For the a ttention of Mr Marius Kohl Administration des Contributions Directes Bureau d'irnposition Societes VI 18, Rue du F01t Wedell L-2982 Luxembourg 24 June 2009 References: CDT/NLKL/Q2709113M-FYHS Nort hern & Shell L uxembourg Finance Sarl-2009 24 02445 PriccwatcrhouseCoopers Societe ii responsabilite limitee Reviseur d'entrepriscs 400, routed' Esch B.P. 1443 L-1014 Telephone +352 494848-1 Facsimile +352 494848-2900 www.pwc.com/lu [email protected]Nort hern & Shell L uxembourg Finance No 2 Sari - New Luxembourg Company Convertible Loan Note - Intra Group Refinancing Dear Mr Kohl, Further to our meeting dated 10 June 2009 and at the request of the above mentioned client, we would like to submit to your attention, the following transaction and obtain your agreement and/or your comments on the tax treatment described herein. A Background 1 We ref er to our letter dated 11 Febrnary 2009 (referenced CDT/CEQN/Q2709014M-MLFO) for the detailed description and tax analysis of the financing strncture set up by the No1them & Shell Group (the "Group") further to which intra-group receivables towards North & Shell Network Limited, Northern & Shell Plc, No1them & Shell Worldwide Limited and Express Newspapers (all together referred to as "Receivables") were transferred to Luxfinco in exchange for an Intra-group Convertible Loan Note ("ICLN 1 "). 2 Given that the ICLN 1 matures on. 19 June, the Group decided to further restructure its intra-group refinancing. ln this respect, LuxFinCo will establish a Luxembourg subsidiary ("LuxFinco 2") to which it will transfer the receivables it holds in exchange for an Intra-group Convertible Loan Note ("fCLN 2") . R.C.S. Luxembourg B 65 477 - TV A LU 17564447
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For the attention of Mr Marius Kohl
Administration des Contributions Directes Bureau d'irnposition Societes VI 18, Rue du F01t Wedell L-2982 Luxembourg
Northern & Shell Luxembourg Finance No 2 Sari - New Luxembourg Company
Convertible Loan Note - Intra Group Refinancing
Dear Mr Kohl,
Further to our meeting dated 10 June 2009 and at the request of the above mentioned client, we would like to submit to your attention, the following transaction and obtain your agreement and/or your comments on the tax treatment described herein.
A Background
1 We ref er to our letter dated 11 Febrnary 2009 (referenced CDT/CEQN/Q2709014M-MLFO) for the detailed description and tax analysis of the financing strncture set up by the No1them & Shell Group (the "Group") further to which intra-group receivables towards North & Shell Network Limited, Northern & Shell Plc, No1them & Shell Worldwide Limited and Express Newspapers (all together referred to as "Receivables") were transferred to Luxfinco in exchange for an Intra-group Convertible Loan Note ("ICLN 1 ").
2 Given that the ICLN 1 matures on. 19 June, the Group decided to further restructure its intra-group refinancing. ln this respect, LuxFinCo will establish a Luxembourg subsidiary ("LuxFinco 2") to which it will transfer the receivables it holds in exchange for an Intra-group Convertible Loan Note ("fCLN 2").
R.C.S. Luxembourg B 65 477 - TV A LU 17564447
f'R/cEWAJERHousf[roPERS I
3 As part of the restructuring, Northern & Shell Media Limited and LuxFinco 2 will enter into a Forward Subscription Agreement ("FSA") whereby Northern & Shell Media Limited agrees to issue 73,232,917 shares to LuxFinco 2 for a fixed amount of GBP 417mio.
4 For your information, you will find enclosed the background information and the current abridged group structure (Appendix 1) as well as the contem lated transaction and the final abbreviated structure (Appendix 2). ~E- co
5 LuxFinco 2 will have its registered seat and its place of central administration in Luxembourg. The shareholders meetings as well as the meetings of the board of directors of the company will be physically held in Luxembourg. The management decisions and, in particular, the exercise of central management and control of the company will be carried out in Luxembourg by the board of directors of LuxFinco 2.
6 As a result, LuxFinco 2 will be considered to be Luxembourg tax-resident, as understood under article 159 of the Luxembourg Income Tax Law ("LITL"). Consequently, a tax residency certificate may be requested and granted for LuxFinco 2.
B.2 Forward Subscription Agreement ("FSA") between Media and LuxFinco 2 (step 2)
7 The tax treatment will follow the accounting treatment according to article 40 LITL.
The issuance of the FSA will not be reflected in LuxFin~o 2 accounts but will only be disclosed in the notes to the annual accounts for its subscription price (i.e. GBP 417,000,000). Hence no Luxembourg tax consequences should arise in this respect and until effective contribution by LuxFinco 2.
8 Upon subscription, the Northern & Shell Media limited's shares will be recognized in the account of LuxFinco 2 at their subscription price (i.e GBP 417 ,000,000). Hence, no capital gain would arise from the subscription of the FSA.
B.3 Conversion of ICLN 1 issued by LuxFinco (Step 3)
9 ICLN l issued by LuxFinco will be converted into shares (i.e. on 19 June 2009). In accordance with the terms of ICLN l , for every GBP 11] of the Bonus Principal Amount (GBP 804m + around GBP 21.Sm), one Ordinary Share with face value of GBP 11 l in the share capital of the Company wi ll be issued (we refer to our letter CDT/CEQN/Q2709014-MLFO for the detailed tax analysis).
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B.4 Qualification purposes (Step 4)
10 Based on the characteristics described in Appendix 3 (mainly no profit-related return, no voting rights, privileged ranking over the share capital, no rights in the profits or liquidation surplus of the issuer, short term of ICLN 2), ICLN 2 should be treated as debt for Luxembourg tax purposes.
B.S Accounting and tax treatment of ICLN 2 at the level of LuxFinco 2(Step 4)
11 ICLN 2 will be recorded, when issued, based on Lux GAAP as liability for a principal amount of GBP [826m].
Based on the conversion bonus of GBP [36m], LuxFinco 2 needs to record an expense of GBP 136mJ before conversion. There may be different ways to book this expense from a timing perspective and should be at the discretion of the directors/managers of LuxFinco 2. There will be either an expense in the full amount at the issue date of ICLN 2 or pro-rata over the term until conversion.
The conversion then is a pure balance sheet transaction.
12 Should the conversion not take place, there will be a cotTesponding income, equivalent to the booked Bonus, in LuxFinco 2.
13 The tax treatment follows the accounting treatment according to LITL 40.
Therefore, the expense related to the conversion bonus will be fully deductible from the interest income provided the below-mentioned margin is respected and any income based on the non-conversion will be taxable.
B.6 Tax treatment of ICLN 2 at the level of LuxFinco (Step 4)
14 LuxFinco will record an asset in the amount of GBP 826m.
15 No income will be recognized in the hands of LuxFinco 1 during the duration of the contract.
16 Moreover, the conversion of the loan will be performed at book value from a tax point of view, in accordance with the roll over relief regime foreseen by Article 22bis 2, (1) LITL which provides that "Notwithstanding Article 22(5), the exchange operations(. .. ) do not give rise to the realization of the gains inherent in the assets exchanged, unless, ( ... ) either the creditor or the shareholder renounces the application of the present provision upon conversion of a loan: the allocation of securities to the creditor".
17 Therefore, the attribution of LuxFinco 2 shares to LuxFinco upon the conversion of ICLN 2 will not give rise to the realization of any capital gain at the level of LuxFinco.
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B.7 Lending activity financed by borrowing (Step 4)
19 LuxFinco 2 will hold interest bearing receivables against Group companies in the amount of GBP [826m]. These interest bearing receivables will be financed by ICLN 2 in the amount of GBP f826mj.
LuxFinco 2 will therefore be in a financing activity (lending financed by borrowings) for an amount of GBP [826ml.
In view of the facts described and given the limited risk, a margin would be considered to be an appropriate and acceptable profit with respect of article 164 (3) LITL if it amounts to 2/32% p.a. of the principal amount involved in this financing activity, i.e. GBP 1826ml.
20 The margin (from which reasonable general expenses may be deducted) will be subject to corporate income tax and municipal business tax in the hands of LuxFinco 2.
However, if the taxable commercial profits of the company would exceed this minimum margin, they would be subject to tax on said higher taxable basis.
21 Interest income earned by LuxFinco 2 may be re-lent to the group at interest, which will be fully taxable. Alternatively, any interest earned by LuxFinco 2 could be re-invested in a qualifying participation.
B.8 Discounted loan notes and interest income received by LuxFinco 2 (Step 5)
22 Receivables between LuxFinco 2 and Northern & Shell Plc, Northern & Shell Network Limited, Northern & Shell Worldwide Limited and Express Newspapers will mature on 29 June 2009 and will be replaced with discounted loan notes.
The above-mentioned margin will also be complied with after the replacement of the current Receivables by discounted loan notes.
B.9 Functional Currency
23 LuxFinco 2 will use GBP as an accounting and tax functional currency. In the present case the use of a functional currency is justified by the fact that both the Loans and ICLN 2 financing the Loans are in GBP. The tax return will be prepared on the basis of the yearly net profits converted into Euro by using the year end market EUR/GBP rate provided by www.factiva.com.
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B.10 Net wealth tax
24 The book value (which corresponds to fair market value) of ICLN 2 is fully deductible without any discount in the hands of LuxFinco 2 for the calculation of its unitary value for net wealth tax purpose.
We respectfully request that you confirm the tax treatment of the situation described above or that you provide us with your remarks, if any.
We remain at your disposal should you need any further information and would like to thank you for the attention that you will give to our request.
Yours sincerely,
Catherine Dupont Partner
Appendices:
Appendix 1: Appendix 2: Appendix 3:
Background information and current abridged group structure Contemplated transactions and final abbreviated structure Characteristics of ICLN 2 and tax analysis
Le prepose du bureau 'imposition Societes 6 Mariu Kohl
Luxembourg, le ............... 2009
1 5 JUIL. 2009
This tax agreement is based 011 the facts as presented t \ PricewaterlwuseCoopers Sari as at the date the advice was given. The agreement is dependem on specific facts and ircumstances and may not be appropriate to any party other than the one for which it was prepared. This tax agree111e1 (•Was prepared with only the interests of Northern & Shell in mind, and was not planned or carried ow in contemplation 'r,f any use by any orher party. Pricell'aterhouseCoopers Sari, irs partners. employees and or agems, neither owe nor accept any duty of care or any responsibility to any other parry. whether in contract or in tort (including witho111 li111itation. negligence or breach of starwory dWv) however arising, and shall not be liable in respect of any loss, damage or expense of whatever nature which is caused to any other party.
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Appendix 1
Background information and current abridged group structure
Northern & Shell was founded in December 1974 and became an important player in the British and worldwide media. The group holds a broad portfolio of magazines and broadcast interests and acquired the Express Newspapers in November 2000.
Today, N01them & Shell owns four national newspapers and is 50 per cent joint venture partner in two more newspapers in Eire. It also dominates important parts of the consumer magazine market in the UK and worldwide with 12 foreign editions, operates in all major areas of publishing and has diverse interest in television, print, distribution, investment and property.
303m
RCD1
___ N&S Network
303m convertible
Finance Worldwide
175m convertible
54m
convertible loan loans
Media
Express
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Appendix 2
Contemplated transaction and final abbreviated structure
Step 1: LuxFinco establishes a Luxembourg subsidiary, LuxFinco 2, with share capital of GBP 200k.
Step 2: Media and Lux Finco 2 enter into a FSA whereby Northern & Shell Media Limited agrees to issue 73,232,917 shares to LuxFinco 2 for a fixed amount of GBP 417,000,000 at any time between 1 December 2009 and 12 January 2010 (upon election of LuxFinco 2). If no earlier issue of the shares is chosen by Luxfinco 2, Northern & Shell Media Limited will automatically issue the shares on 12 January 2010 and LuxFinco 2 will have to pay the . . issue pnce.
Step 3: ICLN l issued by LuxFinco to Express Newspapers, Northern & Shell Media Limited, Northern & Shell Finance Limited and Northern & Shell Pie will be converted into ordinary shares in LuxFinco on 19 June 2009.
Step 4: LuxFinco transfers the rights and obligations under the Loans with Northern & Shell Network Limited, Northern & Shell Pie, Northern & Shell Worldwide Limited and Express Newspapers to LuxFinco 2 (including interest) in consideration of a new intra-group conve1tible loan note ("CCLN 2") for an amount of GBP 826m on 19 June 2009. ICLN 2 will mature on I 0 January 2010.
Step 5: Loans between LuxFinco 2 and Northern & Shell Pie, Northern & Shell Network Limited, Northern & Shell Worldwide Limited and Express Newspapers mature on 29 June 2009 and are replaced with discounted loan notes of GBP 827mio (including interest up to 29 June).
l ICLN 2 issued by LuxFinco 2 have the following characteristics based on the draft deed:
• The issue price is GBP 826m. • The principal amount is GBP 826m. • Term: 6 months and 21 days. • No interest. • The holder of ICLN 2 shall not be entitled to any voting rights or any
profit or liquidation proceeds in respect of LuxFinco 2. • No stapling to any shares. • The Notes rank at least pari passu with all other unsecured obligations of
LuxFinco 2. • Bonus anticipated on convers ion at the time of issue should be of around
GBP 36m calculated share by share. • Conversion into share capital of an amount corresponding to the
aggregate of the issue price and the Bonus. • Conversion: For every GBP [1] of the Bonus Principal Amount (the
Principal Amount increased by the Bonus in the event of conversion of ICLN 2), one Ordinary Share with face value of GBP [ l J in the share capital of the Company will be issued.
• If not converted: Repayment at principal amount of GBP 826m at choice of holder.
2 Tax Analysis
2 In this context, the explanatmy note to the income tax reform law No 571 of 1955 (Projet de loi on article 144 - currently Article 97 of the LIR) points out that the distinction between debt and equity must be drawn on the basis of the economic characteristics of the financial instrument. In particular, the main economic features that characterise a financial instrument as debt are:
• The fact that the instrument yields a fixed income (as opposed to an equity partkipation which gives right to a percentage of the company's profits), and
• A privileged ranking over the company's shares.
Consequently, and given that ICLN 2 do not confer any voting rights to the holder, ranks prior to the company's shares, have a sho1t term and do not grant the holder a right in the profits or liquidation surplus of the issuer, ICLN 2 will be qualified as debt for Luxembourg tax purposes at the level of LuxFinCo 2.
