Maximising tax efficiency 22 November 2006 Eleanor Watts

Maximising tax efficiency – Agenda Key considerations in relation to tax efficient structuring Options for investment in UK real estate –Offshore Special Purpose Vehicle (“SPV”) –Unit trusts –Maintaining offshore residence –UK REITs Typical structure for investment in European real estate UK legislation specific to Shariah compliant financing

Key considerations for tax efficient structuring Entry; Holding; Cash Repatriation; Exit; Gearing; and Further considerations

Key considerations for tax efficient structuring Entry and Holding Entry Local capital duty Local transfer taxes SPVs vs assets Holding Offshore holding company – low tax jurisdiction Intermediate holding company – access to treaty benefits Taxation of local SPV Management and control / substance

Key considerations for tax efficient structuring Cash Repatriation Cash repatriation can be achieved through: –payment of dividends –interest on shareholder loans –capital redemption Withholding tax on payments of interest and dividends may be avoided through: –EU Parent Subsidiary Directive –EU Interest and Royalties Directive –Tax treaty network Restrictions if a lack of distributable reserves - “trapped cash”

Key considerations for tax efficient structuring Exit and Gearing Exit Aim to minimise tax on disposal of asset by: –Holding local SPVs through intermediate holding company in a beneficial jurisdiction; or –Holding assets through a two-tier Luxembourg structure. Gearing Mitigation of tax liabilities in local SPV achieved by tax deductions for external and internal “debt” External Shariah compliant financing - provided at SPV level / holding company level? Downstream loaning of investor equity through internal loans - increase gearing (and therefore interest deductions) – Shariah compliant? Thin capitalisation and transfer pricing regulations

Key considerations for tax efficient structuring Further considerations Management arrangements / fees -Roles must be clearly structured and defined -Optimisation of recovery opportunities for VAT -Tax deductions for management fees paid

Features SPV for each investment property Gives choice for purchaser to acquire asset or shares Tax Issues SDLT efficient where shares in SPV are acquired Exempt from UK tax on capital gains 22% UK income tax on net rent after expenses Non-resident Landlord’s scheme UK thin capitalisation / transfer pricing Local taxes, depending on jurisdiction Costs and practicalities of maintaining offshore tax residence Options for investment in UK real estate - Offshore SPV TopCo (non UK) UK Property SPV (non UK) Ltd

Options for investment in UK real estate – Unit trusts Authorised – typically UK Exempt from tax on capital gains 20% tax on income as property is currently not a “qualifying investment” Unauthorised – typically offshore For capital gains purposes taxed as an offshore company i.e. in principle exempt from tax on gains Trust is tax transparent for income purposes Units in offshore vehicle can be traded free of stamp taxes. land transaction Trust land holding Unit Holders

Options for investment in UK real estate - Maintaining offshore residence Place where highest level of control is exercised Place where the Board meet and make key decisions (e.g. to invest, sell etc) Board should comprise a majority of non-UK people Board must have genuine decision-making power and the competence to exercise this Documentation

Options for investment in UK real estate UK REITs - requirements Company - Closed-ended company, tax resident in UK - Shares listed on a recognised stock exchange (not AIM) - Only one class of ordinary share capital - No one investor has beneficial entitlement to 10% or more of the shares/votes Qualifying activities - Minimum 3 properties held, no single property totalling more than 40% fair value - Excludes owner-occupied properties - 90% of tax exempt profits to be distributed (not chargeable gains) Balance of business - At least 75% of profits and assets must relate to qualifying rental business - Profits before interest must be 1.25 times interest

Options for investment in UK real estate Effect of REITs regime Entry charge 2% of market value Income and capital gains from qualifying activities tax exempt (residual activities subject to corporation tax). Must distribute 90% of taxable profits from qualifying activities (but not capital gains). Investors taxed on those dividends as if they were income from a property business (but subject to tax treaties). Must impose 22% withholding tax on dividend payments from qualifying activities

Typical structures for investment in European real estate Two tier Luxembourg structure used where tax treaty assigns taxation rights on disposal to Luxembourg – participation exemption Use of local SPV may be a legal requirement. If taxation rights on disposal are assigned to Luxembourg, sell Local SPV – participation exemption Where taxation rights are not allocated to Luxembourg, a second holdco in a favourable jurisdiction can be used to access beneficial treatment (e.g. use of Netherlands for investment in Spain).

UK legislation specific to Shariah compliant financing Treasury objectives:  Ensure that Shariah compliant financial products are taxed in a way that is neither more nor less advantageous than equivalent conventional banking products.  Remove uncertainty / disadvantages from the tax treatment of such products. Programme of legislation and consultation since 2003, including:  Removing the double SDLT charge on Ijara, Murabaha and Diminishing Musharaka mortgages – extended to corporate purchases in FB 2006  Allowing a tax deduction for alternative financing costs –  FA 2005: Mudaraba and Murabaha effective from 6 April 2005  FB 2006: Musharakah and Wakala effective from 1 April 2006