«IMPORTANT NOTICE Attached please find an electronic copy of the Offering Circular (the “Offering Circular”), dated September 22, 2006 relating to ...»
A U.S. Holder that makes a QEF election may recognize income in amounts significantly greater than the distributions received from the Issuer. Income may exceed distributions when, for example, the Issuer uses earnings to repay principal on the Notes or accrues original issue discount or market discount on Collateral Debt Securities. In addition, if any portion of any given Class of Notes is not ultimately paid upon maturity, the Issuer may recognize cancellation of indebtedness income without any corresponding offsetting losses (due to tax character differences or otherwise), in which case U.S. Holders also may have additional “phantom income.” A U.S. Holder that makes a QEF election will be required to include in income currently its pro rata share of the earnings or discount whether or not the Issuer actually makes distributions. The Holder may be able to elect to defer payment, subject to an interest charge for the deferral period, of the tax on income recognized on account of the QEF election. In addition, it should be noted that if the Issuer invests in obligations that are not in registered form for U.S. federal income tax purposes, a U.S.
PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE
ADVISABILITY OF MAKING THE QEF AND DEFERRED PAYMENT ELECTIONS.Controlled Foreign Corporation. The Issuer also may be a controlled foreign corporation (a “CFC”) if U.S. Holders that each own (directly, indirectly or by attribution) at least 10% of the Preference Shares and any other interests treated as voting equity in the Issuer (each such U.S. Holder, a “10% U.S.
Holder”) together own more than 50% (by vote or value) of the Preference Shares and any other interests treated as equity in the Issuer. If the Issuer is a CFC, a U.S. Holder that is a 10% U.S. Holder on the last day of the Issuer’s taxable year must recognize ordinary income equal to its pro rata share of the Issuer’s net earnings (including capital gains) for the tax year whether or not the Issuer makes a distribution. Earnings on which the U.S. Holder pays tax currently will not be taxed again when they are distributed to the U.S. Holder. A U.S. Holder’s basis in its interest in the Issuer will increase by any amounts the Holder includes in income currently and decrease by any amounts not subject to tax when distributed. If the Issuer is a CFC, (i) the Issuer would incur U.S. withholding tax on interest received from a related U.S. person, (ii) special reporting rules would apply to directors of the Issuer and certain other persons and (iii) certain other restrictions may apply. Subject to a special limitation for individual U.S.
Holders that have held the Preference Shares for more than one year, gain from disposition of Preference Shares recognized by a U.S. Holder that is or recently has been a 10% U.S. Holder will be treated as dividend income to the extent earnings attributed to the Preference Shares accumulated while the U.S.
Holder held the Preference Shares and the Issuer was a CFC.
The relationships between the PFIC and CFC rules and the possible consequences of those rules for a particular U.S. Holder depend upon the circumstances of the Issuer and the U.S. Holder. If the Issuer is a CFC, a 10% U.S. Holder will be subject to the CFC rules and not the PFIC rules. Each prospective purchaser should consult its tax advisor about the application of the PFIC and CFC rules to its particular situation.
Tiered PFIC and CFC. The Issuer may be treated as holding securities issued by non-U.S.
corporations treated as equity for U.S. federal income tax purposes, such as CDO Securities. In that event, a U.S. Holder of Preference Shares could be treated as holding an indirect investment in a PFIC or a CFC, and an indirect equity interest in a PFIC or CFC would be treated as owned directly by such U.S.
Holder. Because the U.S. Holder--and not the Issuer--would be required to make any QEF election with respect any such indirectly-owned PFIC, and because adequate PFIC information statements necessary for any such election may not be made available by the PFIC, there can be no assurance that a U.S.
Holder will be able to make a QEF election with respect to any particular indirectly-held PFIC. If the U.S.
Holder has not made a QEF election with respect to an indirectly-owned PFIC, the U.S. Holder would be subject to the consequences described above with respect to excess distributions of such PFIC, gain indirectly realized on the sale by the Issuer of such PFIC, and any gain indirectly realized with respect to such PFIC on the sale by the U.S. Holder of its Preference Shares. Alternatively, if the U.S. Holder has made a QEF election with respect to the indirectly-owned PFIC, the U.S. Holder would be required to include in income its share of the indirectly-owned PFIC’s ordinary earnings and net capital gain as if the indirectly-owned PFIC were owned directly.
Reporting Obligations. U.S. Holders generally must report, with their tax return for the tax year that includes the Closing Date, certain information relating to their purchase of the Preference Shares. A U.S. Holder may be required specifically to disclose any loss on the Preference Shares on its tax return under recent regulations on tax shelter transactions. When the U.S. Holder holds 10% of the shares in a CFC or QEF, the Holder also must disclose any Issuer transactions reportable under those regulations, which require disclosure of certain types of transactions whether or not they were undertaken for tax reasons. U.S. Holders are urged to consult their tax advisors about these and all other specific reporting requirements.
A U.S. Holder (including a tax-exempt entity) that purchased Preference Shares for cash would be required to file an IRS Form 926 or similar form with the IRS, if (i) such person is treated as owing, directly or by attribution, immediately after the transfer at least 10% by vote or value of the Issuer or (ii) if the amount of cash transferred by such person (or any related person) to the Issuer during the 12-month period ending on the date of such transfer, exceeds $100,000. U.S. Holders should consult their tax advisors with respect to this or any other reporting requirement which may apply with respect to their acquisition of the Preference Shares.
The penalties for failure to comply with applicable reporting obligations can be significant.
Non-U.S. Holders. Distributions to a Non-U.S. Holder on Preference Shares generally will not be subject to U.S. tax unless the distributions are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States. Gain realized by a Non-U.S. Holder on the sale or other disposition of the Preference Shares will not be subject to U.S. tax unless (i) the gain is effectively connected with the Holder’s conduct of a U.S. trade or business or (ii) the Holder is an individual present in the United States for at least 183 days during the taxable year of disposition and certain other conditions are met.
Certain Non-U.S. Holders, such as banks not protected by an applicable income tax treaty with the United States, could possibly be subject to U.S. withholding under certain Treasury Regulations regarding “conduit financing arrangements” if such Notes are considered to have been issued or acquired pursuant to a “tax avoidance plan.” Non U.S. Holders generally are required, as a condition of their purchase of Notes, to make certain representations and warranties negating the existence of any such plan. Consequently, the Issuer expects that the IRS ultimately should not prevail if it were to attempt to establish such a plan and attempt to apply these regulation to the Issuer.
U.S. Information Reporting and Backup Withholding
Payments of principal and interest on the Notes, payments on the Preference Shares and proceeds from the disposition of the Notes paid to a non-corporate Holder generally will be subject to U.S.
information reporting. Payments to Non-U.S. Holders that provide certification of foreign status generally are exempt from information reporting. Backup withholding tax may apply to reportable payments unless the Holder provides a correct taxpayer identification number. Any amount withheld may be credited against a Holder’s U.S. federal income tax liability or refunded to the extent it exceeds the Holder’s liability.
Circular 230 Under 31 C.F.R. part 10, the regulations governing practice before the IRS (Circular 230), the
Issuer and its tax advisors are (or may be) required to inform you that:
• Any advice contained herein, including any opinions of counsel referred to herein, is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer;
• Any such advice is written to support the promotion or marketing of the Notes and the transactions described herein (or in such opinion or other advice); and
• Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
THE DISCUSSION ABOVE IS A GENERAL SUMMARY. IT DOES NOT COVER ALL TAX MATTERS
THAT MAY BE IMPORTANT TO A PARTICULAR INVESTOR. EACH PROSPECTIVE INVESTOR
SHOULD CONSULT ITS OWN TAX ADVISOR ABOUT THE TAX CONSEQUENCES OF AN
INVESTMENT IN THE NOTES AND PREFERENCE SHARES UNDER THE INVESTOR’S OWN
CAYMAN ISLANDS TAX CONSEQUENCES
The following discussion of certain Cayman Islands income tax consequences of an investment in the Offered Securities is based on the advice of Walkers as to Cayman Islands law. The discussion is a general summary of present law, which is subject to prospective and retroactive change. It assumes that the Issuer will conduct its affairs in accordance with assumptions made by, and representations made to, counsel. It is not intended as tax advice, does not consider any investor’s particular circumstances, and does not consider tax consequences other than those arising under Cayman Islands law.
Under existing Cayman Islands laws:
The Issuer will not be subject to income, capital, transfer, sales or franchise tax in the Cayman Islands. The Issuer has been incorporated under the laws of the Cayman Islands as an exempted company. The Issuer has obtained an undertaking from the Governor in Cabinet of the Cayman Islands
in substantially the following form:
In accordance with Section 6 of the Tax Concession Law (1999 Revision) the Governor in
Cabinet undertakes with Montrose Harbor CDO I, Ltd. (the “Issuer”):
(a) That no law which is hereinafter enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to the Issuer or its operations; and (b) In addition, that no tax be levied on profits, income, gains or appreciations or which is in the
nature of estate duty or inheritance tax shall be payable:
(i) on or in respect of the shares, debentures or other obligations of the Issuer; or
The United States Employee Retirement Income Security Act of 1974, as amended (“ERISA”), imposes certain duties on persons who are fiduciaries of employee benefit plans (as defined in Section 3(3) of ERISA) subject to Title I of ERISA (“ERISA Plans”) and of entities whose underlying assets include assets of ERISA Plans by reason of an ERISA Plan’s investment in such entities. These duties include investment prudence and diversification and the requirement that an ERISA Plan’s investments be made in accordance with the documents governing the ERISA Plan. The prudence of a particular investment must be determined by the responsible fiduciary of an ERISA Plan by taking into account the ERISA Plan’s particular circumstances and liquidity needs and all of the facts and circumstances of the investment, including the availability of a public market for the investment. In addition, certain U.S. Federal, state and local laws impose similar duties on fiduciaries of governmental and/or church plans that are not subject to Title I of ERISA.
Any fiduciary of an ERISA Plan, of an entity whose underlying assets include assets of ERISA Plans by reason of an ERISA Plan’s investment in such entity, or of a governmental or church plan that is subject to fiduciary standards similar to those of ERISA (“Plan Fiduciary”), that proposes to cause such a plan or entity to purchase Offered Securities should determine whether, under the general fiduciary standards of ERISA or other applicable law, an investment in the Offered Securities is appropriate for such plan or entity. In determining whether a particular investment is appropriate for an ERISA Plan, U.S.
Department of Labor (“DOL”) regulations provide that the fiduciaries of an ERISA Plan must give appropriate consideration to, among other things, the role that the investment plays in the ERISA Plan’s portfolio, taking into consideration whether the investment is designed reasonably to further the ERISA Plan’s purposes, an examination of the risk and return factors, the portfolio’s composition with regard to diversification, the liquidity and current return of the total portfolio relative to the anticipated cash flow needs of the ERISA Plan and the projected return of the total portfolio relative to the ERISA Plan’s funding objectives. Before investing the assets of an ERISA Plan in Offered Securities, a Plan Fiduciary should determine whether such an investment is consistent with the foregoing regulations and its fiduciary responsibilities, including any specific restrictions to which such fiduciary may be subject.