Technical Tax Guidance on Passive Foreign Investment Companies (PFIC) for Fund Partners

potentially subject to the surtax should consult their own advisors concerning its potential applicability to their individual circumstances. Passive Foreign Investment Companies - A portfolio investment by the Fund in a non-US. corporation that is classified as a “passive foreign investment company” (“PFIC”) will cause taxable U.S. Partners to be subject to taxation under Sections 1291 through 1298 of the Code. In general, a non-US. corporation will be classified as a PFIC if 75% or more of its gross income constitutes “passive income” — generally, interest, dividends, royalties, rent and similar income, and gains on the disposition of assets that generate such income — or 50% or more of its assets (by value or, in certain situations, by adjusted tax bases) produce passive income or are held for the production of such income. Under the PFIC rules, gain attributable to a disposition of PFIC stock, as well as income attributable to certain “excess distributions” with respect to that PFIC stock, is allocated ratably over the shareholder’s holding period for the stock. Gain allocated under this rule to (i) the year in which the shareholder disposes of the PFIC stock and (ii) any year prior to the time the foreign corporation first satisfied the PFIC income or assets test, as well as income attributable to any excess distribution on PFIC stock allocated to those years, is subject to tax (as ordinary income) at the U.S. federal income tax rates applicable to the shareholder for the year in which the disposition occurs. Disposition gain attributable to years included in the shareholder’s holding period — other than those described in the preceding clauses (i) and (ii) — and income attributable to excess distributions allocated to each such other year is subject to tax (as ordinary income) at the maximum U.S. federal income tax rate applicable to the shareholder for the year in which the income is treated as realized, and also to an interest-like charge on the shareholder’s “deferred” payment of this tax liability that accrues generally from the year of deemed realization through the due date of the shareholder’s U.S. federal income tax return for the year of disposition or distribution (determined without regard to extensions). A U.S. Partner effectively will be treated as a U.S. shareholder with respect to its proportionate share of any PFIC stock owned by the Fund. If, however, that PFIC is also a “controlled foreign corporation” in which the Fund is a “United States Shareholder” (as defined below), the PFIC rules generally will be superseded by the rules discussed below dealing with controlled foreign corporations. The PFIC rules generally should not affect tax-exempt U.S. Partners. The PFIC rules are highly technical and it is possible that a non-U.S. corporation in which the Fund makes an investment will be classified as a PFIC. If the Fund invests in the stock of a portfolio company classified as a PFIC, and that company agrees to provide the Fund and, if necessary, the IRS with certain financial information, the Fund may elect to treat that company as a “qualified electing fund” (“QEF”). If the Fund holds stock of a non-U.S. corporation with respect to which a QEF election has been made for the first taxable year in the Fund’s holding period for which the non U.S. corporation is a PFIC, each U.S. Partner will be subject to tax currently on its proportionate share of certain earnings and net capital gain of that non-US. corporation — regardless of whether that corporation actually distributes cash or other property to the Fund — but generally will not be subject to the tax regime described in the preceding paragraph with respect to its investment in that corporation. Although the maximum rate of tax imposed on certain dividends is currently 20%, this rate does not apply to dividends paid or deemed paid by PFICs. A QEF election generally will not result in current inclusion of the PFIC’s earnings for any year in which the PFIC has no net ordinary earnings and no net capital gain. Alternatively, if such PFIC stock is publicly traded, the Fund may be eligible to value the 76 CONTROL NUMBER 257 - CONFIDENTIAL HOUSE_OVERSIGHT_024087