1. Foreign Foundations [] San Juan, Puerto Rico, May 15, 2002 BRIAN ROWBOTHAM KENT D. LAWSON ROWBOTHAM AND COMPANY LLP ACCOUNTANTS AND INTERNATIONAL TAX CONSULTANTS San Francisco 400 Montgomery Street, Suite 600 San Francisco, CA 94104 Tel: (415) 433-1177 Fax: (415) 433-1653 email: br@rowbotham.com klawson@rowbotham.com www.rowbotham.com

2. 2 U.S. § 501(c)(3) Foundation [] deduction for fair market value of appreciated public stock limited annually to 20% of AGI U.S. PRIVATE FOUNDATION Tax-free Stock Sale o IRS registration o public disclosure o annual reporting o private foundation rules U.S. RESIDENT Rowbotha m & c o m p a n y l l p

3. 3 U.S. Private Foundation Rules [] In general the private foundation rules prohibit: self-dealing between a foundation and its founders and managers annual distributions of less than 5% of foundation asset value excess business holdings of more than a 20% equity stake jeopardizing investments in a concentrated portfolio prohibited expenditures including most grants to individuals, non-public charities, and non-operating private foundations Rowbotha m & c o m p a n y l l p

4. 4 Non-exempt Foreign Foundation [ ] FOREIGN FOUNDATION FOREIGN CORPORATION NO DEDUCTION TAX- FREE STOCK SALE o NO IRS REGISTRATION o NO PUBLIC DISCLOSURE o NO ANNUAL REPORTING o NO PRIVATE FOUNDATION RULES U.S. Resident Rowbotha m & c o m p a n y l l p

5. 5 Foreign Foundations [] Private U.S. Foundation (§509(a)) Private Foreign (Registered with IRS) Foundation: (§509(a)) Foreign Charitable Foundation (Registered in local jurisdiction only) Foreign Charitable Foundation (Not registered, Charitable provision in articles) Foreign Foundation with Charitable and Non-charitable Provisions Rowbotha m & c o m p a n y l l p

6. 6 Classification of Foreign Foundations [] Registered Charitable Foundation - Isle of Man Foundations - Liechtenstein Star Trusts - Cayman Rowbotha m & c o m p a n y l l p Possible Classifications under U.S. Tax Law: (1)Qualified Foundation (§509(a)) (2)Foreign charitable foundation (Income Tax Treaty) (3)Non-exempt foreign foundation (4)Foreign trust [§7701(30) & (31)] (5)Foreign corporation [§7701(3) & (5)] (6)Controlled foreign corporation (§951 - §960)

7. 7 Non-exempt Foreign Foundation [] The potential risks posed by non-exempt foundations to U.S. founders require analysis in several areas: gift tax pursuant to section 508(d)(2)(b) classification as a foreign corporation or trust form 3520 reporting by recipients of grants Rowbotha m & c o m p a n y l l p

8. 8 vs. Taxation of Foreign Foundation [] Foreign Charitable Foundation Non-exempt Foreign Foundation Foreign Corporation Foreign Trust (nongrantor) Rowbotha m & c o m p a n y l l p Investment Income 4% exercise tax 30% on most investment income “portfolio interest” exempt Complicated pass-through tax issues U.S. Source Unrelated Business Income on Effectively Connected Income Corporate tax rates Ordinary income tax rates Corporate tax rates plus branch profit tax Ordinary income tax rates

9. 9 Non-exempt Foreign Foundation [] The risks posed to U.S. founders by non-exempt foreign foundations can be minimized through: contribution of assets before appreciation use of the one million dollar life time gift tax exemption design of the foundation structure choice of jurisdiction and entity type drafting of organizing documents formal tax advice careful reporting Rowbotha m & c o m p a n y l l p

10. 10 § 508(a) Registered Foreign Foundation [] FOREIGN FOUNDATION ASSETS o registration with the IRS o subject to reporting and disclosure o subject to private foundation rules o limited deductions o minimizes risk regarding classification o enhances ability to receive grants and contributions NONRESIDENT Rowbotha m & c o m p a n y l l p

11. 11 § 4948 85% Foreign Foundation [] FOREIGN FOUNDATION ASSETS o exemption from IRS registration o exemption from private foundation rules o minimal risk regarding classification o useful for pre-arrival and expatriation planning NONRESIDENT Rowbotha m & c o m p a n y l l p

12. 12 U.S. & Foreign Foundations [ ] Tax Treatment of Differing Types of Foundations Rowbotha m & c o m p a n y l l p