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: Example Fund Details
information dated 2004
Investors should take their own counsel regarding taxation.
The summary set out below has been based upon (I) the information relating to the organisation and management as set out in this Information Memorandum and (II) tax laws and regulations currently in effect. The tax laws are subject to change by executive, legislative, judicial or regulatory action and in some instances changes may have retrospective effect.
The discussion below is a general summary only. It does not address in detail the tax consequences relevant to individuals nor to particular categories of investors subject to special tax treatment (e.g., dealers in securities, insurance companies, tax exempt entities and banks). Shareholders are urged to consult their own tax advisers to determine the particular tax consequences to them (in particular the application and effect of the tax laws of the jurisdiction of their residence and any applicable treaty) of the acquisition, ownership, redemption and/or disposition of Limited Fund Interests or Fund assets.
Neither The Fund, the Sponsors or the Manager nor any of their advisers accept any responsibility to the Shareholders for the tax consequences to them.
Each United States Shareholder will be required to report on its income tax return its share of the income, gains, losses, deductions and credits of The Fund for the taxable year ending within or with the taxable year of such United States Shareholder whether or not any distribution (or amount thereof of money or property is made to the Shareholder.
Subject to generally applicable limitations under the Internal Revenue Code (the Code), the United States Shareholders will be able to claim as a tax credit against tax liability the amount of any foreign withholding or income tax imposed on their distributive share of income received by The Fund.
The following is a summary of the anticipated United States tax consequences which may be relevant to a prospective US taxpaying Shareholder. This summary is not intended as a substitute for professional tax advice, nor does it purport to be a complete discussion of all tax consequences that could apply to this investment. Each prospective United States investor is urged to seek their own advice from United States based professional tax advisors as to the tax treatment of their investment in The Fund.
The Fund believes that it will be classified as a Fund and not as a corporation for United States Federal income tax purposes. The Fund will not secure a ruling from the Internal Revenue Service with respect to its classification. The Fund has obtained an opinion of tax counsel to the effect that The Fund will be classified as a Fund for United States Federal income tax purposes. However, investors should be aware that an opinion of counsel is not binding on the Internal Revenue Service or the courts. If The Fund were characterised as a corporation for United States tax purposes, no United States corporate tax should result provided The Fund was not engaged in a trade or business in the United States. The Fund intends to conduct its operations so that it will not be treated as so engaged. The Fund would constitute a passive foreign investment company and United States investors would be subject to the passive foreign investment company rules. The discussion below assumes that The Fund will be classified as a Fund for Federal income tax purposes.
For United States Federal income tax purposes, The Fund Loans should be viewed as additional equity contributed in respect of such Shareholder’s Fund interest. The amount of such Loan will increase a Shareholder’s adjusted basis with respect to its Shareholder’s interest and distributions "in repayment" of such loans will be treated as distributions with respect to such Fund interest.
As noted, each United States Shareholder must include in its own income tax return each year its allocable share of The Fund income, gain, loss, or deductions, or foreign tax credits (tax items) and must determine its tax liability, if any, with respect to its share of The Fund’s taxable income whether or not it has received or will receive any cash distributions from The Fund. The Fund will provide each United States Shareholder with an information return that should enable such Shareholder to include its share of the tax items on its return. The Fund is not required to distribute profits or gains in each year. Consequently, a Shareholder’s tax liability, if any, with respect to its share of Fund taxable income may exceed the cash, if any, distributed to such Shareholder in a given year.
In general, cash distributions, to the extent they do not exceed a Shareholder’s adjusted tax basis in its Fund interest, will not result in taxable income to such Shareholder, but will reduce the adjusted tax basis of its interest. Distributions in excess of a Shareholder’s adjusted basis in his Fund interest will result in the recognition of gain to the extent of such excess. However, gains recognised by The Fund which are allocated to a Shareholder will increase such Shareholder’s adjusted basis in its Limited Fund interest, so that, if such gains are distributed, they will in effect only be taxed once to the Shareholder. If a Shareholder disposes of its interest, such dispositions will give rise to a gain if the amount realised exceeds the adjusted basis of such interest. Certain rules may apply to recharacterise a portion of the gain (on a sale or a distribution in excess of the basis) as ordinary income or as subject to the PFIC provisions described below.
The Fund anticipates investing in operating companies that will not be passive foreign investment companies (PFICs) within the meaning of section 1296 of the Code and thus, disposition of such companies at a gain should not be subject to the throwback rules and interest charge provisions that generally apply to PFICs that have not made an election for the PFIC to be a qualified electing fund. In certain cases, investments may be made through intermediate holding companies, where the intermediate holding company owns less than 25% of the value of the underlying operating company. In such a case the Manager will attempt to have the intermediate company structured as a Fund for US tax purposes. While there can be no complete assurance that certain investments, whether with respect to the intermediate holding companies or the underlying operating companies, will not be PFICs, the Manager will attempt to structure acquisitions to avoid PFIC characterisation.
The Fund acts as a trader, and not as a dealer, in that The Fund buys and sells securities for its own account. Under current tax laws, net capital gains of non-corporate Shareholders is fully includable in income. The excess of a non-corporate Shareholder’s share of Fund capital losses over such Shareholder’s share of Fund capital gains is deductible only against his capital gains from this and other sources, plus up to $3,000 of ordinary income each year. Unused capital losses may be carried forward indefinitely and used to offset capital gains plus up to $3,000 of ordinary income each year, but may not be carried back. As a result of these limitations, among others described herein, an individual Shareholder should anticipate that his share of The Fund’s capital losses, if any, will not materially reduce his Federal income taxes arising from his ordinary income from this and other sources.
Individual Shareholders should also be aware of the applicability of section 67(c) of the Code which permits an individual to deduct miscellaneous itemised deductions, including his investment expenses other than interest, only if such items exceed 2% of his adjusted gross income (and are not deductible at all for alternative minimum tax purposes). Additional limitations apply to further reduce the deductible portion. The Code also places limitations upon deductibility of interest on funds borrowed to acquire or carry assets held for investment purposes by taxpayers other than corporations.
In the case of a corporate Shareholder, all capital gains are fully includable in income and taxed at the same tax rate as other income. Capital losses may be offset only against capital gains, but unused capital losses may be carried back three years or forward five years. The amount that can be carried back is limited to an amount which does not cause or increase a net operating loss in a carryback year.
Plans subject to ERISA, individual retirement Funds and other entities exempt from Federal income taxation under Section 501(a) of the Code will be subject to taxation, under Section 511 of the Code on their "unrelated business taxable income" (UBTI). A portion of The Fund assets may be "debt financed", in that they will be acquired using borrowed monies. As such, a portion of any income and gain from such investment, as well as a portion of any gain realised by such Shareholder on a sale of its Fund Interest, will constitute UBTI. A tax exempt Shareholder may be able to avoid UBTI by making its investment through a foreign corporate entity. Prospective tax exempt Shareholders should consult their own tax advisor as to the appropriate structure to make their investment in The Fund.
In additional to Federal income tax consequences, described above, the Shareholders may also be subject to various state and local taxes.
The foregoing summary is not intended as a substitute for professional tax advice, nor does it purport to be a complete discussion of all tax consequences that could apply to this investment. In addition, the foregoing does not discuss estate tax, gift tax or other estate planning aspects of this investment. Accordingly, prospective Shareholders must consult their own tax advisors with respect to the effects of this investment on their own tax situation.
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