate income tax. Conversely, if the nominal rate of federal tax is less than 15%, the tax will be presumed to be substantially more advantageous than the Belgian corporate income tax, and therefore insufficient for purposes of the dividends received deduction. Both the taxpayer and the Belgian Revenue Service will be allowed to introduce evidence rebutting the presumption. Hence, in the event that a nominal federal tax rate of less than 15% applies, the taxpayer will be allowed to prove that the tax effectively paid at the level of the subsidiary is, in the relevant facts and circumstances, comparable to or not substantially more advantageous than the corporate income tax that a Belgian company would pay. Conversely, in a situation where the federal tax rate amounts to 15% or more, the Belgian Revenue Service will be allowed to demonstrate that the tax regime applied to the

-31-

subsidiary is, in its circumstances, not comparable to, or is substantially more advantageous than, the Belgian corporate income tax regime.

4.1.3.3. Proscribed Business Activities

The dividends received deduction is not available for dividends distributed by a company defined as a finance company, a treasury company, or an investment company, which although in principle is subject to a tax regime that meets the standards set out above in the country where it is a resident for tax purposes, enjoys a tax regime that deviates from the normal tax regime.

A "finance company" is defined as a company the sole or principal activity of which consists in providing financial services (e.g., financing and financial management) to unrelated parties, i.e, parties that do not form part of a group to which the finance company belongs. "Group" is defined under a standard applicable to the Belgian Coordination Center Regime (i.e, a 20% shareholding or voting rights threshold). As a result, a Belgian Coordination Center is not considered a finance company for this purpose.

A “treasury company” is defined as a company mainly or solely engaged in portfolio investment other than cash-pooling.

An "investment company" is defined as a company the purpose of which is the collective investment of capital funds, e.g., SICAVs, SICAFs and comparable entities.

Under certain conditions, the dividends received deduction is nevertheless available for E.U.-based finance companies and for investment companies.

4.1.3.4. Offshore Activity

The Dividends received deduction is not available for dividends distributed by a company to the extent that the non-dividend income the latter receives originates in a country other than the country where the distributing company is a resident for tax purposes and such income is subject in the latter country to a separate tax regime that deviates from the normal tax regime. Thus, a an investment in a low-tax subsidiary cannot be hidden merely by channeling the investment through an intermediary company organized in an acceptable jurisdiction.

4.1.3.5. Certain Foreign Branch Income

The dividends received deduction is not available for dividends distributed by a company to the extent that it realizes profits through one or more foreign branches that are subject to a tax assessment regime substantially more advantageous than the tax regime to which such profits would have been subject in Belgium, i.e, the Belgian corporate income tax regime for nonresident companies. Under certain conditions,

-32-

the dividends received deduction is, however, available for dividends distributed by Belgian companies with foreign branches and also for dividends distributed by companies --established in certain treaty jurisdictions-- availing of a foreign branch.

Under the pending Belgian corporate tax reform proposals, dividends stemming from non-Belgian branch profits will be able to qualify for the dividends received deduction to the extent that the branch profits are taxed under a tax regime in the branch country that is similar to the tax regime applicable to the “head office.”

4.1.3.6. Intermediary Companies

The dividends received deduction is not available for dividends distributed by an intermediary company, other than an investment company, that redistributes dividend income derived from tainted participations. As a result, if at least 90% of a dividend received from an intermediary company is funded by its own receipt of dividends from subsidiaries located in third countries, the dividends received deduction may be disallowed if no deduction would have been permitted had the lower-tier companies paid dividends directly to the Belgian corporation. In other words, a group cannot “launder” tainted dividends by washing them through an intermediary located in an acceptable jurisdiction.

4.1.3.7. Other Aspects

Under existing law, the Belgian dividends received deduction has several favorable aspects. Once the foregoing conditions are met, the deduction does not require a minimum holding period or a high percentage of ownership. Moreover, neither the receiving company nor the distributing company must have any of the specific legal forms mentioned in the Annex to the E.U. Parent/Subsidiary Directive in order to qualify for the deduction.

This may change under the pending Belgian corporate tax reform proposals. A minimum holding period of one year will be introduced in order for the dividends received deduction to apply. Moreover, the Belgian holding company will be required to have full legal title to the shares, where under the current regime it suffices to have the so-called “right of usufruct” to the shares (a form of economic ownership to the dividends generated by the shares that exists for a period of time and that is separate from the capital interest).

Interest and other expenses relating to the acquisition and/or the management of shares in, or capital contributions to, either a Belgian or a foreign subsidiary company remain in principle fully deductible to the extent that they meet regular arm's-length criteria. There is no general minimum debt-to-equity ratio. Finally, the participation exemption applies to payments received in connection with a liquidation or a redemption of shares.

-33-

4.1.3.8. Ruling Practice

The Belgian tax administration must, upon the taxpayer’s request, issue an advance tax ruling on the availability of the Dividends received deduction and especially on the question whether one or more anti-abuse provisions apply in a particular case. No such ruling will be granted, however, with respect to jurisdictions or types of companies listed as non-qualifying in the official tax haven list.

4.1.4. Capital Gain Exemption

Under the participation exemption, capital gains realized by a Belgian resident company (or the Belgian branch of a foreign company) on shares in a Belgian or a foreign subsidiary are fully exempt from Belgian corporate income tax, provided the dividends on the shares qualify for the dividends received deduction. However, if a foreign subsidiary derives dividends (directly or indirectly) from one or more companies not meeting the anti-abuse requirements for the dividends received deduction, the entire capital gain on the disposition of the shares of the subsidiary would be taxable.5

4.1.4.1. No Minimum Ownership Requirement

The minimum participation requirement that exists for dividends (5% of the capital or acquisition value of not less than €1.2 million) does not apply for capital gains. The exemption applies only to the extent that the capital gain realized on the shares exceeds the tax book value of these shares. The capital gain exemption is granted by a direct elimination of the gains from taxable income. Consequently, the limitation connected with the method used for granting the dividends received deduction does not come into play and loss utilization is not adversely affected. This means that losses derived from other activities of the Belgian holding company do not absorb the participation exemption on capital gains.

Under the pending Belgian corporate tax reform proposals, no additional requirements will be imposed for the application of the participation exemption for capital gains. The additional requirements that will be introduced for the application of the dividends received deduction (viz., the threshold of 10% or €1.2 million, the booking of the shares as “fixed financial assets,” the requirement that full legal title to the shares must be held during an uninterrupted period of one year) will not apply for the capital gains exemption. However, the introduction of a formal subject-to-tax test (i.e., a nominal rate of 15% of federal income tax) will also affect the capital gains exemption.

5 This is the official view of the Belgian Revenue; however, this view is contested.

-34-

4.1.4.2. Options

If a Belgian company purchases stock below fair market value pursuant to the exercise of a call option or a warrant, any subsequent gain realized upon the disposition of the shares of stock qualifies, in principle, as a tax-exempt capital gain. The exemption does not apply to the sale of the option or the warrant. If the call option itself were sold at a gain, the gain would not be eligible for exemption.

4.1.4.3. Unrealized Gains

Unrealized capital gains are not taxable if the capital gain is not expressed in the accounts. If the capital gain would merely be expressed in the Belgian company's accounts, said gain is not taxable so long as it is booked in a non-distributable reserve account. Upon later realization of such capital gain, the non-distributable reserve account disappears without triggering corporate income tax.

4.1.4.4. Capital Losses

As a counterpart to the exemption of capital gains, capital losses on the disposition of shares are not tax deductible. However, the loss incurred in connection with the liquidation of a subsidiary company remains deductible up to the amount of the paid-up share capital of that subsidiary.

4.1.5. Deductible Expenses

Interest paid by a Belgian company is generally tax deductible provided the general arm's length criteria and specific debt-to-equity rules are complied with. There are exceptions. Interest is not deductible to the extent that, it corresponds to dividend income that is effectively exempt from corporate income tax under the dividends received deduction, if such dividend is derived from shares that are not held during an uninterrupted period of at least one year. However, this rule does not apply if the shares that are purchased and sold within one year are not held as either passive investment or inventory.

Under the pending Belgian corporate tax reform proposals, the non-deductibility of interest corresponding to dividends deductible under the dividends received deduction and generated by shares that are not held on to for at least one year, will be removed. This is the logical consequence of the anticipated introduction of a one-year holding period in order for the Dividends received deduction to apply.

-35-

4.2. Withholding Tax on Distributions

4.2.1. To Belgium

Dividends distributed to a Belgian company are, in principle, subject to a dividend withholding tax at the domestic rate of the country in which the distributing company is established. In most situations, this rate is reduced or eliminated by virtue of a bilateral tax treaty or the E.U. Parent/Subsidiary Directive.

4.2.2. From Belgium

In principle, all dividends distributed by Belgian companies to both resident and nonresident shareholders are subject to withholding tax of 25%. A reduced rate of 15% is available for dividends relating to shares issued on or after January 1, 1994, provided that a number of conditions are met.

A full exemption of Belgian withholding tax applies on the distribution of dividends to a parent company established within the E.U. (including Belgian companies) which holds at least 25% of the capital of the Belgian resident distributing company. If a qualifying parent company holds or has held a qualifying participation, all additionally acquired shares will also qualify, even though the one-year holding period may not be met with respect to such additional shares.

4.2.3. Denkavit Case

Following the ruling from the E.U. Court of Justice in the Denkavit case, Belgium abandoned the condition that the parent must have held a participation of at least 25% uninterruptedly during a period of at least one year preceding the distribution of the dividend. Therefore, the parent may hold the 25% participation for one entire year, which may occur partly before and partly after the dividend distribution. If the one-year period has not entirely elapsed at the time the dividend is paid, the Belgian distributing company is allowed to pay out the net dividend only, i.e, the gross dividend minus an amount equal to the dividend withholding tax that would apply if the one-year holding period is not respected. If the latter occurs, the amount of withholding tax that becomes due, increased with interest for late payment, must be paid to the Belgian treasury by the dividend distributing company.

Unlike the participation exemption, the exemption from dividend withholding tax is subject to the conditions mentioned in the E.U. Parent/Subsidiary Directive with respect to the legal form, the E.U. tax residency, and the parent company's compliance with a subject-to-tax requirement. The legal form requirement does not apply to dividends paid to Belgian entities that are subject to Belgian corporate income tax.

As a separate matter, we note that an exemption from dividend withholding tax is available in case of a liquidation of a Belgian company or redemption by a Belgian resident company of its shares. This exemption is unconditional and applies with respect to both Belgian and foreign shareholders.

-36-

Under the pending Belgian corporate tax reform proposals, the introduction of a 10% withholding tax is provided in the event of a distribution of earnings and profits pursuant to a liquidation or redemption of shares. This 10% withholding tax will in principle apply to all liquidations and redemptions on or after January 1, 2002. However, both regular distributions and distributions pursuant to liquidations and redemptions continue to benefit from rate reductions or exemptions from withholding tax on the basis of the bilateral tax treaties concluded by Belgium and the E.U Parent/Subsidiary Directive.

4.3. Withholding Tax on Outbound Interest Payments

Interest paid by any Belgian company is, in principle, subject to interest withholding tax of 15%. This domestic rate can often be reduced by virtue of bilateral tax treaties and by virtue of several domestic exemptions.

4.4. Capital Duty

In general, all contributions to the capital of a Belgian company – upon incorporation or any subsequent share capital increase – are subject to a non-recurrent 0.5% capital tax. The taxable base equals the higher of the nominal value of the shares issued in consideration for the contribution or the fair market value of the contribution.

Exemptions are available for E.U. reorganizations. Consequently, exemptions are available for:

(1) A contribution by an E.U.-based company of all its assets and liabilities to a Belgian company in consideration solely for shares in the Belgian company, or in consideration for both shares and cash, provided the cash payment (boot) does not exceed 10% of the par value of the shares received;

(2) A contribution by an E.U.-based company to a Belgian company of an independent part of its enterprise when the compensation received by the contributing E.U. company consists solely of shares in the Belgian company, or in consideration for both shares and cash, provided the boot payment does not exceed 10% of the par value of the shares received;

(3) A contribution of shares in an E.U.-based company to a Belgian company in consideration solely for shares in the Belgian company, or in consideration for both shares and cash, provided the cash payment (boot) does not exceed 10% of the par value of the shares received, and provided the shares contributed either constitute 75% or more of the share capital of the issuing E.U.-based company, or result in the Belgian company achieving an interest of 75% or more in the issuing E.U.-based company. In comparison to the Netherlands and Luxembourg, Belgium does not impose a 5-year holding requirement on the shares contributed to the Belgian company to qualify for the exemption.

-37-

(4) The transfer to Belgium of a company's statutory seat or seat of effective management from another E.U. member state.

By private ruling letter, the Belgian Minister of Finance has confirmed that the initial two exemptions are also available to contributors established or resident in a jurisdiction outside the E.U. that has a bilateral tax treaty in force with Belgium containing a non-discrimination clause that includes a provision alike Article 24(5) of the 1997 OECD Model Convention.(e.g., the United States).

4.5. VAT

In a Parliamentary inquiry that occurred in November 2000, the Belgian Minister of Finance was asked if a Belgian holding company qualifies as a VAT entrepreneur entitled to credit input-VAT that is charged to it by various service providers, e.g., investment bankers, consultants, etc.

The Belgian Minister of Finance replied that case law of the E.U. Court of Justice (Case C-4/94, April 6, 1995, BLP Group plc.) support the view that input-VAT is creditable only if a direct link exists between the services rendered to the company and the output transactions which are subject to VAT. The collection of dividends as well as the realization of capital gains upon disposition of shares or participations are either exempt from VAT or outside the scope of the VAT regulations. Hence, no input-VAT payable in connection with services rendered can be credited against output VAT by a “pure” holding company. The view of the Minister of Finance is that the goal of the company acquiring the shares or the participation is irrelevant (e.g., passive investment versus the creation of a close economic link between the holding company and the participation). The view of the Minister of Finance is subject to question. Belgian legal doctrine holds that a company that acquires one or more participations in other companies with a view to actively participate in the management of the acquired companies should be entitled to a credit for input VAT charged on various services rendered to it.

5. The Netherlands

5.1. Introduction

Over the past few decades, the Netherlands has been a prime location for holding companies. The Netherlands was deemed to be so attractive that a number of countries have copied the Dutch participation exemption system with more and less success. The main benefits of the Dutch holding company remain access to an extensive tax treaty network, the Dutch tax ruling practice and the transparency of its holding regime.

-38-

5.2. Dutch Corporate Income Tax

In principle all income of a holding company will be subject to Dutch corporate income tax at the rate of 34.5% (first €22,689 subject to 29%). However, due to the working of the Dutch participation exemption, a holding company will often have little or no taxable income.

5.3. Participation Exemption

Under the participation exemption as laid down in Article 13 of the Dutch Corporate Income Tax Act ("CITA"), dividends (including dividends in kind as well as "hidden" profit distributions) and capital gains derived from qualifying shareholdings are exempt from Dutch corporate income tax, while capital losses are deductible only under special circumstances (see section 6.4.3, below). No minimum holding period is required. The participation exemption will apply if the following conditions are met (for shareholdings in a Dutch subsidiary however, only the first two conditions need be met):

(1) The subsidiary is a company with a capital that is in whole or in part, divided into shares;

(2) The company must hold at least 5% of the nominal paid-in share capital of the subsidiary (in certain special circumstances, a shareholding of less than 5% will qualify);

(3) The shares in the subsidiary must not be held as inventory, which relates to the purchase and holding of shares for the purposes of immediate resale. This requirement generally applies only to so-called cash-box companies;

(4) The foreign subsidiary must be subject to a tax on its profits in its state of residence;

(5) The shares in the foreign subsidiary must not be held as a portfolio investment. In general, this condition will be deemed met if a business connection exists between the ultimate shareholder of the holding company and the foreign subsidiary.

With respect to a participation in a foreign group financing company it should be noted that such shareholding will be deemed to be a portfolio investment, unless several additional requirements relating to the substance of the finance entity are met. The group finance company should for instance be actively involved in financial transactions on a regular basis, it should have financed its investments for at least 20% out of third party debt and the management of the company should be able to operate without involvement of its Dutch parent company.

The term "qualifying shareholding" also includes profits rights and hybrid receivables held in combination with a qualifying shareholding. For purposes of Article 13 CITA, receivables are considered "hybrid" if they are treated as capital for Dutch tax purposes and, in the event the debtor is a non-Dutch entity, the interest paid on the receivable is non-deductible in its courntry of residence.

-39-

5.4. Other Aspects

5.4.1. Implementation of Parent/Subsidiary Directive

The E.U. Parent/Subsidiary directive, as implemented into Dutch law, states that the non-portfolio test is considered met if (i) the Dutch holding company has a shareholding of at least 25% in an E.U. resident subsidiary, (ii) the subsidiary is not subject to a special tax regime in its state of residence, and (iii) the subsidiary has the corporate form listed in the Directive. The foregoing tests are subject to an anti-abuse rule designed to prevent the “laundering” of a holding in a third country through an E.U. resident subsidiary. Under the anti-abuse rule, the participation exemption does not apply to shares of an E.U. resident subsidiary where more than 70% of its assets consist of shares of a lower-tier company that is not a resident of the E.U. and dividends from that lower-tier subsidiary would not qualify for the participation exemption if they would have been paid directly to the Dutch holding company.

5.4.2. Costs/Expenses

If the participation exemption applies, expenses incurred by the holding company which are attributable to that shareholding are not deductible, unless and to the extent that it can be demonstrated that these expenses are instrumental to generating taxable income in the Netherlands. Typically, interest expenses (and currency exchange gains or losses) incurred on a loan used to acquire a foreign participation are not deductible. Expenses incurred in respect of loan agreements entered into by a Dutch holding company within six months prior to the acquisition of a shareholding to which the participation exemption will apply will be deemed to be non-deductible unless it is reasonable to believe that the loan agreements were entered into for a purpose unrelated to the share acquisition.

5.4.3. Capital Losses

As mentioned above, if the participation exemption applies, capital losses are generally not deductible. There are however two exceptions. First, liquidation losses may under certain circumstances be deductible. Second, if certain conditions are met, the holding company may claim a tax deductible depreciation for a decrease in value below the original cost-price of the participation during the first five years after acquisition. This depreciation must be recaptured during the five subsequent years.

5.5. Tax Rulings

In general, it is possible to obtain advance tax rulings whereby the Dutch revenue confirms in advance the tax treatment of a holding company. With regard to a holding company, a ruling will inter alia confirm that, on basis of the facts presented, the non-portfolio test is met and that as a consequence the participation exemption will apply. It is standard policy that the ruling is subject to the condition that the holding company

-40-

finances its participation(s) with at least 15% equity. Even when an advance tax ruling is not obtained, it is advisable to observe this (non-statutory) debt/equity ratio of 85/15.

5.6. Dividend Withholding Tax

The Dutch statutory rate of dividend withholding tax is 25%. This rate may be reduced under an applicable tax treaty. Moreover, under the E.U. Parent/Subsidiary directive, no dividend withholding tax will be levied on dividends paid to E.U. resident parent companies, provided the parent has a shareholding in the holding company of at least 25% and provided certain other conditions are met. The 25% ownership requirement is reduced to 10%, if the relevant E.U. member state, in the reverse situation, has adopted a 10% rather than a 25% test. To this date, within the E.U., this so-called "reciprocity test" has been met in relation to Finland, Germany, Greece, Luxembourg, Spain and the UK. Under the tax treaty between the Netherlands and the US, dividends paid to a U.S. parent company are subject to a withholding tax of 5%, provided that the U.S. parent owns at least 10% of the shares of the Dutch company.

Under certain conditions the dividend withholding tax payable by the holding company upon distribution of a dividend, may be reduced by 3% in order to compensate for foreign withholding taxes levied on dividends received by it, which taxes could not be credited against Dutch corporate income tax due to the applicability of the participation exemption.

5.7. Dutch capital tax

All capital contributions to a holding company, whether in cash or in kind, will be subject to a non-recurrent capital tax of 0.55%. Capital tax paid is a deductible expense for corporate income tax purposes.

There are numerous exemptions available. For instance, when a U.S. company transfers its E.U. shareholdings (minimum shareholding 75%) to a Dutch holding company in exchange for shares of that Dutch holding company or as a contribution to the shares of the Dutch holding company it already owns, such transfer is exempt under the so-called share merger exemption. Alternatively, when the Dutch holding company of a US group is used as an acquisition vehicle, it is generally required that at least part of the acquisition price is contributed to the Dutch holding company in cash. In that case the U.S. parent company involved can incorporate a U.S. special purpose company which in turn incorporates the Dutch holding company. In the event the U.S. special purpose company qualifies as a resident under the US-Netherlands tax treaty and has no other assets than cash (to be contributed to the Dutch holding company) and no liabilities, an exemption may be available when the cash is transferred by the U.S. special purpose company to the Dutch holding company pursuant to the business merger exemption.

5.8. Treaty Network/E.U. Parent Subsidiary Directive

The Netherlands does not levy withholding taxes on interest and royalties under provisions of domestic law.

-41-

The Netherlands has an extensive treaty network. Under an applicable treaty, foreign withholding taxes on dividends, interest and royalties may often be substantially reduced or completely eliminated when received by a Dutch holding company. In additiona, under the E.U. Parent/Subsidiary directive, dividends received by a Dutch holding company are, under certain circumstances, completely exempt from foreign dividend withholding tax. Similarly, as already mentioned above, dividends paid to an E.U. resident parent may be completely exempt from Dutch dividend withholding tax.

5.9. Functional currency

Dutch subsidiaries of foreign companies are under certain conditions allowed to file their tax returns and compute their profits for Dutch corporate income tax purposes in the functional currency used by the group, rather than in Euro's.

6. Spain

Spain offers a substantial advantage vis-à-vis other attractive European holding company locations, as dividends distributed by the Spanish holding company to non-Spanish resident shareholders are exempt from the Spanish withholding tax on dividends. In addition, capital gains triggered by a nonresident shareholder on the transfer of its interest in a Spanish holding company are not subject to the Spanish 35% capital gains tax to the extent that such capital gains (indirectly) arise from an increase in the value of the foreign holdings of the Spanish holding company.

A Spanish holding company or “Entidad de Tenencia de Valores Extranjeros” (better known by the Spanish acronym “ETVE”) is a regular Spanish company subject to a 35% tax on its income, but exempt from taxation on qualified foreign source dividends and capital gains. As such, the ETVE is protected by European Union directives such as the Parent/Subsidiary Directive and the Merger Directive and is regarded as a Spanish resident for tax purposes pursuant to Spain’s 43 bilateral tax treaties. Spain’s broad tax treaty network with Latin America and the European character of the ETVE make it an attractive vehicle for channeling capital investments in Latin America as well as a tax efficient exit route for European Union capital investments.

In June 2000 the regime was amended in order to introduce significant new improvements, such as the capital gains tax exemption on the transfer of shares in the Spanish holding company, which enhanced the possibilities of the ETVE as a holding vehicle.

Also, it must be pointed out that the European Council, through the work of the Primarolo Group, has determined that the ETVE is in conformance with the EU Code of Conduct and does not represent potentially harmful tax competition.

-42-

6.1. Exemption on Qualified Foreign Source Income

The main tax feature of the ETVE is that (i) dividends obtained from qualified nonresident subsidiaries and (ii) capital gains realized on the transfer of the shares held by the ETVE in qualified nonresident subsidiaries are exempt from Spanish Corporate Income Tax Law 43/1995, of December 27, 1995, as amended (“CIT”).

The exemption applies pursuant to the fulfillment of certain requirements governing (i) the foreign investments made by the ETVE, as well as (ii) the ETVE itself.

6.1.1. Qualified Foreign Investments

According to Articles 130 and 20 bis of the CIT, dividends and capital gains received by the ETVE from nonresident subsidiaries will be exempt from Spanish taxation if the following requirements are met:

(1) The ETVE holds a minimum 5% participation in the equity of the nonresident subsidiary or, alternatively, the acquisition value of the interest in the nonresident subsidiary amounts to 6 million euros;

(2) The ETVE directly or indirectly holds the interest in the nonresident subsidiary for at least one year;

(3) The nonresident subsidiary is subject to and not exempt from a tax similar in nature to the Spanish CIT and is not resident in a tax haven country or jurisdiction; and

(4) Finally, the nonresident subsidiary is engaged in an active trade or business.

6.1.2. Minimum Participation and Holding Period

The equity of the nonresident subsidiary may be represented by shares, quotas or other forms of capital interest. Dividends will be exempt at the level of the ETVE even if the required one year holding period is completed after the dividends have been received or the shares in the nonresident subsidiary have been transferred. In comparison, the capital gains will be exempt only if the one year holding period requirement is met the date on which the transfer takes place.

For the purposes of computing the time that the participation has been held by the ETVE, foreign participations will be considered to have been held by a newly incorporated ETVE from the date on which they were held by other companies pertaining to the same consolidated group for accounting purposes.

-43-

6.1.3. Subject to and Not Exempt from Tax

The nonresident subsidiary must be subject to and not exempt from a tax of a nature similar to the CIT. Determining the degree of compatibility of foreign tax systems with the Spanish CIT is difficult. Under an amendment introduced in June 2000, “a tax of a similar nature” will include any foreign tax levied on the income of the nonresident subsidiary, even if levied on a partial basis. For the purposes of this test, it is irrelevant whether the object of the foreign tax is the nonresident subsidiary’s income, turnover or any other index-linking element of the nonresident subsidiary. This requirement will be deemed met, unless there is proof to the contrary, if the nonresident subsidiary resides in a tax treaty country (except for Switzerland).

Finally, nonresident subsidiaries located in one of the following tax haven countries or territories (as established by Royal Decree 1080/1991) do not qualify for the ETVE tax exemption regime:

1. Principality of Andorra

2. Netherlands Antilles

3. Aruba

4. Emirate of Bahrain

5. Sultanate of Brunei

6. Republic of Cyprus

7. United Arab Emirates

8. Gibraltar

9. Hong Kong

10. Anguilla

11. Antigua and Barbuda

12. Bahamas Islands

13. Barbados

14. Bermuda

15. Cayman Islands

16. Cook Islands

17. Dominica

18. Grenada

19. Fiji

20. Guernsey and Jersey

21. Jamaica

22. Malta

23. Falkland Islands

24. Isle of Man

25. Mariana Islands

26. Mauritius

27. Montserrat

28. Nauru

29. Salomon Islands

30. St. Vincent and Grenadines

31. St. Lucia

32. Trinidad and Tobago

33. Turk and Caicos Islands

34. Vanuatu

35. British Virgin Islands

36. U.S. Virgin Islands

37. Jordan

38. Lebanon

39. Liberia

40. Liechtenstein 41. Luxembourg, in so far as it

concerns income received by companies to which paragraph one of the attached protocol of the Treaty for the Avoidance of Double Taxation entered into by Luxembourg and Spain (Luxembourg holding companies incorporated under Law of July 31, 1929 and by Ducal Decree of December 17, 1928).

42. Macao

43. Monaco

44. Oman

45. Panama

46. San Marino

47. Seychelles

48. Singapore

-44-

The above list has not been amended since its publication in 1991.

6.1.4. Active Nonresident Subsidiary

The nonresident subsidiary must be actively and primarily engaged in an active trade or business carried out abroad; certain passive income may be generated by the nonresident subsidiary to the extent that it does not exceed 15% of its total turnover. In general, any trade or business is eligible to the extent that the nonresident subsidiary possesses sufficient material means and personnel to perform such trade or business activity.

A nonresident holding company subsidiary will be deemed to be carrying out an active business to the extent that, with respect to its participated nonresident entities, (i) it holds a minimum 5% participation and (ii) it exercises management and control, and provided that (iii) the participated nonresident entities qualify as active entities engaged in a trade or business.

A nonresident financial subsidiary will be deemed to be active if (i) it is engaged in financial transactions with individuals or entities resident in its jurisdiction of residence or in a foreign country, other than Spain, (ii) to the extent that such financial services are rendered through the material means and personnel available to the nonresident financial subsidiary.

6.2. Qualified Holding Company

A Spanish company will qualify as an ETVE if the following requirements are met:

(1) The corporate purpose of the Spanish company includes, among others, the holding of participations in operating nonresident entities;

(2) The Spanish company carries out its activities with the necessary “human and material resources;” and

(3) The Spanish holding company informs the Spanish Tax Authorities that it opts to be subject to the Spanish holding company regime provisions.

6.2.1. Corporate Purpose

The ETVE may conduct any activities, in Spain or abroad, in addition to holding participations in nonresident companies. However, such activities will not be covered by the holding company regime. Therefore, any profits will be subject to the general 35% CIT tax rate and the dividends distributed on such profits will be subject to regular Spanish withholding tax.

-45-

It must be mentioned that it is not necessary for the Spanish Holding Company to control and manage the activities of the participated companies, but rather the participation itself. The Spanish Tax Authorities have interpreted this requirement very flexibly.

6.2.2. Material Means and Personnel

This requirement is intimately related to the previous one. The substance requirements are those standard in other holding company jurisdictions. However, as a significant development and within the context of the EU Code of Conduct and the attempt by the Ecofin Council to eliminate harmful tax competition within the EU, at least one resident Spanish individual must be empowered with sufficiently broad powers of attorney to allow him to manage the ETVE. In this context, the Ecofin Council confirmed the compatibility of the Spanish Holding Company regime with the EU Code of Conduct.

6.2.3. Filing with the Spanish Tax Authorities

It is no longer required that the ETVE obtain a ruling from the Spanish Tax Authorities confirming the application of the regime. Under current regulations, it is sufficient for the ETVE to file a notice with the Spanish Tax Authorities confirming its intention to apply the holding company tax regime. In addition, the Spanish holding company may file ruling requests on the interpretation of the regulations and requirements of the regime. The special tax regime will come into effect in respect of the fiscal period of the ETVE, which ends after the notice is filed.

As a footnote, the shares of the ETVE must be in registered form. Therefore, Spanish listed companies may not opt for the regime, since their shares are in book-entry form.

6.3. Exemption of ETVE Dividend Distributions

Dividends distributed by the ETVE to its nonresident shareholder out of qualified exempt income (i.e. dividends and capital gains that were exempt from tax at the level of the ETVE) will not be subject to the Spanish dividend withholding tax. However, the dividend withholding exemption does not apply to nonresident shareholders resident in a tax haven country or territory, as established by Royal Decree 1080/1991 (and listed above).

Otherwise, dividends distributed by the ETVE will be subject to the standard 18% withholding tax or the reduced bilateral Tax Treaty rate, as applicable. In the context of an EU resident shareholder, dividends paid by the ETVE to its European Union resident shareholder will not be subject to the dividend withholding tax if the EU shareholder (i) takes one of the forms set out in the Annex to the Parent/Subsidiary Directive; (ii) is subject to and not exempt from tax as listed in Article 2.c) of the same Directive; (iii) owns directly at

-46-

least 25% of the share capital of the ETVE and, finally, (iv) such participation has been held for a period of at least twelve months immediately prior to the dividend payment or is held until the one year period is completed. In the latter case, the withholding will be levied at distribution and the EU resident shareholder will be entitled to claim a refund once the one year holding period has been completed.

6.4. Deduction of Costs

The value of a participation in the nonresident subsidiaries may be written down for accounting and tax purposes under the general CIT rules applicable to all Spanish resident companies. Financing expenses connected with a participation are tax deductible without limitation. Foreign exchange gains and losses are taxable or deductible.

6.5. Liquidation Losses

A loss realized upon the liquidation of a foreign subsidiary is deductible.

6.6. Capital Gains

Capital gains triggered by the nonresident shareholders, other than a tax haven company, on the (i) transfer or full amortization of its interest in the Spanish holding company or (ii) liquidation of the Spanish holding company will not be subject to the Spanish Capital Gains tax to the extent that the capital gain triggered by the nonresident shareholder is equivalent to (i) the existing reserves (from qualified exempt income) of the Spanish holding company, and/or (ii) a difference in value of the interest in the foreign subsidiaries of the Spanish holding company, if such interest fulfills the requirements described above for minimum participation and holding period.

The capital gains exemption was introduced in the June 2000 amendments to the regime and represents a substantial improvement since capital gains are normally subject to a 35% tax. Although in a tax treaty context, a capital gain on the disposition of shares in the ETVE will generally not be subject to Spanish taxation, some tax treaties entered into by Spain, such as the US-Spanish tax treaty, allows the latter to tax the capital gain at the general 35% tax rate provided that the foreign shareholder has a “substantial interest”, usually more than 25% of the capital, in the Spanish entity.

EU resident shareholders will not be subject to tax on the capital gain triggered by the disposition of the interest in the ETVE provided that at no time during the 12-month period prior to the disposition of such interest, the EU resident shareholder held a participation in the capital of the ETVE equal to or greater than 25%.

-47-

6.7. Liquidation of an ETVE

The liquidation of an ETVE triggers a capital gain, not subject to dividend withholding tax, taxable as described in paragraph 6.3, above.

6.8. OTHER INCOME TAX ISSUES

6.8.1. Corporate Income Tax Rate

An ETVE governed by the Spanish CIT is subject to the 35% Spanish corporate income tax on income other than qualified dividends and capital gains, as explained above.

6.8.2. Debt-Equity Ratio

The thin capitalization rules apply to financing arranged by a resident entity with related nonresident entities. When the net interest-bearing debt, whether direct or indirect, of a Spanish entity with one or more related individuals or entities not resident in Spain exceeds three times the entity’s equity (excluding profit or loss for the year), interest accruing on the excess is deemed to be a dividend distribution. Therefore, interest paid over the maximum allowed ratio will not be considered a deductible item for tax purposes for the ETVE and will be subject to dividend withholding tax as an ordinary dividend (and subject as well to the possible dividend withholding tax exemptions).

If a double taxation treaty applies and is subject to reciprocity, the ETVE may submit proposals to the tax authorities to apply a coefficient other than the three to one debt to equity ratio. The proposals must be based on the financing which the ETVE would have been able to obtain under normal market conditions from unrelated persons or entities.

6.8.3. Capital Duty

Cash contributions and in kind contributions to the capital of a Spanish company are subject to a 1% Capital Duty. The tax is levied on the nominal value of the shares being issued by the incorporated company, including any share premium thereof. Capital Duty is payable by the entity at the time of its incorporation or formation and is written off over a period not exceeding five years. Such expense is regarded as deductible. Furthermore, the movement of the seat of management of a foreign entity to Spain will trigger Capital Duty on the basis of the foreign entity’s net worth, unless the foreign entity was previously established in a European Union Member country that imposes a tax on capital.

As a local tax incentive measure, entities domiciled in the Canary Islands are exempt from Capital Duty (except for the liquidation of the entity, which is subject to a 1% Capital Duty on the value of the liquidation

48

proceeds). The 100% exemption was only applicable until the year 2001. In a transitional period, for the years 2002 and 2003 the Capital Duty is 0.25% and 0.5%, respectively.

As an exemption, in kind contributions, such as the contribution of shares in a foreign entity, made to the capital of an ETVE are exempt from Capital Tax if, as a consequence of the contribution, the contributor holds an interest of at least 5% in the capital of the Spanish entity.

In addition, under the guidelines established by the European Union Merger Directive, certain types of corporate reorganizations such as mergers, de-mergers, asset contributions and share exchanges may qualify for an exemption from the Capital Tax, (as well as a deferral on Corporate Income Tax and Individual Income Tax). The following may be applicable in the context of the incorporation of an ETVE:

(1) De-merger: an entity, as a consequence of its dissolution without liquidation, divides all of its assets and liabilities into two or more parts and transfers the same to two or more existing or new entities in exchange for the pro rata issue to its shareholders of securities representing the capital of the entities acquiring the assets and liabilities, and if applicable, making a cash payment not exceeding 10% of the nominal value of such securities;

(2) Partial De-merger: an entity splits off one or more parts of its assets and liabilities which form a branch of activity and transfers them as a whole to one or more newly-created or existing entities in exchange for securities representing the capital of the latter entities which are allocated to its shareholders in proportion to their respective shareholdings, reducing its capital and reserves accordingly, and if applicable, making a cash payment not exceeding 10% of the nominal value of such securities;

(3) Partial De-merger of a Substantial Holding: an entity, without being dissolved, contributes a majority interest in the capital of other entities to a newly created or existing undertaking in exchange for securities representing the capital of the latter entities which are allocated to its shareholders in proportion to their respective shareholdings, reducing its capital and reserves accordingly, and if applicable, making a cash payment not exceeding 10% of the nominal value of such securities; or

(4) In-Kind Contribution of a Business: an undertaking, without being dissolved, contributes the whole of one or more businesses to a newly created or existing undertaking by means of a transfer of shares in the acquiring undertaking (this is distinguished from a de-merger in that the shares received in consideration for the contribution of the business are kept by the contributing undertaking, whereas in a de-merger such shares are allotted to its shareholders).

In order to qualify for the tax neutrality system, the income generated on the transaction must be one of the following:

(A) Income arising from transfers by entities resident in Spain of property and rights located therein. Where the transferor or transferee entity is resident abroad, only income deriving

49

from a transfer of elements connected with a permanent establishment located in Spain may be excluded from taxable income;

(B) Income arising from transfers by entities resident in Spain of permanent establishments located in non-member States of the European Union to entities resident in Spain;

(C) Income arising from transfers by entities, which are not resident in Spain of permanent establishments located within Spain; or

(D) Income arising from the transfer by entities resident in Spain of permanent establishments located in European Union Member States to entities resident in said States which take one of the forms set out in the Annex to the Parent/Subsidiary Directive and which are subject to and not exempt from one of the taxes mentioned in article 3º therein..

Furthermore, the income generated by the shareholders as a consequence of the reorganization will not be subject to Spanish taxation provided the said shareholders are resident in Spain or a European Union Member State or any other State provided that, in the latter case, the shares represent the capital of an entity resident in Spain.

Finally, it must be noted that the incorporation of a Spanish company will trigger notary fees and registration costs equivalent to approximately 0.05% of the total committed capital.

6.8.4. Transfer Pricing

The Spanish tax authorities may value transactions between related companies on an arm’s length basis, to the extent that the valuation agreed upon by the related parties, taking into account the related persons and entities as a whole, results in (i) taxation in Spain lower than would have resulted if the fair market value had been applied or (ii) a deferral of such taxation. Related entities are those defined in article 16.2 of the CIT.

A fair market value is deemed to be the value agreed upon among unrelated parties, unless it can be shown that a different value should prevail. There are no specific rules or guidance to determine the fair market value for a given related transaction. However, the OECD rules applicable for transfer pricing are applied on a supplementary basis, that is the cost plus method, resale minus method and price apportionment between the relevant parties, taking into account the risks assumed, the assets involved and the functions of the related parties.

In order to resolve the issue of transfer pricing on a preliminary basis, the CIT provides for the possibility of submitting to the authorities a preliminary proposed valuation of transactions between related parties (Advance Pricing Agreement or “APA”).

50

6.8.5. Controlled Foreign Corporation.

The ETVE, as any other Spanish resident company, is subject to CFC rules (“Transparencia Fiscal Internacional”). Under the CFC rules, certain income generated by a foreign entity participated in by the ETVE, provided that the ETVE has a minimum 50% participation in its capital, equity, P/L, or voting rights, will be imputed as taxable income of the ETVE if, in addition, such income (i) qualifies as tainted income (such as financial income, passive real estate income, etc) and (ii) is subject to a tax lower than 75% of the Spanish CIT that would have been payable.

7. IRELAND 7.1. INTRODUCTION.

Tax is a very important consideration in reaching a decision as to where to locate an overseas holding company; other relevant, non-tax factors will include the political and economic climate of a jurisdiction, exchange control restrictions and the existence of a well-developed business infrastructure. In all the non-tax considerations, Ireland scores highly but, until recently, it would not have been seen as a successful holding company jurisdiction and nor would it have sought to compete with, for instance, the Netherlands, for this accolade. This is, however, changing and there are a number of tax factors which cause Ireland to be considered anew as a jurisdiction of choice for a holding company.

As mentioned in the introduction to this paper, an optimal holding company location will possess some or all of the folowing tax related attributes:

(1) An exemption from tax on dividends received;

(2) An exemption from capital gains tax on the disposal of group companies;

(3) Absence of withholding tax on dividend, interest and royalty payments (both inward and outward); and

(4) Access to an extensive tax treaty network.

The combined effect of recent changes to the Irish tax code in relation to credit relief for foreign taxes and the lowering of tax rates makes Ireland an attractive location for establishing holding companies, in certain circumstances. As against this, there is no comprehensive dividend or capital gains tax participation exemption.

7.2. CORPORATION TAX RATE.

51

7.2.1. Trading Income. The rate of corporation tax on trading income has been reduced in recent years and is to be further reduced further until it reaches 12.5% in 2003. The corporation tax rate for 2002 is 16% and this will decrease to 12.5% with effect from 1st January, 2003. Dividend income from Irish resident companies can be received tax-free by an Irish resident company.

7.2.2. Passive Income.

A corporation tax of 25% applies to non-trading or passive income. This rate will apply to the investment income of a holding company, such as dividends and interest income. The receipt of royalty income may or may not qualify for the 12.5% rate of tax applicable to trading income, depending upon whether the recipient of the royalties could be said to be actively trading.

7.3. TAX DEDUCTION FOR EXPENSES .

A tax deduction will available for any related costs of management of an Irish holding company, if the company is regarded as an investment company for the purposes of §83 Taxes Consolidation Act 1997. A company will be regarded as an investment company if the business consists wholly or mainly in the making of investments provided it derives the principal part of its income from the making of investments.

Costs of management have not been defined in Irish legislation but have been considered in numerous cases in the U.K. Under Irish jurisprudence, U.K. case law is considered to be persuasive interpretations of law, but are not binding authority. The case law in the U.K. on the subject has both broad and narrow views. The broad is that any expense incurred by management is deductible. In comparison, the narrow view is that only the expenses of management in determining company policy and managerial decisions in relation to the making of investments are deductible. There is only one Irish case on this issue, and it is generally viewed to favor the broader view. However, the Irish Revenue have published guidance confirming that in relation to directors’ remuneration, only the portion of the remuneration which can reasonably be related to the duties performed may be treated as tax deductible.

7.4. CAPITAL GAINS TAX RATE.

As noted above, Ireland does not have a participation exemption for capital gains tax on the disposal of foreign subsidiaries. The rate of Irish capital gains tax is generally 20%. Therefore, any gains chargeable to Irish capital gains tax on the disposal by an Irish holding company of a foreign subsidiary are taxable at 20%

52

(subject to the existence of relief for indexation and deduction of costs of acquisition and disposal). A number of countries provide an exemption from capital gains tax on capital gains generated on the disposal of participations in subsidiaries. It may thus be appropriate to avoid a charge to Irish capital gains tax arising at the level of the Irish company by interposing a sub-holding company in a jurisdiction which has a participation exemption for capital gains.

7.5. IRELAND’S DOUBLE TAXATION TREATY NETWORK.

Ireland has double taxation treaties with a large number of countries. Under Ireland’s tax treaty network, credit relief for foreign taxes is allowed against Irish tax. Given that Ireland is now a relatively low tax jurisdiction, the foreign effective rate should in many cases exceed the Irish effective rate of tax, in which case no additional Irish tax is payable in respect of the income in question.

7.6. E.U. PARENT/SUBSIDIARY DIRECTIVE.

The directive was implemented in Ireland in the Finance Act 1991 and was designed to reduce tax barriers to flows of profits between companies resident in different EU Member States. Where the flow of profits is from a 25% subsidiary to a parent, the following reliefs apply to distributions of profit:-

(1) Withholding tax is not to be deducted from the distributions by the subsidiary’s country of residence;

(2) Withholding tax is not to be deducted by the parent’s country of residence;

(3) The parent company’s country of residence must either exempt the parent company from corporation tax on the distributions from the subsidiary, or allow credit for underlying corporation tax or equivalent foreign tax suffered by the subsidiary on the profits out of which the distribution is made. Ireland has adopted the foreign tax credit alternative.

7.7. CREDIT RELIEF FOR FOREIGN TAXES

Unilateral tax credit relief is available to an Irish resident company in respect of foreign tax on dividends received from nonresident companies. There must be a 25%, direct or indirect, ordinary shareholding

53

relationship. This relief was originally available only where Ireland had a tax treaty with the jurisdiction imposing the tax. However, since 1998, the relief has been broadened by eliminating the tax treaty requirement.

7.7.1. Relevant Dividend.

Relief is given in respect of “relevant dividends”. A relevant dividend is a dividend paid by a nonresident company to:

(1) Its Irish resident parent which holds either directly or indirectly at least 25% of the ordinary share capital of the payer company, or

(2) An Irish resident 50% subsidiary of the parent.

The foreign tax on a dividend for which relief is available includes withholding tax on the dividend paid and tax paid in the territory concerned by the company paying the dividend on its profits insofar as the tax is properly attributable to the proportion of the profits represented by the dividend.

7.7.2. Calculation of Credit for Foreign Taxes Suffered.

The re-grossing rule to be applied where an Irish resident company receives income from a foreign source net of foreign tax and where credit is available in Ireland for such foreign tax, is as follows:

(1) Calculate the Irish effective rate of tax and the foreign effective rate of tax. (2) Gross up the foreign income net of foreign tax (net foreign income) at the lower of the two

effective rates calculated at paragraph (1) above.

54

(3) Calculate the credit relief available by multiplying the grossed up foreign income calculated at paragraph (2) above by the lower of the two effective rates calculated at paragraph (1) above.

(4) Include the figures calculated at paragraphs (2) and (3) above in the appropriate part of the Irish corporation tax computation, i.e. Schedule D Case III in the case of grossed up foreign dividends.

(5) The foreign tax credited thus calculated is deducted from the Irish tax charge in respect of the dividends, to calculate the net Irish tax payable.

The net effect of the relief is that where the foreign effective rate exceeds 25%, no additional Irish tax will apply to the dividend to which the tax charge relates.

7.7.3. Use of Mixer Companies.

There has been considerable debate as to whether an offshore mixing company can be used to mix dividends ultimately received by an Irish holding company. One view is that an offshore mixing company can be used to blend underlying tax rate. This is an area in which specific clarification from the Irish Revenue Commissioners would be helpful.

7.8. Dividend Withholding Tax.

The standard rate of income tax will apply to dividends paid by an Irish resident company. The withholding tax requirement will not apply to dividends paid to certain categories of Irish resident shareholders, nor to dividends paid to certain categories of non resident shareholders, provided appropriate declarations are made by such shareholders to the company that pays the dividend.

Non resident shareholders who can avail of the exemption include:

55

(1) Companies not resident in Ireland which are controlled directly or indirectly by persons who are resident for tax purposes in a tax treaty country or an E.U. Member State other than Ireland and who are not controlled directly or indirectly by persons who are not so resident;

(2) Companies not resident in Ireland and resident in a tax treaty country or another E.U. Member State and not under the control of persons resident in Ireland;

(3) Companies, the principal class of whose shares are substantially and regularly traded on a recognized stock exchange in a tax treaty country or an E.U. Member State other than Ireland or any other stock exchange approved by the Minister for Finance, and their 75% subsidiaries; and

(4) Companies owned by two or more companies, where the principal class of the shares of each company is substantially and regularly traded on one or more stock exchange in an E.U. Member State or in a tax treaty country or on such other stock exchange as may be approved by the Minister for Finance.

To qualify for the exemption, the recipient must make a declaration on a prescribed form to the company. No declarations are required where the shareholder is a 25% parent company resident in another E.U. Member State pursuant to the EU Parent Subsidiary Directive.

7.9. Thin Capitalization.

There are broadly two ways in which an investment in a company can be financed – it can be financed by debt or equity. Generally speaking, interest paid on an outstanding debt will be tax deductible whereas dividends representing a return on equity will not. In recent years, a number of jurisdictions have introduced debt-to-equity ratios – or thin capitalization rules – to reduce the erosion of the tax base.

Ireland does not have thin capitalization legislation and the efficacy of interest relief is increased by the comprehensive group relief regime which exists in Ireland.

56

7.10. Controlled Foreign Company (“C.F.C.”) Legislation

Ireland does not have any domestic C.F.C. legislation.

7.11. Transfer Pricing

Although it has been suggested that Ireland is ready to introduce transfer pricing legislation along the lines of the O.E.C.D. principles, this has not been done to date.

8. United Kingdom

8.1. Introduction

The United Kingdom has long formed the de facto European or international headquarters for many U.S. based multinational companies. The U.K. system of taxing individuals who are resident but not domiciled in the U.K. in respect of their foreign source income and capital gains – those items of income and gains are taxed only to the extent remitted to the U.K. – has made the U.K. an attractive and cost-effective centre for locating foreign executives. Historically, the corporate tax regime was less inviting and the ownership of European or international operations often bypassed the U.K. management center. However, as a result of recent successive legislative reforms,6 the U.K. now offers a number of attractive features:

(1) No capital gains tax generally on the sale of shares in U.K. companies by nonresidents. (2) No withholding tax on dividends paid by U.K. companies to nonresident shareholders.

(3) No capital taxes on formation or paid-in capital of companies.

6 The most significant reforms are contained in the 2002 Finance Bill, which at the time of writing is passing through Parliament. This article is based on the Finance Bill. It is used for finance legislation introduced by the Government to be passed by Parliament substantially in the form introduced.

57

(4) Foreign tax credit system which permits (within limits) pooling of foreign source dividends to maximize foreign tax credit.

(5) Exemption from tax on capital gains on the sale of substantial shareholdings involving trading

groups.

(6) Competitive 30% corporation tax rate.

(7) The largest tax treaty network in the world. 8.2. Corporate Tax Rate.

The main corporation tax rate in the U.K. is 30%. This is levied on the worldwide income and gains of U.K. resident companies. Capital gains are taxed at the same rate as income. However, the base cost of assets is indexed by reference to the U.K. retail price index to eliminate gains based on inflation. The starting rate of tax is 0% for companies whose profits do not exceed £10,000 and an intermediate rate of tax of 19% exists for companies whose profits do not exceed £300,000 for the year. Between those rates, marginal rates are applied, so that companies earning in excess of the relevant thresholds have all of their income taxed at the higher applicable rate.

Computation of profits for corporation tax purposes will henceforth follow U.K. GAAP7. As a result of successive reforms, specific codes apply accounting principles to profits on loan relationships (interest), foreign exchange gains and losses, derivative contracts, and intellectual property rights and other intangibles.

8.3. Dividends Received By U.K. Companies.

In principle, corporate profits within groups are taxed only in the company where earned. As a result, dividends paid by a U.K. resident company to a U.K. resident corporate shareholder are not subject to tax. This exemption applies regardless of the size of shareholding.

Dividends paid by non-U.K. resident companies to U.K. resident corporate shareholders are however subject to corporation tax in the hands of a U.K. corporate shareholder. Relief for foreign tax is provided in the first instance by treaty. Where treaty relief is unavailable, unilateral relief is available under domestic law.

7 Finance Bill 2002, Clause 101.

58

8.4. Foreign Tax Credit.

As a general rule, credit is granted against U.K. corporation tax for foreign withholding tax levied on dividends. In addition, indirect foreign tax credit (referred to in the U.K. as “underlying credit tax”) is granted in respect of dividends paid by nonresident companies where the U.K. company has a substantial interest in the foreign company. The threshold is, in most cases, determined by treaty. The usual requirement is that the recipient company must own shares that represent at least 10% of the voting power in the paying company. Provided that the dividend payer and the recipient are related, underlying tax in this context includes underlying tax from related companies through an indefinite number of successive levels in the corporate chain. For this purpose, two corporations are related where the shareholder receiving the dividend directly or indirectly controls not less than 10% of the voting power in the paying company. Alternatively, the shareholder may be a subsidiary of a company that controls the dividend-paying company under the foregoing standard.

8.4.1. Source of Income.

Although the U.K. does not have a “basket” system for allocating foreign tax credits, the “source” doctrine has imposed significant restrictions on the pooling of foreign tax credits. The shares in a foreign company constitute a distinct source, and the foreign tax may only be credited against income from that particular source. In certain cases, a particular class of shares in a company may be a distinct source.

8.4.2. Mixer Companies and Pooling.

In order to blend income from different foreign affiliates taxed in foreign jurisdictions at varying tax rates, it was common several years ago to hold foreign subsidiaries through a nonresident “mixer” company. This effected a blending of foreign income and underlying tax to be credited against all dividends paid by the mixer to the U.K. parent company. Such mixers were typically located in the Netherlands or Luxembourg.

The current tax regime eliminates the utility of an offshore mixer, and indeed, provides some disincentives to holding foreign companies through a chain of subsidiaries in respect of dividends paid by other foreign companies from April 1, 2000. Mixing of dividends outside the U.K. is eliminated by capping the credit for foreign tax at a rate equal to the main U.K. rate at each level in the corporate chain.

Offshore mixing has, however, been replaced with onshore pooling of foreign tax credits. The use of pooling eliminates the need to have a two-tier structure involving offshore mixer companies. The current rules relating to foreign tax credits allow excess foreign tax from one source (i.e., one foreign company) to be applied against foreign tax in respect of dividends paid by other foreign companies. Foreign tax in excess of the main U.K. rate (eligible unrelieved foreign tax or “E.U.F.T.”) is now available to be credited against U.K. tax on dividends from foreign sources. E.U.F.T. may also be surrendered between members of a U.K. tax group to

59

the extent that it is not used within the company in receipt of dividends. Unused E.U.F.T. may be carried back three years and carried forward indefinitely. This pooling is not unlimited. First, there is no credit to the extent that the foreign tax on non-U.K. dividend income exceeds 45%. Second, it cannot be offset against tax in respect of a dividend which itself gives rise to E.U.F.T. Since E.U.F.T. may be generated at any level in the foreign corporate chain, this imposes a positive disincentive to hold foreign affiliates through intermediate holding companies. Third, E.U.F.T. cannot be offset against dividends paid by foreign affiliates which are controlled foreign companies and where the dividend is paid by the C.F.C pursuant to an “acceptable distribution policy.” This is discussed below.

8.5. Dividends Paid By U.K. Companies to U.S. Shareholders

The U.K. does not impose withholding tax on dividends. Advance Corporation Tax was abolished for dividends paid after April 6, 1999. A number of treaties, however, continue to extend the repayment of dividend tax credits to qualifying residents of treaty countries. Dividends and other qualifying distributions paid by U.K. resident companies carry a tax credit of one ninth of the amount of the dividend or distribution. Under the 1975 U.K.-U.S. Income Tax Treaty, for example, U.S. corporations with at least 10% of the voting control of U.K. companies are entitled to a repayment of one half of the tax credit less a withholding of 5% on the dividend plus half credit repayment. In the case of other investors, they are entitled to a repayment of the whole tax credit, less a withholding of 15% on the cash dividend plus credit. However, since the tax credit was set at one ninth of the dividend from 6 April 1999, the effect of the withholding is that any repayment to portfolio investors is eliminated. Substantial shareholders can only claim repayment of the credit by seeking a refund pursuant to an applicable treaty. Entitlement to this repayment will be withdrawn when the U.S.-U.K. Income Tax Treaty signed in 2001 enters into effect.

8.6. Capital Gains Tax Exemption on The Disposal of Operating Company Shares.

From 1 April 2002, the disposal by U.K. companies of shares in operating companies may qualify for exemption from U.K. tax on the gain, if certain substantial shareholding requirements are met. The main requirements are essentially:

8.6.1. Substantial Shareholding.

The investing company must have had a substantial shareholding in the company investing in throughout a 12-month period beginning no more than two years before the day on which the disposal takes place. A substantial shareholding is at least 10% of the company’s ordinary share capital. The shareholder must also be beneficially entitled to not less than 10% of the profits available for distribution and 10% of the assets on a winding-up.

60

8.6.2. Trading Company Limitations.

The investing company must have been a trading company or a member of a qualifying group from the start of the 12-month period ending at the time of the disposal. It must also be a trading company or member of a qualifying group immediately after the disposal. A qualifying group is a trading group. In addition, the company invested in must have been a trading company over the same time period, the holding company of a trading group or a trading sub-group.

A trading group means a group in which one or more members carry on trading activity. In addition, the activity of the group members, when taken together, must not include “to a substantial extent” activities other than trading activities. “Trading company” and “trading sub-group” are defined in a similar manner. The Inland Revenue have indicated that they will interpret this as meaning that 80% of the value of the group must be attributable to trading activity.

For this purpose, a 51% holding in a company is sufficient to make that company a group member. Under this definition, the activities of companies in which minority participations are held are ignored in determining whether a group qualifies for the exemption. However, in the normal course, smaller participations in joint ventures will fall outside the group and, on ordinary principles, could be treated as investments by the group member holding the participation.

To avoid relatively harsh results when a group member invests in a joint venture, joint ventures are given special recognition. Under a special rule, a participation in a joint venture company will not dilute the trading activity of the company, as long as the holding is at least 10%. A joint venture company in this context is one where at least 75% of the shares are held by five or fewer persons. Intra-group activities are ignored for this purpose. In addition, funds held for the purpose of reinvestment in a trading company of a qualifying joint venture shareholding are regarded as part of the trading activity provided the investment is made within a reasonable time. An anti-avoidance provision seeks to deny the exemption where arrangements are made with the sole or main purpose of securing the exemption and the profits of the company being sold are untaxed. This is likely to be of narrow application.

A related amendment to the rules on foreign exchange gains and losses will clarify that any gain or loss which would have arisen under the foreign exchange matching rules, connected with a disposal of a substantial shareholding, will no longer be a chargeable gain or capital loss. This is a logical extension of the exemption in relation to foreign shareholdings where the currency exposure has been hedged.

Disposals of shareholdings that do not meet this requirement will be liable to corporation tax on any gains realized on the disposal. Capital losses are allowable, but may be only offset against capital gains of the accounting period of the company in which the disposal arises, or may be carried forward.

61

8.7. Capital Gains on The Disposal by Nonresidents Of Shares In U.K. Companies

The United Kingdom does not normally tax the disposal of shares in U.K. companies by nonresident shareholders.

A limited exception exists in the case of shares of oil companies whose value is based on exploration or exploitation rights in the U.K. sector of the North Sea. In addition, anti-avoidance provisions relating to U.K. real property may, in certain circumstances, trigger a liability to income tax on the sale of shares of companies whose value is based on U.K. real estate. Shares forming part of the assets of a U.K. branch of a nonresident company may also be liable to capital gains tax.

8.8. Capital Tax And Stamp Duty.

There is no capital tax on the formation of a company or on any capital paid in. No stamp duty is paid on share subscriptions. Transfers of shares of U.K. companies are liable to stamp duty or stamp duty reserve tax at 0.5% of the consideration for the sale. This may be increased to 1.5% where incorporated companies are issued or transferred into a clearing system or a depository receipt facility.

8.9. Tax Treaty Network.

The U.K. has in effect treaties with 106 jurisdictions. The significance of the extensive U.K. treaty network is in reducing or eliminating non-U.K. taxes on payments made to recipients that are resident in the U.K. The U.K. treaty negotiating position is to seek to eliminate withholding taxes on interest and royalties. About one quarter of the U.K. treaties achieve this, with others typically reducing the rates. Almost all treaties reduce foreign withholding taxes on dividends. In the case of dividends paid by subsidiaries in other E.U. member states, the European Parent/Subsidiary Directive eliminates withholding tax. A 25% minimum holding is required to qualify under the Directive. U.K. treaties commonly exempt the disposal of shares from capital gains tax in the source state.

8.10. Debt Financing of U.K. Companies.

The U.K. has liberal rules in connection with the deduction of interest expense. Most interest expense and other costs of debt finance are deductible. Deductibility is determined in accordance with an authorized accounting method. Either an accruals or mark-to-market basis may be used. Related party financing must be in accordance with the accruals method. These rules apply in relation to “loan relationships.” Loan relationships are broadly defined and exist in respect of a money debt that arose from a transaction for the lending of money. This is the case where a company is either a debtor or a creditor. A money debt for this purpose is one that is satisfied by the payment of money or the transfer of rights under a debt that is itself a

62

money debt. Where a company issues an instrument as security for a money debt, a loan relationship similarly exists.

Anti-avoidance provisions permit the disallowance of interest expense where the interest or loan relationship has tax avoidance as its purpose, or as one of its main purposes. Although the legislation is widely drawn, it is generally regarded as applying in limited circumstances. In particular, recent discussions relating to interest expense in order to acquire shareholdings that qualify for exemption from corporation tax under the new substantial shareholdings exemption described above will be permitted. Likewise, borrowing which is connected with the purchase of shares in respect of which foreign tax credits eliminate the U.K. tax liability are normally regarded as not contravening these rules. Other anti-avoidance provisions also aimed at denying interest expense deductions have limited application.

The U.K. does, however, have thin capitalization rules. Interest may be re-categorized as a “distribution” or dividend in a variety of circumstances. The most important is where the U.K. borrower is a 75% subsidiary of the foreign lender, or the U.K. lender and foreign borrower are both part of a group in which a common parent company has a 75% interest, directly or indirectly. The U.K. has neither fixed ratios nor safe harbors in this respect. A facts and circumstances approach is adopted based on ordinary transfer pricing principles. However, as an administrative matter, the Inland Revenue do not normally question related party borrowings where there is a debt to equity ratio of one to one and interest is covered by earnings in a ratio of one to three. Higher gearing can be agreed with the Inland Revenue on a case by case basis.

The general transfer pricing rules may also be applicable in the context of related party financing where a 75% corporate group does not exist. The broad scope of the transfer pricing legislation may bring in a variety of indirect financing structures, although the scope of the application of this rule is narrower than the scope asserted by the Inland Revenue.

Most U.K. source interest is subject to withholding tax at the rate of 20%. Exclusions apply for “short” interest which is interest on debt with a term of less than one year. Interest on “quoted Eurobonds” may also be paid without deducting tax at source. A quoted Eurobond is a debt security issued by a company which carries a right to interest and is listed on a recognized Stock Exchange.

8.11. Controlled Foreign Companies.

The U.K. controlled foreign companies regime seeks to apportion the profits of a controlled foreign company (“C.F.C.”) to its U.K. corporate shareholders.

8.11.1. Control.

63

Control for this purpose is widely defined to cover a variety of circumstances in which a party can ensure that the non-U.K. resident company’s affairs are conducted in accordance with its wishes. It also applies to certain joint venture companies in which a U.K. shareholder has at least 40% of the non-U.K. resident company and another shareholder has at least 40% but not more than 55% of the joint venture vehicle.

8.11.2. Low Tax.

The regime only applies if the C.F.C. is located in a low tax jurisdiction. This is generally where the profits are subject to an effective rate of tax of less than 75% of the U.K. rate on those profits determined in accordance with U.K. rules. In addition, specific rules are aimed at including so-called “designer” corporate tax regimes, which offer facilities such as agreeing the rate of tax, so as to meet the U.K. C.F.C. level of tax. This includes Guernsey and Jersey in the Channel Islands. Further jurisdictions may be designated by regulation. The Finance Bill 2002 proposes to extend Treasury powers to designate jurisdictions in respect of which the normal exemptions from C.F.C. apportionment would apply. No such jurisdictions have been identified and it is believed that this measure has been introduced in order to demonstrate to other OECD member countries that the U.K. Government is putting in place measures to retaliate against jurisdictions engaging in harmful tax practices.

8.11.3. Applies to Profits, Not Gains.

The C.F.C. regime seeks only to apportion profits liable to be taxed as income, rather than capital gains, to the U.K. corporate shareholders. Capital gains are therefore not within the C.F.C. rules. However, certain items which in general terms might be thought of as giving rise to capital gains may not so qualify. In particular, the introduction of a new tax regime relating to the taxation of intangible property eliminates the distinction between capital gains and ordinary income, taxing all amounts as income. As a result, disposals by C.F.C.’s of A bundle of assets that include intangible assets will result in a potential apportionment of profit to U.K. corporate shareholders. The most common example is likely to be goodwill.

8.11.4. Planning Opportunities.

U.K. Corporate shareholders can avoid apportionment of the C.F.C. profits in several circumstances:

(1) The C.F.C. pursues an “acceptable distribution policy”. This broadly involves distributing 90% of the profits by way of dividend.

(2) Throughout the relevant period, the C.F.C. is engaged in exempt activities. This generally

requires trading activity effectively managed from a business establishment in the country of residence, as well as certain permitted holding company functions.

64

(3) The C.F.C. is listed on a recognized Stock Exchange where at least 35% of the voting power in the company is publicly held and the shares are traded. Only a Stock Exchange in the country of residence is acceptable.

(4) The chargeable profits for the relevant accounting period do not exceed £50,000.

(5) The company is resident in a country specified in the Excluded Countries Regulations. This comprises a white list for certain jurisdictions and a list where companies may qualify if they do not participate in certain local tax favored regimes.

(6) The main purpose of the company’s existence is not avoidance of U.K. tax.

* * *

9. CONCLUSION

For the U.S. company expanding abroad, each of the foreign countries discussed above provides opportunities to reduce overall tax burden through the use of a holding company. Each of the countries provides various forms of tax relief designed to attract investment. However, each country brings with it a unique set of rules and potential tax issues. The choice of country likely will require an in-depth projection of the anticipated levels of investment, dividend income, and potential gains that are anticipated abroad.