Special Bilateral Investments Andrew Wilkes, Director

1. Special Bilateral Investments Andrew Wilkes, Director

2. 1. Introduction • Overview of presentation • Objectives (of presentation) • Investment objectives • Maximise returns from investment in Eastern European property, minimise tax leakage • Tax objectives • Minimise tax leakage from the Fund, at local and holding company level • Facilitate withdrawal of income and gains by investors • Summary of the Structure • Holding Company/Finance Company – Luxembourg • Cypriot intermediate company – minimise withholding taxes • Main tax cost is small margin on interest on shareholder loans

3. 2. Summary Investors Equity Fixed Shareholder Loan Profit Participating Loan Bank Debt BVI Co Cyprus Co Lux Hold Co Lux Fin Co Local SPV Bank Asset

4. 2. Summary – cont. • Key Structuring Objectives • Tax efficient repatriation of income, minimising withholding taxes on dividends, interest payments and liquidation proceeds • Sheltering rental income from taxation in the local jurisdictions • Sheltering of capital gains from taxation in both the local jurisdictions and Luxembourg • Reduction of real estate transfer tax • Mitigating capital duty on establishment of Luxembourg entities

5. 3. Steps to establish the structure 3.1 Step 1 – Establishment of Company in British Virgin Islands (“BVI Co”) • Establish new BVI Co as fund vehicle. • BVI Co should not suffer tax on income or gains and can make distributions to investors without withholding taxes. • BVI Co enters into an advisory agreement with a UK company, but itself makes all final investment decisions. Investors BVI Co

6. 3. Steps to establish the structure 3.2 Step 2 – BVI Co establishes a Cyprus corporation Investors • Cyprus Co will be utilised to hold the shares in the Luxembourg Hold Co. • BVI Co will fund Cyprus Co with minimal shareholder equity. • Cyprus Co is interposed to enable distributions from Luxembourg Hold Co without tax leakage (to be discussed below). BVI Co Cyprus Co

7. 3. Steps to establish the structure 3.3 Step 3 – Cyprus Co establishes Luxembourg Holding Co (“Lux Hold Co”) • Lux Hold Co will be established in the legal form of a Société a Responsabilite Limitee (“SaRL”), a corporation under the laws of the Grand-Duchy of Luxembourg. • Lux Hold Co will be utilised to hold interests in corporations incorporated under the laws of various Eastern European countries which hold investment properties (“Local SPVs”). • Lux Hold Co will be funded, upon incorporation, with the minimum capital share requirement of €12,500, which would trigger capital duty of 1% on the said amount. • BVI Co will extend a profit participating loan (“PPL”) to Lux Hold Co (The PPL will be used to fund the equity in the Local SPVs). Investors BVI Co Cyprus Co PPL Lux Hold Co

8. 3. Steps to establish the structure 3.4 Step 4 – Lux Hold Co establishes a Luxembourg financing entity • Lux Fin Co will be established in the legal form of a Société a Responsabilite Limitee (“SaRL”), a corporation under the laws of the Grand-Duchy of Luxembourg. • Lux Fin Co will be funded, upon incorporation, with the minimum capital share requirement of €12,500, which would trigger a capital duty of 1%. • Lux Fin Co will finance the Local SPVs with back-to-back loans extended by BVI Co. • Interposing Lux Fin Co below Lux Hold Co will enable in most cases payment of interest from the Local SPVs to Lux Fin Co without triggering any withholding taxes. Investors BVI Co Fixed Interest Loan Cyprus Co Lux Hold Co Lux Fin Co

9. 3. Steps to establish the structure 3.5 Step 5 – Lux Hold Co establishes a local SPV Investors • Lux Hold Co will establish local SPVs in each jurisdiction to acquire and hold the local properties. • Lux Hold Co will finance each Local SPV with the minimum equity to meet local thin capitalisation and company law requirements. • Lux Fin Co will finance each Local SPV under a back-to-back shareholder loan arrangement with BVI to provide the balance of funding after equity and third party debt. BVI Co Cyprus Co Lux Hold Co Equity Local SPV Bank Lux Fin Co Bank Loan Fixed Interest Loan Asset

10. 4. Selection of an appropriate Holding and Financing Structure and Jurisdiction 4.1 Use of BVI Co as fund vehicle • 0% tax on interest and dividends • No withholding taxes on payments to investors 4.2 Use of Cyprus Co to hold Lux Hold Co • Capital gains in Lux Hold Co repatriated by PPL to BVI Co • Luxembourg thin capitalisation rules could mean 3% tax • Interposing Cyprus Co will eliminate this tax leakage

11. 4. Selection of an appropriate Holding and Financing Structure and Jurisdiction 4.3 Use of Luxembourg as intermediate holding company jurisdiction • Favourable tax regime • Familiarity of investors and wide use by property funds • Gains and income repatriated by profit participating loans • Participation exemption should ensure receipt of tax free dividends and capital gains • Lux Hold Co should also benefit from the EU Parent subsidiary Directive and the EU Interest and Royalties Directive • Dividends subject to withholding tax at 30% but avoided by interest payments on PPL. But care is needed with Luxembourg thin capitalisation rules

12. 4. Selection of an appropriate Holding and Financing Structure and Jurisdiction 4.4 Use of Luxembourg as intermediate holding jurisdiction for Lux Fin Co • Debt enables tax efficient extraction of rental income • No withholding tax for funding via EU entity (except Poland) • Local thin capitalisation rules will need to be satisfied • Lux Fin Co activities subject to tax at 30.30% on interest rate spread of 0.125% to 0.25% of principal

13. 5. Financing Issues 5.1 External acquisition financing 5.2 Shareholder acquisition financing • Equity – use of Profit Participating Loan. Fixed interest at 1% and a profit participating coupon equal to profits • Debt – back to back loan with fixed coupon from BVI Co to Lux Fin Co which extends to SPVs on same terms • Local thin capitalisation and transfer pricing rules will be considered • This enables tax free extraction of rental income from SPV

14. 6. Repatriation of rental income 6.1 Rental income repatriated by way of interest payments • Interest paid by SPVs to Lux Fin Co – 0% withholding tax due to EU Interest and Royalty Directive (except Poland) • Interest paid by Lux Fin Co to BVI Co – taxed on spread at 30.38% on back to back loan (subject to Luxembourg Advance Tax Agreement)

15. 6. Repatriation of rental income 6.2 Rental income repatriated by way of dividend • Dividends paid by SPVs to Lux Hold Co – 0% withholding tax due to EU Parent Subsidiary Directive. Dividends not taxed in Lux Hold Co if participation exemption criteria are met • Dividends received by Lux Hold Co are paid to BVI Co under profit participating loans

16. 7. Repatriation of gains 2 Ways to realise Fund’s real estate investments: (i) Disposal of SPV and repatriation of proceeds via payment on profit participating loan or (ii) Disposal of property within SPV and subsequent payment of dividend by SPV to Lux Hold Co or liquidation of SPV

17. 7. Repatriation of gains 7.1 Repatriation of gains derived from sale of shares • Sales of shares in SPVs are exempt from tax in European countries under domestic law or treaty • Sale of shares exempt from tax in Luxembourg due to participation exemption • Proceeds repatriated to BVI Co by payments on profit participating loan

18. 7. Repatriation of gains 7.2 Repatriation of gains from sale of properties • Profit in SPV taxed at local rates: • Poland 19% • Hungary 16% • Czech Republic 24% • Slovakia 19% • Dividends paid by SPV to Lux hold Co or liquidation proceeds • No withholding tax on dividends due to EU Parent Subsidiary Directive • No tax on dividends in Lux Hold Co due to participation exemption • Payment to Lux Hold Co to BVI Co under profit participating loan

19. 8. Set up Issues Cyprus Set up of entity 8.1 There is no real minimum statutory capital required for an incorporated entity. It is common for Cyprus incorporated companies to have an authorised share capital of CYP 10,000 (around €17,000) and issue a minimum of CYP 1,000 (around €1,700).

20. 8. Set up Issues Cyprus Set up of entity 8.2 In order to be tax domiciled in Cyprus a company should • be incorporated there; • not consider itself to be managed and controlled outside of Cyprus In addition, Luxembourg may require some additional substance (for instance we understand that Luxembourg will require the Cyprus company to obtain a certificate of tax residency in Cyprus and have a Cyprus director).

21. 8. Set up Issues Cyprus Set up of entity 8.2 In order to be tax domiciled in Cyprus a company should • be incorporated there; • not consider itself to be managed and controlled outside of Cyprus In addition, Luxembourg may require some additional substance (for instance we understand that Luxembourg will require the Cyprus company to obtain a certificate of tax residency in Cyprus and have a Cyprus director).

22. 8. Set up Issues Cyprus Taxation regime 8.3 Capital duty for authorisations is 0.6% on the nominal value authorised (plus CYP 60 for initial authorisations) and capital duty on issue is CYP 10 (nil if an initial issue at nominal). As an example, where 10,000 shares of CYP 1 each are authorised and 1,000 of these shares are issued (at whatever premium), the total capital duty will be CYP 130 (around €225). 8.4 No WHT on distributions to non-resident shareholders.

23. 8. Set up Issues Luxembourg Set up of entity 8.5 The minimum share capital required under Luxembourg law is €12,500. 8.6 In order to be tax domiciled in Luxembourg a company should: • have a registered office in Luxembourg; • Hold board meetings locally (however providing they are not held in the UK there shouldn’t be a risk that the company would become a UK tax resident); • Have at least one Luxembourg director (this can be a professional directors); and • Have its books and records kept locally.

24. Luxembourg Taxation regime 8.7 Luxembourg imposes a capital duty of 1% on equity 8.8 Capital gains and dividends may be exempt from taxation under the participation exemption 8.9 Note the Lux Hold Co and Lux Fin Co may be required to demonstrate and substantiate the “business substance” of the Luxembourg entities in view of the increasing trend of tax authorities across Europe to limit the eligibility to benefits under treaty and EU Directives to entities which can demonstrate such substance 8. Set up Issues

25. Tax efficient repatriation of income, minimising withholding taxes on dividends, interest payments and liquidation proceeds Repatriation of income from local jurisdictions to Luxembourg entities Establishing a Luxembourg holding and financing structure to ensure that interest \ dividends payments are exempted from withholding taxes under an applicable tax treaty or an EU Directive Repatriation of income from Luxembourg entities to BVI Co Structuring shareholder financing to ensure repatriation from Luxembourg entities in the form of interest and profit participating loan repayments Agreement with Luxembourg tax authorities enabling reduction of Luxembourg tax leakage on upstream interest payment to BVI Co Interposing a Cyprus Co between BVI Co and Lux Hold Co would enable the elimination of the Luxembourg tax leakage of 3% on payments treated as dividends from Lux Hold Co 9. Summary – Key Objectives

26. Sheltering rental income from taxation in the local jurisdictions Sheltering of capital gains from taxation in both the local jurisdictions and Luxembourg Reduction of real estate transfer tax Mitigating capital duty on establishment of Luxembourg entities Utilising: Depreciation Interest payments on third party financing Interest payments on shareholder debt Consolidation or merger enabling the offsetting of income earned by the local SPV against interest payments paid by Bid SPV The disposal of shares in the SPVs under the Luxembourg participation exemption Purchase of shares in SPVs in some countries Limiting the injected equity in Luxembourg entities to the minimum 9. Summary – Key Objectives

27. 10. Investor Issues • Varies depending on type and residence of investor • From a UK perspective: • Capital vs income • Collective Investment Schemes • Controlled Foreign Companies • Attribution of gains • Attribution of income

28. Special Bilateral Investments