| Passive Foreign Investment
Company Status
Based
upon its current and projected income, assets and activities,
the Company believes that it is not currently a passive
foreign investment company (a "PFIC") for U.S. federal
income tax purposes and will not be a PFIC for any subsequent
year. The Company would be classified as a PFIC if,
for any taxable year, either (i) 75% or more of its
gross income in the taxable year is passive income,
or (ii) 50% or more of the average value of its gross
assets in the taxable year, calculated quarterly by
value produce or are held for the production of passive
income. For this purpose passive income includes dividends,
interest, royalties, rents, annuities and the excess
of gain over losses from the disposition of assets which
produce passive income. If the Company were a PFIC for
any taxable year during a U.S. Shareholder's holding
period, and the U.S. Shareholder does not timely elect
to treat the Company as a "qualified electing fund"
under Section 1295 of the Code or elect to mark the
ordinary shares to market, a U.S. Shareholder would
be subject to special tax rules on the receipt of an
"excess distribution" on the ordinary shares (generally,
a distribution to the extent that it exceeds 125% of
the average annual distributions in the prior three
years) and on gain from the disposition of the ordinary
shares. Under these rules, the excess distribution and
any gain would be allocated ratably over the U.S. Shareholder's
holding period for the ordinary shares, the amount allocated
to the current taxable year and any taxable year prior
to the first taxable year in which the Company is a
PFIC would be taxed as ordinary income, the amount allocated
to each of the other taxable years would be subject
to tax at the highest marginal rate in effect for the
applicable class of taxpayer for that year, and an interest
charge for the deemed deferral benefit would be imposed
on the resulting tax allocated to such other taxable
years. The tax liability with respect to amounts allocated
to years prior to the year of the disposition or "excess
distribution" cannot be offset by any net operating
losses. Additionally, if the Company is deemed to be
a PFIC, a U.S. Shareholder who acquires ordinary shares
in the Company from a decedent will be denied the normally
available step-up in tax basis to fair market value
for the ordinary shares at the date of the death and
instead will have a tax basis equal to the decedent's
tax basis if lower than fair market value.
U.S.
Shareholders may avoid taxation under the rules described
above by making (i) a "qualified electing fund" election
for the first taxable year in which the Company is a
PFIC to include such holder's share of the Company's
ordinary earnings and net capital gain on a current
basis or (ii) a "deemed sale" election in a subsequent
year along with a qualified electing fund election if
the Company is still classified as a PFIC. However,
a U.S. Shareholder may make a qualified electing fund
election only if the Company agrees to furnish the U.S.
Shareholder annually with certain tax information. The
Company does not presently prepare or provide such information,
and such information may not be available to U.S. Shareholders
if the Company is subsequently determined to be a PFIC.
U.S.
Shareholders holding "marketable shares" (which the
Company considers the ordinary shares to be) in a PFIC
may make an election to "mark-to-market" the ordinary
shares annually, rather than be subject to the above-described
rules. Under such election, the U.S. Shareholder will
include in income each year any excess of the fair market
value of the PFIC stock at the close of each taxable
year over the U.S. Shareholder's adjusted basis in such
stock. The U.S. Shareholder generally will be allowed
an ordinary deduction for the excess, if any, of the
adjusted basis of the PFIC stock over its fair market
value as of the close of the taxable year, or the amount
of any net mark-to-market gains recognized for prior
taxable years, whichever is less. A U.S. Shareholder's
adjusted tax basis in the ordinary shares generally
will be adjusted to reflect the amounts included or
deducted under the mark-to-market election. Additionally,
any amounts included in income pursuant to a mark-to-market
election, as well as gain on the actual sale or other
disposition of the PFIC stock, are treated as ordinary
income. Ordinary loss treatment also applies to any
loss recognized on the actual sale or disposition of
PFIC stock to the extent that the amount of such loss
does not exceed the net mark-to-market gains previously
included with respect to such stock. An election to
mark-to-market generally will apply to the taxable year
in which the election is made and all subsequent taxable
years.
If
a U.S. Shareholder makes one of these two elections,
distributions and gain will not be recognized ratably
over the U.S. Shareholder's holding period or be subject
to an interest charge as described above. Further, the
denial of basis stepup at death described above will
not apply. A U.S. Shareholder making one of these two
elections may experience current income recognition,
even if no cash is distributed by the Company.
A U.S.
Shareholder who beneficially owns shares in a PFIC must
file an annual return with the IRS on IRS Form 8621
that describes any distributions received with respect
to such shares and any gain realized on the disposition
of such shares.
A number
of specific rules and requirements apply to both of
these elections and a U.S. Shareholder is urged to consult
his or her tax advisor concerning these elections. |
