1. International Taxation – Case Study Dubrovnik, 26 September 2008 1

2. German company expanding internationally 2 parent corporation in Hannover, Germany business: manufacturing fire protection and detection devices and engineering facilities medium sized, 40 mio € sales p.a., 3-4 € mio profit p.a. existing locations abroad: United Kingdom, Netherlands, Austria expanding to: Middle East UAE, China, France, Spain, Sweden, Denmark, Singapore, Poland

3. 3 Existing structure

4. 4 Given legal structure & taxation Shareholder - individuals Germany abroad Corporate tax at subsidiary Withholding tax on distributions to parent Tax exemption at parent 95% Taxation of distribution to individuals Total taxation 50%-60% Task: Is there a possibility to lower the total tax burden? Parent corporation Subsidiary corporation

5. 5 Tax Advising Task Is there a possibility to lower the total tax burden? If yes, how can the existing subsidiary corporations transformed? If yes, how can the newly planned companies organized best? Restrictions: loss utilization, capital gains taxation, transfer pricing aspects, social security aspects, liability limitation, tax aspects of financing and royalty payments

6. 6 Structure analysis 1/2 Shareholder - individual Germany abroad corporation Shareholder - individual partnership Two levels of taxation One level of taxation, if tax exemption method for PE profits applies But no application of flat corporate tax rates Germany corporation partnership abroad

7. 7 Structure analysis 2/2 Germany abroad Shareholder – individuals partnership permanent establishment Shareholder – individuals Germany abroad One level of taxation, if tax exemption method for PE profits applies But no application of flat corporate tax rates Income taxation abroad, one level of taxation if tax exemption method applies No liability limitation abroad

8. In this structure current profits will be taxed at the PE with corporation tax. In the following the profits flow to the individual shareholders with no further taxation, since the PE profits are tax exempted under the tax treaty. A German corporation will be established. This corporation grants the application of the corporate tax scheme for pe profits abroad. The tax treaty applies the tax exemption method for PE profits. Furthermore a fiscal unity will be established between the German corporation and the parent partnership. Germany abroad corporation Shareholder - individuals fiscal unity permanent establishment - PE partnership Optimized structure 8

9. 9 D Target of tax structuring: The total tax burden consists of foreign corporate tax only Tax calculation example: Profit foreign LLP 100,00 % Less foreign corporate tax -25,00 % Pay off to Germany 75,00 % Withholding tax 0,00 % Taxation Germany 0,00 % Profit allocation to shareholder – individual 75,00 % Total tax burden 25,00 %

10. 10 Alternative optimized structure Germany abroad corporation Shareholder - individuals fiscal unity Parent partnership LLP - partnership The PE has been replaced by a LLP for reasons of better liability limitation abroad. If the partnership is tax transparent the limited partner will be taxed abroad with its income derived from the LLP with corporate tax. For tax treaty purposes the interest in the LLP is deemed to be a PE. The tax treaty applies the tax exemption method for PE profits. In the end there is only a foreign corporate tax burden. Unlimited partner 100% 0%

11. 11 Dear …….., We would like to ask you to answer some general questions concerning your countriy´s tax law. I. Facts One of our clients intends to establish a Limited Liability Partnership (LLP) in your country. Our client is a developer and manufacturer of fire protection products. The LLP in your country shall distribute these products in your country. The LLP should be established with two partners. The limited partner should be a German corporation that is part of a fiscal unity in Germany with a German partnership as parent company (head of the fiscal unity). The partners of this German partnership are individuals resident in Germany. The general partner of the Swedish LLP should be a corporation of your country in order to limit the liability of the partnership respectively the partners. If possible the general partner should not hold a participation in the assets of the partnership and should not receive a part of the profits of the LLP but only (if necessary) a flat fee as remuneration for its liability. The management of the LLP of your country and the management of its general partner may be domiciled in Germany. The intention is, that the profits of the LLP of your country are taxed in your country at the level of the partners of the LLP of your country with your countriy´s corporate tax. The withdrawal of the results by the partners should not be subject to any further taxation in your country (especially no withholding tax). The double taxation agreement should grant an exemption from taxation in Germany to the limited partner with respect to the profits derived from the LLP of your country. Questionaire foreign aspects tax & legal 1/3

12. 12 II. Questions 1. Is it possible to establish a LLP in your country s described above? 2. Could you please roughly estimate the amount of fees necessary to establish the LLP and the corporation (general partner)? 3. Could you please roughly estimate the amount of fees for preparing the annual tax returns, fees for the annual bookkeeping and other current costs caused by the corporation (general partner) assumed that it has no own business activity beside its function as general partner in the LLP? 4. Could you please confirm that the LLP is not subject to taxation in your country but the partners will be taxed in your country on their profits derived from the LLP (your country´s corporate tax)? 5. Could you please confirm that the LLP is - from your country´s tax perspective - treated as permanent establishment of the German corporation (limited partner) with respect to the double taxation agreement? Questionaire foreign aspects tax & legal 2/3

13. 13 II. Questions 6. Will the tax authorities of your country accept the German corporation for your country´s tax purposes as partner of the LLP or is there any risk that due to the structure (fiscal unity to a German partnership with individuals as partners) the profits of the LLP will be taxed at the level of the German individuals behind the structure? 7. Which tax rate will be applicable to the profits of the LLP in your country (at the level of the partners)? 8. Could you please confirm that the withdrawal of profits by the partners of the LLP will not be subject to tax (especially no withholding tax) in your country ? 9. Do you see any uncertainties concerning the taxation in your country ? Please provide us with the amount of fees you will charge for answering our questions before you begin with your work. We would appreciate if you could provide us with your answers until …………. If you have any further questions please do not hesitate to contact us Kind regards Mönning & Partner Questionaire foreign aspects tax & legal 3/3

14. 14 No LLP available – working with a PE or working with an incorporated subsidiary No tax treaty Instead of exemption method only credit method available in the tax treaty Switch over clause in tax treaty from exemption method to credit method in case of passive income under the treaty definition LLP is not treated as tax transparent, LLP is taxed as corporation Withdrawals from LLP are taxed / withdrawals are subject to withholding tax / withholding tax exemption under the EC Parent Subsidiary Directive is not available Risk of application of individuals tax scheme instead of corporate tax regime Taxation in case of losses? Social security aspects? Aspects of royalty and interest payments? Open question: Any other risks? Risk analysis target structure – foreign risks

15. 15 Activity clauses in tax treaties - switch over from tax exemption method to credit method Unilateral switch over clause - switch over from tax exemption method to credit method Functioning of fiscal Unity – lack of efficient business activities in German LLP as head of fiscal unity Loss utilization Tax qualification of the foreign LLP from a German point of view – hypothetical comparison of legal form – rather corporation or partnership and thus taxation as corporation or partnership Tax aspects of finance structure, royalties Risk of application of anti tax avoidance rules Risk analysis target structure – risks from a German tax point of view

16. 16 Reorganization of existing foreign subsidiaries

17. 17 Starting point: loss bearing companies due to start up losses, tax losses to carry forward existing, losses had been financed through shareholder loans Austria: selling shares and transform to LLP UK: structure remains unchanged Netherlands: asset deal with NewCo LLP profit from asset deal uses the tax losses to carry forward acquired assets at NewCo LLP are financed by takeover of shareholder loans Reorganization of existing foreign subsidiaries

18. 18 Alternative structure

19. 19 No tax treaty with Hongkong – establishing an incorporated subsidiary No LLP available in United Arab Emirates / Dubai – establishing an incorporated subsidiary Carry on business in Permanent establishments was refused since there is no liability limitation in the foreign country Alternative structure

20. 20 Target structure - preliminary

21. Thank You for your attention! 21

22. 22 Carsten Franke c.franke@moenningpartner.de Phone: +49 40 37097-169 Fax: +49 40 37097-699 Tax Consultancy VAT International Tax Law Professional background 1993 - 1997reading economics 1997 - 2001tax consultant at KPMG, Hamburg 2001 - tax consultant at Moenning & Partner, Hamburg Field of expertise International Taxation Cross border VAT