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This Summary of Principal Terms summarizes the principal terms of an investment in Parnasa 62 Basad Ltd, an Israeli limited liability company (the “Company“), and is subject to, and qualified in its entirety by reference to, the Articles of Incorporation of the Company (the “AoI“). To the extent that the terms of this summary are inconsistent with the terms of the AoI, the terms of the AoI control.
Parnasa 62 Basad Ltd, an Israel limited company (the “Company“).
The Company’s investment objective will be to generate superior long-term capital appreciation through private equity investments in early-stage private companies based in Israel (each such investment, a “Portfolio Investment“, and each company in which a Portfolio Investment is made, a “Portfolio Company“).
Each investor meeting certain qualifications as set forth below (each, an “Investor” and collectively, the “Investors”) will irrevocably subscribe for one or more Units consisting of non-voting shares of the Company (the “Shares”). Each Unit consists of 3,000 non-voting shares of the Company. Subscription amounts must be paid in readily available funds by wire transfer or by bank check delivered to the Investment Manager (as defined below) and must be received prior to the Closing Date (as defined below). The subscription for Units of Shares is subject to acceptance or rejection by the Company, in whole or in part in its sole discretion. No Investor will be admitted to the Company unless the Company receives such Investor’s entire subscription amount prior to the Closing Date.The price of each Unit is $16,994 and the minimum number of Units offered by the Company for Subscription by any Subscriber is two (2). Subscribers will subscribe for a whole number of Units. No fractions of Units will be offered by the Company for Subscription. Subscribers will subscribe for a whole number of Units. No fractions of Units will be offered by the Company for Subscription.
Parnasa Nihul Basad Ltd, an Israeli limited liability company (the “Investment Manager”), is the investment manager of the Company. The Investment Manager is controlled by Baruch Eliezer Gross (the “Principal“) and holds all the voting shares of the Company (6,001 shares). The Principal holds directly or indirectly 83.5% of the initial capital of the Company. The Investment Manager will be responsible for the investment objectives of the Company and will also perform certain administrative functions for the Company.
|Board of Directors:||
The Company currently has one director, the Investment Manager, which is represented by the Principal. All investments are subject to the approval of the Board of Directors. The Board of Directors shall decide whether to enter into a potential investment based on information provided to it with respect to any such potential investment by the Investment Manager. The Board of Directors shall approve investments that it finds, in its sole discretion, to be in the best interests of the Company. There is no expectation that such structure would change in the foreseeable future.
Only Investors that are “accredited investors”, as such term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended may acquire Shares in the Company. The Company reserves the right to reject any subscription for Shares in its sole discretion.
The term of the Company will terminate on the tenth anniversary of the initial Closing Date (as defined below), subject to up to two consecutive one-year extensions in the sole discretion of the Board of Directors.
All of each Investor’s subscription amount will be drawn down (each such drawdown, a “Capital Contribution“, and the aggregate amounts drawn down from all Investors, the “Capital Contributions“) as of the closing of each Investor’s subscription to the Company (the date of each such closing, a “Closing Date“).
The Investment Manager will not be entitled to receive a management fee from the Company.
The Company has previously incurred and in the future may incur, at the sole discretion of the Board of Directors, indebtedness to finance operations of the Company or to make new or follow-on investments in Portfolio Investments. In addition, the Company may enter into short-term indebtedness for the purpose of extending bridge financing to Portfolio Investments (such financing not to exceed 180 days in duration). Payments of principal and interest as well as any payments in respect of any Lender’s Excess (as defined below) will be payable by the Company and shall constitute Company Expenses (as defined below).
Prior to the date hereof the Company incurred certain loans for the purposes set forth above in “—Indebtedness” (collectively the “Prior Loans” and each, a “Prior Loan“). Each Prior Loan is subject to an annual interest rate of 4% and a term of thirty (30) months. In addition, the lender under each Prior Loan (a “Prior Lender“) is entitled on the stated maturity of such Prior Loan to receive, in addition to the principal and interest payable thereon on such date, a portion (determined as described below) of twenty percent (20%) of the excess of (i) the fair value of the Company’s assets as of such date (as determined by a third party appraiser experienced in appraising the value of such assets) over (ii) 15,000,000 NIS (the “Lender Excess“). For the purposes of determining the amount of any Lender Excess (if applicable) payable to a Prior Lender on the stated maturity date of the related Prior Loan, (x) such Prior Lender shall be deemed to hold as of the stated maturity date of such Prior Loan a number of shares of the Company equal to the principal amount of the related Prior Loan divided by the fair value per share of the Company’s assets as of such date (the “PriorLender’s Shares“), and (y) the percentage of the Lender Excess attributable to any Prior Lender’s Shares shall be equal to the number of Prior Lender’s Shares attributable to such Prior Lender divided by the aggregate number of all Prior Lender’s Shares deemed to exist as of such stated maturity date.
All Prior Loans are subject to early repayment at the sole discretion of the respective Prior Lenders thereunder. Upon a demand for early repayment by a Prior Lender, the Company will pay the principal and accumulated interest on such Prior Loan within ninety (90) days of such demand; provided that no Prior Lender who demands early repayment of a Prior Loan shall be eligible to receive any portion of any Lender Excess to which it may otherwise be entitled. In addition, the Company may redeem any Prior Loan prior to the stated maturity date thereunder at any time in its sole discretion, and upon any such early redemption the Company will repay the principal and accumulated interest on such Prior Loan within ninety (90) days; provided that if all Prior Loans are repaid within one year after any such early redemption by the Company, the Prior Lender on a Prior Loan prepaid by the Company will be entitled to its share of any Lender Excess determined as if such Prior Loan were being repaid as of the date on which the final outstanding Prior Loan is being repaid.
Current cash or disposition proceeds received by the Company relating to a Portfolio Investment, net of expenses allocated to such Portfolio Investment and any payments due to the loan holders (“Distributable Proceeds“), will be distributed to the Investors at least annually, but not later than forty-five (45) days following the end of any fiscal year in which the Distributable Proceeds are received by such Portfolio Investment.
Distributions of Distributable Proceeds relating to a Portfolio Investment will be apportioned and distributed to the Investors along with the rest of the Company’s shareholders pro rata based on their respective ownership of the Shares and subject to the allocation described below.
Amounts so apportioned to each Investor will be distributed to such Investor, on the one hand, and the Investment Manager, on the other hand, as follows:
(i) first, one hundred percent (100%) to such Investor until it has received cumulative distributions pursuant to this clause (i) in an amount equal to its aggregate Capital Contribution;
(ii) second, one hundred percent (100%) to such Investor until it has received cumulative distributions pursuant to this clause (ii) in an amount representing a four percent (4%) return on its aggregate Capital Contribution;
(iii) third, twenty two percent (22%) of the amounts distributable pursuant to this clause (iii) to the Investment Manager, and seventy eight percent (78%) of such distributable amounts to such Investor (the amounts payable to the Investment Manager: the “Carried Interest“).
The Company will bear all costs and expenses incurred in connection with the offering of the Shares (collectively, the “Offering Expenses“).
The Company will be responsible for (a) all expenses relating to its own operations and (b) all expenses relating to Portfolio Investments (“Company Expenses“).
|Transfer of Shares:||
Transfer of shares shall be subject to approval to do so by the Board of Directors of the Company. A request to transfer the shares shall not be unreasonably denied. Each Investor shall be personally responsible to find a buyer for its Shares.
The Company is being treated as a corporation under the Israeli tax laws and regulations and as a partnership for the purposes of United States tax laws and regulations. Please see “Certain Tax Considerations” for further information.
The Company will indemnify and hold harmless each of the Investment Manager, its affiliates and its respective members, managers, quotaholders, partners, officers, directors, shareholders, agents, employees and other related parties (each, an “Indemnified Party“) in connection with any actions that arise out of or in connection with the affairs of the Company (other than an internal dispute among the interest holders of the Investment Manager), but only to the extent that such person’s conduct did not constitute fraud, willful misconduct, the commission of a felony, a violation of applicable securities laws or gross negligence.
Expenses incurred by an Indemnified Party in defense or settlement of any claim that will be subject to a right of indemnification may be advanced by the Company prior to the final disposition thereof upon receipt of a written undertaking by or on behalf of the Indemnified Party to repay such amount to the extent that it will be determined ultimately that such Indemnified Party is not entitled to be indemnified, provided that the foregoing advancement of expenses will not be available to any Indemnified Party with respect to a claim filed by a majority in interest of the owners of the Shares. No advances will be made by the Company without the prior written approval of the Investment Manager.
|Fiscal Year End:||
The Company’s fiscal year ends on December 31.
DLA Piper LLP (US) (“DLA“) will act as special U.S. counsel to the Company and the Investment Manager. DLA has not acted as counsel to the Company or the Investment Manager with respect to Israeli law. Please refer to “Risk Factors—Representation by DLA Piper LLP (US)” for additional information.
No independent counsel has been retained to represent Investors.
The Company engaged Weinstein & Co., a U.S. Public Company Accounting Oversight Board (PCAOB) member in good standing. Weinstein & Co. is a member of TIAG – The International Accounting Group, a worldwide network of independent accounting firms. www.wcpa.co.il
|Voting and Reports:||
Shares purchased by Investors in this offering do not have voting rights. Therefore, Investors in this offering will not be entitled to vote on proposals brought before the general assembly of shareholders of the Company. Investors will receive within 120 days of the end of each fiscal year (subject to reasonable delays in the event of the late receipt of any necessary financial statements from the Portfolio Investment), an annual financial report of the Company audited by the independent auditors. Financial information provided in the audited reports to Investors will include the valuation of illiquid investments based on a generally acceptable method under the standard by which the financial statements of the Company will be audited.
Upon liquidation and winding up of the Company, each holder of Shares of the Company shall have the right, after receiving cumulative distributions in an amount equal to the sum of (i) such holder’s Capital Contributions and (ii) an amount equal to a four percent (4%) return on such holder’s aggregate Capital Contributions, to participate, on a pro rata basis, in 78% of the Company’s profits and excess assets distributable upon liquidation of the Company. The balance of 22% will be distributed to the Investment Manager.
Eliezer Gross, Founder and Chairman
With over 30 years of experience launching business ventures in Israel, the United States, and Europe, Mr. Gross is a true sales and marketing expert. He was a founding partner of the American GBM Group, and of the largest retail chains in Israel. Active in dozens of startup initiatives and companies worldwide, he knows the U.S market inside and out and has been influential in developing many new products. His keen business acumen has led him through the doors of dozens of leading companies – primarily from the Fortune 100 including: Johnson & Johnson Corporation, CBS Studios, Goodyear Tires, et al.
Oded Eliashiv – Head of Development, Besadno Group
Mr. Eliashiv (LLB) is the Head of Development in the Besadno Group. Oded has vast experience in the Israeli startup industry, having led numerous ventures in leading companies including Excellence Capital Group (Singapore), Excellence AgriTech Solutions (Cambodia), Slyde, ElectroPep, Beyond Interactive and Epos Technologies. Using his strong experience in the startup ecosystem, Oded is now advising early-stage startups and providing them with the mentoring and fundraising assistance.
Gabby Hasson – US Investor Relations Officer, Besadno Group
Mr. Hasson (MBA) is the Head of US investments in the Besadno Group. Gabby is the CEO and Co-Founder of Bseed Investments. Previously, Gabby held management, investment, and business development positions, at CB Alliance (VC), IBM, and HP, as well as Mashik Consulting and CTI. He specialized in uncovering and enhancing solutions for mobile telecom, banking, and online marketing. Gabby gained vast experience with IBM’s Global Technology Unit (GTU) that focused on startups and innovations.
Cobi Bitton – CEO, Besadno Group
Mr. Bitton is an entrepreneur, organizational consultant, and expert in business development and the study of entrepreneurial business models. He holds a Bachelor’s degree in Industrial and Management, a MBA and is highly knowledgeable about conventional industrial production, environmental issues, and safety and security products. He was one of the entrepreneurs and founders of the SEC (Safe Evacuation Coalition) – an advocacy group formed by companies, and dedicated to promoting advanced emergency means of egress solutions in the global market. He has been counseling businesses, entrepreneurs, startups and corporations for the past 25 years, empowering clients in the American, Eastern and Central European, Latin, Russian, and East Asian markets, among other locations.
Investment Company Act of 1940
The Company will not be subject to the provisions of the Investment Company Act of 1940, as amended (the “1940 Act“), in reliance upon Section 3(c)(1) of the 1940 Act, which excludes from the definition of “Investment Company” issuers whose outstanding securities are beneficially owned by not more than 100 persons who meet the conditions with respect to “beneficial ownership” contained in Section 3(c)(1).
With respect to the determination of beneficial ownership and accredited investor status, the Company will obtain appropriate representations and undertakings from purchasers in order to ensure that such purchasers meet the conditions of the exemption on an ongoing basis.
Investment Advisers Act of 1940
The Investment Manager has no intention to register with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) in reliance on an exemption from registration under Section 203 of the Advisers Act, as amended by The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
An entity such as the Investment Manager, advising a pooled investment vehicle, such as the Company, in the absence of an applicable exemption, would need to register as an investment adviser under the Advisers Act. An exemption that may apply to the Investment Manager is the exemption available to an adviser solely to one or more venture capital funds under Section 203(l) of the Advisers Act (commonly referred to as the “venture capital fund exemption”).
The Investment Manager believes that it and its affiliates will be eligible to rely on the venture capital fund exemption as of the initial closing. No assurance can be given, however, that the Investment Manager and its affiliates will be able to rely on the exemption on an ongoing basis, as the exemption requires continuous re-evaluations. Moreover, reliance on this exemption may necessitate the Investment Manager or its affiliates changing the operations of its business or the investment activities of the pooled vehicles advised by the Investment Manager or its affiliates. If the Investment
Manager and its affiliates are able to rely on such an exemption, the Investors in the Company will not be entitled to the benefits of certain protections under the Advisers Act.
Even if the Investment Manager and its affiliates are able to rely on the venture capital fund exemption, they will nonetheless be required to provide the SEC with some information as an exempt reporting adviser. That information will be made publicly available by the SEC. In addition, the Investment Manager, its affiliates and the Company may be subject to SEC examination authority, certain other Advisers Act compliance obligations, and may nonetheless be required to register with a state agency.
If the Investment Manager and its affiliates cannot qualify under an exemption from Advisers Act registration, they may need to register with the SEC as an investment adviser. Registration under, and compliance with, the Advisers Act would be costly. Such a registration obligation also would require the Investment Manager and its affiliates to report to the SEC detailed information regarding the Investment Manager, its affiliates, and the Company. The additional time required to comply with Advisers Act obligations could divert attention of the Company’s management team from Company operations.
To ensure compliance with the Advisers Act in the event the Investment Manager and its affiliates are no longer exempt from registration, the Company may only accept subscriptions for Interests from investors that are “qualified clients” as that term is defined in the SEC’s rules promulgated pursuant to the Advisers Act. Generally, individual investors need to have a USD 2.1 million net worth exclusive of any equity in their personal residence or invest USD 1 million in the Company in order to be considered a “qualified client.”
Securities Act of 1933
The offer and sale of the Shares offered pursuant to this Memorandum will not be registered under the Securities Act of 1933, as amended (the “1933 Act”) in reliance upon the exemption from registration provided by Section 4(a)(2) and Regulation D promulgated thereunder and/or Regulation S promulgated under the 1933 Act. Each purchaser must be a U.S. person that is an “accredited investor” (as defined in
Regulation D) or a non-U.S. person that meets the requirements of Regulation S. Each Investor will be required to represent, among other customary private placement representations, that he, she or it is acquiring his, her or its Shares for investment purposes only and not with a view to resale or distribution.
Prior to the sale of Shares, Investors and their advisors are invited to ask questions of and obtain additional information concerning the Shares described herein, the terms and conditions of the offering and any other relevant matters (including, but not limited to, additional information to verify the accuracy of the information set forth herein).
The following is a general summary of certain U.S. federal income tax consequences relating to the acquisition, ownership and disposition of interests in the Company. This summary is based on existing provisions of the Code, existing and proposed regulations promulgated thereunder, and current administrative rulings and court decisions, all of which are subject to changes that could be applied retroactively.
This summary does not address all of the U.S. federal income tax consequences that may be relevant to a particular Investor in view of such Investor’s particular circumstances or (unless otherwise indicated) to certain Investors subject to special treatment under U.S. federal income tax laws. For example, this summary generally does not discuss the special tax rules applicable to regulated investment companies, personal holding companies, trusts, tax-exempt organizations, banks, thrifts, securities dealers or brokers, insurance companies and certain other financial institutions. The discussion deals only with Investors who invest in connection with this offering and does not address any aspect of state, local, estate or non-U.S. tax law. This discussion assumes that (i) each Investor (and each of its beneficial owners, as necessary under U.S. federal income tax withholding rules) will provide all appropriate certifications to the Company in a timely fashion to minimize withholding (or backup withholding) on each Investor’s distributive share of the Company’s gross income and (ii) the Investors will hold their interests in the Company as capital assets for U.S. federal income tax purposes. For purposes of this discussion, a “U.S. person” means an individual citizen or resident of the United States, a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the Laws of the United States, any state thereof or the District of Columbia, an estate, the income of which is subject to U.S. federal income taxation regardless of its source or a trust if a court within the United States is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. For purposes of this discussion, a “U.S. Investor” means any Investor that is a U.S. person, and the term “Non-U.S. Investor” means an Investor that is not a U.S. person.
For Investors who own their interests in the Company through a partnership or an entity treated as a partnership for U.S. federal income tax purposes, the U.S. federal income tax consequences relating to the acquisition, ownership and disposition of interests in the Company will generally depend upon the status of the partner and the activities of the partnership. Such Investors should consult their own tax adviser as to their particular tax consequences.
No advance rulings have been or will be sought from the U.S. Internal Revenue Service (“IRS“) regarding any matter discussed in this Memorandum. Each prospective Investor should also note that, except as otherwise provided herein, this summary does not address the interaction of U.S. federal tax laws and any income or estate tax treaties between the United States and any other jurisdiction. Counsel to the Company has not rendered and will not render any legal opinions with respect to any U.S. federal income tax consequences relating to the Company or an investment therein. None of the Investment Manager, the Company or their respective partners, members, directors, officers, employees, agents, representatives, legal counsel, auditors or associates or affiliates of any of the foregoing assume any responsibility for the tax consequences of an investment by an Investor in the Company. Accordingly, prospective investors are urged to consult their tax advisors to determine the federal, state, local and foreign income and other tax consequences to them of acquiring, holding and disposing of interests in the Company, including the application of the U.S. federal alternative minimum tax.
Classification of the Company
It is intended that the Company will be classified as a partnership, rather than a corporation, for U.S. federal income tax purposes. The Company will take all available actions, including the filing of IRS Form 8832, necessary to ensure that the Company is treated as a partnership. In certain cases under Section 7704 of the Code, a partnership which is classified as a “publicly traded partnership” may be taxed as a corporation for U.S. federal income tax purposes. The Investment Manager, in reliance on representations provided by Investors of the Company and by transferors and transferees of interests in the Company, intends to conduct the activities of the Company so as to ensure that the Company will not be treated as a “publicly traded partnership.”
Taxation of Fund Operations Generally
As a partnership, the Company itself will not be subject to U.S. federal income tax. The Company generally will be required to file an annual U.S. partnership information return with the IRS, which will report the results of its operations, if it has either (i) gross income that is effectively connected with the conduct of a trade or business within the United States; or (ii) gross income derived from sources within the United States, which is not expected to be the case . Each U.S. Investor will be required to report its distributive share (whether or not distributed) of the Company’s income, gains, losses, deductions and credits of the character specified in Section 702 of the Code for the taxable year of the Company ending within or with such taxable year of such U.S. Investor, regardless of whether such U.S. Investor has received any distributions from the Company. It is possible that Investors could incur U.S. federal income tax liabilities without receiving from the Company sufficient distributions to defray such tax liabilities. The Company’s taxable year will be the calendar year, or such other period as required by the Code.
The Company may make investments in partnerships. Investing in an entity treated as a partnership will cause the Company to take into account its allocable share of all of the items of the partnership’s income, gain, loss, deduction and credit, regardless of whether the Company has received any distributions from the partnership. Thus, the U.S. Investors will be required to take into account all such items of income, gain, loss, deduction and credit on a current basis because the Company itself will be treated as a partnership for U.S. federal income tax purposes.
Election to Adjust Basis of Fund Assets
The Investment Manager will have the authority to cause the Company to elect under Section 754 of the Code to adjust the basis of the Company’s assets (“tax basis adjustments”) in connection with certain distributions to Investors or certain transfers of interests in the Company. Although the Investment Manager has no present intention of making an election under Section 754 of the Code, tax basis adjustments to the Company’s assets may be mandatory under certain circumstances. These tax basis adjustments could affect the allocation of the Company’s income, gain, loss or deduction among the Investors for U.S. federal income tax purposes, with the result
that some taxable Investors might incur greater tax liability as a result of the tax basis adjustments.
The Investment Manager will also have the authority to cause the Company to elect to be treated as an “electing investment partnership” under Section 743 of the Code. If such election is made, tax basis adjustments that would otherwise be mandatory will not be required. As a consequence of the election, however, Investors who acquire their interests in the Company by transfer from an existing Investor who recognized a tax loss on the transfer will be limited in their ability to deduct their shares of any future losses allocated to them by the Company. There is no assurance that the Company will satisfy the requirements for electing to be an electing investment partnership.
Under the Company’s governing documents, the Investment Manager will have the authority to require any Investor engaged in a transaction that requires the Company to make tax basis adjustments (for example, transferors and, in some cases, transferees of interests in the Company) to bear the Company or its Investors’ incremental accounting and administrative expenses related to current and future tax basis adjustments resulting from the transfer. These costs, which could be significant, may be charged to the Investor without regard to whether the Investment Manager has made either of the elections described above. Furthermore, each Investor will be required to cooperate reasonably with the Investment Manager and to provide the Company with any information necessary to allow the Company to comply with its obligations to make tax basis adjustments or its obligations as an electing investment partnership.
Sale or Taxable Exchange of Interests
Upon the sale or taxable exchange of a U.S. Investor’s interest in the Company or a complete withdrawal from the Company, a selling or withdrawing U.S. Investor generally will recognize gain or loss in an amount equal to the difference between the amount of the consideration received and the U.S. Investor’s allocable adjusted tax basis for its interest in the Company. Such U.S. Investor’s adjusted tax basis will be adjusted for this purpose by its allocable share of the Company’s taxable income or loss for the year of such sale or withdrawal. Subject to the discussion under “—Investments in Non-United States Companies” below, any gain or loss recognized with
respect to such a sale, exchange or withdrawal (or, as discussed in “—Treatment of Cash Distributions: Withdrawals: Liquidations” below, upon certain distributions), generally will be treated as a long-term or short-term capital gain or loss, depending upon the U.S. Investor’s holding period.
Treatment of Cash Distributions; Withdrawals; Liquidation
Cash distributions, to the extent they do not exceed a U.S. Investor’s adjusted tax basis in such U.S. Investor’s interest in the Company, will not result in taxable income to such U.S. Investor but will reduce (but not below zero) such U.S. Investor’s adjusted tax basis in such U.S. Investor’s interest in the Company. Subject to the discussion under “Investments in Non-United States Companies” below, cash distributions in excess of a U.S. Investor’s adjusted tax basis in such U.S. Investor’s interest in the Company immediately prior thereto will result in the recognition of gain to the extent of such excess and generally will be treated as gain from a sale of a capital asset. A U.S. Investor will recognize a loss only to the extent of the excess of its adjusted tax basis over the amount of cash distributions received following the complete withdrawal of its interest in the Company. A complete withdrawal of a U.S. Investor’s interest in the Company will generally be treated as if the U.S. Investor sold his interest in the Company. See also “—Sale or Taxable Exchange of Interests” above.
Tax-Exempt U.S. Investors; Unrelated Business Taxable Income
Income of an otherwise tax-exempt entity will be subject to U.S. federal income tax to the extent that it constitutes “unrelated business taxable income” (“UBTI“) within the meaning of Section 512 of the Code. UBTI generally is defined as income from a trade or business regularly carried on by a tax-exempt entity that is unrelated to its exempt purpose, or income from such a trade or business that is regularly carried on by a partnership of which the entity is a partner. Although passive investment income, such as interest, dividends and capital gains, generally is excluded from the definition of UBTI, such passive investment income will be taxable as UBTI if the investment that gives rise to the income is “debt-financed.” The Company may realize UBTI if a company in which it makes a Portfolio Investment is a pass-through entity rather than a corporation for U.S. federal income tax purposes. The Company may also realize UBTI if any of its own activities are
characterized as regularly carrying on a business. For example, if the Company realizes income in the form of fees for services, that income would be treated as UBTI.
It is possible that, as a result of these activities or arrangements or otherwise, the Company will realize income which would constitute UBTI and, in that event, each tax-exempt U.S. Investor would be subject to U.S. federal income tax on its share of such income and could be required to file a U.S. federal income tax return with respect to such income.
Taxable U.S. InvestorsLimitations on Allowable Deductions
Under Section 67 of the Code, U.S. persons who are individuals may deduct certain miscellaneous expenses only to the extent that such deductions exceed, in the aggregate, two percent (2%) of the individual’s adjusted gross income. Further, Section 68 of the Code separately disallows certain itemized deductions otherwise allowable to taxpayers who are individuals; the amount disallowed varies based on the individual’s adjusted gross income. Part or all of the Company Expenses allocated to a U.S. Investor who is an individual may be disallowed as deductions under these provisions. Moreover, if an Investor is subject to the alternative minimum tax, such deductions will not be deductible in determining the Investor’s “alternative minimum taxable income” that is subject to the alternative minimum tax.
Investors in the Company may be subject to limitations on the deductibility of their shares of any losses generated by the Company. For example, an Investor generally will not be able to deduct losses in excess of its tax basis for its interest in the Company. In addition, U.S. Investors who are individuals, estates, trusts, personal service corporations and closely-held C corporations may be limited in their ability to offset income from the Company with losses from other investments or activities. Further, to the extent that the Company distributive share allocated to a U.S. Investor who is an individual, trust or a closely-held C corporation, consists of a taxable loss, such U.S. Investor may only deduct such taxable loss to the extent such U.S. Investor has an amount “at risk” with respect to its interest in the Company. The deductibility of net capital losses is also subject to limitations.
characterized as regularly
The organizational expenses of the Company are not currently deductible for federal income tax purposes, but the Company expects to take advantage of an election to deduct such expenses over a 180-month period. The Company’s syndication expenses, i.e., the expenses incurred in connection with the offer and sale of interests in the Company, including placement fees, are not deductible by the Company or any Investor.
Medicare Tax on Investment Income
U.S. persons who are individuals, estates and trusts may be required to pay a 3.8% Medicare tax on their net investment income, or in the case of estates and trusts, on their net investment income that is not distributed. For purposes of this tax, net investment income will include any interest, dividends and capital gains attributable to an investment in the Company. This tax applies, however, only to the extent that the U.S. person’s total adjusted gross income exceeds certain income thresholds.
Investments in Non-United States Companies
The Company may make investments in “passive foreign investment companies” (“PFICs“) or “controlled foreign corporations” (“CFCs“) as those terms are defined under the Code.
Passive Foreign Investment Companies. A Portfolio Investment by the Company in the stock of a non-U.S. corporation that is classified as a PFIC will cause U.S. Investors to be subject to a special tax regime. In general, a non-U.S. corporation is deemed to be a PFIC if either 75% or more of its gross income constitutes “passive income” (generally, interest, dividends, annuities and other investment income) or 50% or more of its assets produce, or are held for the production of, passive income. In determining whether a non-U.S. corporation is a PFIC, such corporation is treated as if it directly owned its proportionate share of the assets and received its proportionate share of the income of any other corporation of which it is a 25% or greater shareholder (by value).
A U.S. shareholder of a PFIC (directly, indirectly or by attribution), including a U.S. Investor, either (i) includes its distributive share of certain distributions from a PFIC and gain from the disposition of interests in a PFIC (or gains from the sale by a U.S. Investor of its interest in the Company) as ordinary income at the maximum
applicable rate, and pays an interest-like charge on the tax liability over the period the stock was owned by the U.S. shareholder, or (ii) may make a “qualified electing fund” (“QEF“) election to include in its income annually its share of the PFIC’s ordinary earnings and net capital gains even if not distributed (and would not be able to deduct losses of the PFIC currently), but would avoid the interest charge and ordinary income treatment as to distributions and gains described above. Where stock in a PFIC is held by a foreign partnership, such as the Company, the QEF election generally is made by the first U.S. person in the chain of ownership, i.e., the U.S. Investor. However, there can be no assurance that the QEF election will be available or will be made with respect to any PFIC in which the Company invests, or that the PFIC will provide the necessary information for a U.S. Investor to make or maintain such QEF election.
Controlled Foreign Corporation Considerations. The Company may invest in equity, including options, warrants and convertible securities, of non-U.S. corporations treated as CFCs. A U.S. Investor could have current inclusions of certain undistributed income of a CFC if the Company or such U.S. Investor owns, directly or indirectly (or through certain attribution rules), 10% or more of the total combined voting power of the CFC. Furthermore, gain from the disposition by the Company of an interest in a CFC, or gain recognized by certain U.S. Investors on the disposition of an interest in the Company could be characterized as a dividend, rather than capital gain, in whole or in part.
A non-U.S. corporation generally is treated as a CFC if more than 50% of the total combined voting power or total value of its stock is owned or treated as owned, directly, indirectly, or by attribution, by “U.S. Shareholders.” In general, a U.S. Shareholder is any U.S. person that owns or is treated as owning 10% or more of the total voting power of a non-U.S. corporation. A U.S. Investor may be a U.S. Shareholder of the CFC if the U.S. Investor owns or is treated as owning 10% or more of the voting power of the CFC, taking into account such U.S. Investor’s ownership through the Company and apart from the Company, applying constructive ownership rules. The applicable constructive ownership rules are broad and complex, applying generally to family members, partnerships, estates, trusts, controlled corporations, and holders of certain options.
The rules applicable to CFCs are complex, and the foregoing summary of the U.S. federal income taxation of U.S. Investors indirectly owning an interest in a CFC is general in nature. The Investment Manager cannot provide any assurance that any non-U.S. corporation in which the Company invests will not be CFCs.
Qualified Dividend Income Considerations. With respect to non-corporate U.S. persons, dividends paid by non-U.S. corporations may be “qualified dividend income” that is taxed at a lower applicable capital gains rate provided that (1) the non-U.S. corporation paying such dividend is neither a PFIC nor treated as such with respect to such U.S. persons for either the corporation’s taxable year in which the dividend is paid or the preceding taxable year, (2) certain holding period requirements are met, and (3) the non-U.S. corporation paying such dividend is eligible for the benefits of a comprehensive U.S. income tax treaty which provides for the exchange of information. The Company may acquire interests in non-U.S. corporations that are eligible for the benefits of a comprehensive U.S. income tax treaty that provides for the exchange of information. However, the Company is not obligated to seek out or otherwise make investments that qualify for qualified dividend income treatment. As a result, there can be no assurance that the Company’s dividend income will be qualified dividend income. Each non-corporate U.S. Investor is urged to consult his own tax advisor concerning application of the qualified dividend income rules to their particular situations.
Withholding Taxes; Foreign Tax Credits
The Company intends to make investments in, among other entities, entities that are formed and operating under the laws of countries other than the United States. The countries in which these entities are organized and operate may impose withholding taxes and other taxes on the income of, and distributions made by, these entities. Although an income tax treaty in effect between the foreign country and the United States may reduce or eliminate such taxes, there can be no assurance that such a treaty will apply to the income realized by the Company from its foreign investments.
Subject to applicable limitations on foreign tax credits, a U.S. Investor that is subject to U.S. federal income taxation may be entitled to elect to treat withholding and other non-U.S. taxes as foreign income taxes eligible for credit against such U.S. Investor’s U.S. federal income tax liability. Similarly, each such U.S. Investor’s share of any non-
U.S. taxes, which may be imposed on capital gains or other income realized by the Company, generally should be treated as creditable foreign income taxes. Complex limitations also may apply which would result in reductions in the amount, or the elimination, of foreign tax credit otherwise allowable to a U.S. Investor with respect to its share of the income of the Company. Because of these limitations, U.S. Investors may be unable to claim a credit for the full amount (or, possibly, any amount) of their proportionate shares of any non-U.S. taxes paid by the Company. U.S. Investors that do not elect to treat their distributable shares of foreign withholding and gains taxes as creditable generally may claim a deduction against U.S. federal taxable income for such taxes. However, since the availability of a credit or deduction depends on the particular circumstances of each U.S. Investor, prospective investors are advised to consult their own tax advisors.
Foreign Currency Issues
The Company is expected to engage in transactions involving foreign currencies. As such it is expected that the Company and the U.S. investors will experience foreign currency gain or loss with respect to an investment in the Company. In general, foreign currency gain or loss is treated as ordinary income or loss.
The Investment Manager will use commercially reasonable efforts to ensure that the Company does not engage in transactions that are expected to cause the Company to be engaged in the conduct of a U.S. trade or business for U.S. federal income tax purposes (a “U.S. trade or business“). However, no assurance can be given in this regard. This commercially reasonable efforts undertaking does not apply to the realization by the Company of income attributable to certain fee reductions or offsets. The Investment Manager may satisfy its commercially reasonable efforts undertaking with respect to a Portfolio Investment if the Investment Manager offers Non-U.S. Investors the opportunity to invest in the Portfolio Investment through a blocker corporation. The Company’s activities will consist primarily of investing in stocks and securities of portfolio companies for capital appreciation and ancillary activities (such as making short-term investments in or loans to non-U.S. portfolio companies until permanent financing can be obtained), and it is intended that any income attributable to such ancillary activities will constitute investment income. Under the decided cases, investing in corporate stocks and securities for capital appreciation and
receiving returns solely in the form of interest, dividends and capital gains attributable to enhancements in the value of those investments generally should not constitute engaging in a trade or business for U.S. federal income tax purposes.
Provided that the Company is not engaged in the conduct of a U.S. trade or business, and subject to any withholding taxes that may be imposed under FATCA (as described below), the U.S. federal income tax liability of a Non-U.S. Investor with respect to the Investor’s interest in the Company generally will be limited to withholding tax on certain gross income from United States sources generated by the Company as long as the Non-U.S. Investor undertakes no activities in the United States (determined without regard to its investment in the Company) that would cause that Investor to be engaged in a U.S. trade or business. Further, if the Company withholds and pays over the proper amounts of tax to the United States government, Non-U.S. Investors that are individuals or corporations will not be required to file U.S. federal income tax returns or pay additional U.S. federal income taxes solely as a result of their investment in the Company. If neither the Company nor its Non-U.S. Investors are engaged in a U.S. trade or business, those Non-U.S. Investors’ shares of income and gains from sources other than the United States (generally, interest or dividends paid by non-U.S. portfolio companies and gains realized on the disposition of securities) will not be subject to U.S. federal income tax.
Certain categories of income (including interest and dividends) from United States sources realized by the Company generally will be subject to U.S. federal income tax, collected by withholding, at a 30% rate on the gross amount of that income, when included in the distributive shares of Non-U.S. Investors. A Non-U.S. Investor whose distributive share of such income is subject to U.S. withholding tax may be able to claim an exemption or a reduced rate of withholding under a tax treaty or convention between the United States and that Non-U.S. Investor’s country of residence. However, there can be no assurance that a tax treaty will be available or that a treaty will be applicable to reduce or eliminate tax in the case of any particular Non-U.S. Investor. Notwithstanding the foregoing, certain other exemptions from withholding may be available, including on “portfolio interest”.
Capital gains attributable to sales by the Company of the securities of U.S. corporations generally will not be subject to U.S. taxation or tax withholding when
allocated to a Non-U.S. Investor unless that Non-U.S. Investor is an individual who is present in the United States for 183 days or more during the taxable year in which such gains are realized and certain other conditions are satisfied. This general rule of non-taxability of capital gains of non-residents does not apply to gains attributable to a U.S. trade or business. Also, this general rule of non-taxability does not apply to gains attributable to dispositions of securities of any “United States real property holding corporation” (“USRPHC“), defined, in general, as a corporation with 50% or more of the fair market value of its business assets consisting of interests in real property located in the United States and related assets. Capital gains attributable to sales by the Company of the securities of a USRPHC (other than debt securities with no equity component) may be subject to U.S. federal income tax, collected initially by withholding, when allocated to a Non-U.S. Investor. Non-U.S. Investors would also be required to file U.S. federal income tax returns, and might be liable for U.S. federal income tax in excess of the amount collected by withholding. Similarly, Non-U.S. Investors may become subject to U.S. federal income tax, and U.S. federal income tax return filing obligations, as a result of transfers of their interests in the Company at a time when the Company owns stock of any USRPHC, unless an exception applies.
The discussion above of the U.S. federal income tax treatment of Non-U.S. Investors is based on the assumption that neither the Company nor any Non-U.S. Investor will be treated as engaged in the conduct of a U.S. trade or business. Notwithstanding the Investment Manager’s undertaking to ensure that the Company does not engage in transactions that are expected to cause the Company to be engaged in the conduct of a U.S. trade or business, however, it is possible that the Company could undertake activities that would be regarded as engaging in conduct of a U.S. trade or business. If it were ultimately established that the Company is engaged in a U.S. trade or business, the Company generally would be required to withhold and pay over to the United States government a percentage of the Company’s net income and gains that are both effectively connected with that trade or business and allocated to Non-U.S. Investors, and would be liable for interest and penalties with respect to any amounts which were not so withheld. The relevant withholding percentage is the maximum applicable U.S. federal income tax rate, currently 39.6% for individuals and 35% for corporations. In addition, Non-U.S. Investors generally would be (i) required to file U.S. federal income tax returns and pay tax in respect of their shares of the Company’s effectively connected income including capital gains and (ii) would be
allowed a credit against U.S. federal income tax liability for amounts of U.S. federal income tax withheld by the Company on their behalf. Non-U.S. Investors that are non-U.S. corporations might also be subject to an additional “branch profits” tax on certain earnings of the Company deemed to have been repatriated to those investors.
Withholding and Information Reporting Under FATCA and Other Reporting Regimes
Sections 1471 through 1474 of the Code (together with any regulations, rules and other guidance implementing such Code sections and any applicable intergovernmental agreement or information exchange agreement and related provisions of law (including without limitation statutes, regulations, rules and court decisions) and other guidance thereunder, referred to as “FATCA“) imposes a withholding tax of 30% on certain gross amounts not effectively connected with a U.S. trade or business paid to certain non-U.S. entities unless various information reporting requirements are satisfied. Amounts subject to withholding under these rules generally include gross dividend and interest income from United States sources, gross proceeds from the sale of property that produces dividend or interest income from United States sources paid on or after January 1, 2019 and certain other payments made by “participating foreign financial institutions” to “recalcitrant account holders” not before January 1, 2019 (so called “foreign pass thru payments”). To prevent a non-U.S. entity from being subject to withholding under FATCA, such entity may be required to comply with certain information reporting and disclosure requirements which may include, among other things, entering into an agreement with the IRS and requesting additional information from its investors that may be disclosed to the IRS or, alternatively, disclosing information and meeting other requirements imposed under the terms of an intergovernmental agreement (and local laws promulgated pursuant thereto) between the United States and non-U.S. jurisdiction.
In addition, the Company will be required to deduct and withhold 30% from “withholdable payments” allocable to a Non-U.S. Investor who invests in the Company if that investor fails to comply with the reporting requirements imposed by the IRS or foreign jurisdiction under an intergovernmental agreement in respect of its direct and indirect U.S. investors. Each investor will be required to provide the Investment Manager with information such that the Company can comply with the reporting
requirements under FATCA and if an investor fails to provide such information, the investor will be required to bear the costs of such non-compliance. Prospective investors are encouraged to consult their own advisors regarding the possible application of FATCA to an investment in the Company.
The Company may also be subject to tax information and reporting regimes similar to FATCA and may require Investors to provide additional information to ensure the Company’s compliance with such additional regime or regimes.
The Company will file an annual partnership information return that will report the results of its operations. The Company has certain discretion regarding how to report partnership items on the its U.S. federal income tax returns and all Investors are generally required to treat the items consistently on their own U.S. federal income tax returns. The Company will provide the Investors with Schedules K-1 setting forth the U.S. federal income tax information necessary for them to file their U.S. federal income tax returns.
Under the Code, adjustments in tax liability with respect to the Company’s U.S. federal income tax items generally will be made at the Company level in a single partnership proceeding rather than in separate proceedings with each Investor. The Investment Manager will represent the Company as the “tax matters partner” during any audit and in any dispute with the IRS. Each Investor will be informed by the Investment Manager of the commencement of an audit of the Company. In general, the Investment Manager may enter into a settlement agreement with the IRS on behalf of, and binding upon, the Investors. Prior to settlement, however, an Investor may file a statement with the IRS providing that the Investment Manager does not have authority to settle on behalf of such Investor.
Generally, the period for assessing a deficiency against a partner in a partnership, such as the Company, with respect to a partnership item is the later of three (3) years after the partnership files its returns or the last day for filing such return for such year (determined without regard to extensions). The Investment Manager may consent on behalf of the Company to an extension of the period for assessing a deficiency with
respect to the Company’s U.S. federal income tax matters. As a result, an Investor’s U.S. federal income tax return may be subject to examination and adjustment by the IRS for a Company U.S. federal tax income item more than three (3) years after such return has been filed
Pursuant to the Bipartisan Budget Act of 2015, if the IRS makes audit adjustments to the U.S. federal income tax returns of the Company for tax years beginning after 2017, it may collect any resulting taxes (including any applicable penalties and interest) directly from the Company. The Company intends to take the steps necessary to shift any such tax liability to the Investors in accordance with their interests in the Company, but there can be no assurance that the Company will be able to do so under all circumstances. If the Company is required to make payments of taxes, penalties and interest resulting from audit adjustments, the Company’s cash available for distribution to the Investors might be substantially reduced.
Pursuant to this new legislation, the Company will be required to designate a person to act as the partnership representative who shall have the sole authority to act on behalf of the Company with respect to dealings with the IRS under these new audit procedures.
Possible Tax Law Changes
The foregoing discussion is only a summary and is based upon existing U.S. federal income tax law. Prospective investors should recognize that the U.S. federal income tax treatment of an investment in an interest in the Company may be modified at any time by legislative, judicial or administrative action. Any such changes may have retroactive effect with respect to existing transactions and investments and may modify the statement made above.
Certain State and Local Tax Consequences; Foreign Taxes
State, local and non U.S. taxing jurisdictions may impose income taxes and estate, inheritance and intangible property taxes on income from, or an investment in, the Company. These tax laws may differ substantially from the U.S. federal tax laws. As a result of participating in the Company, an Investor may be required to file tax returns with, and pay taxes to, any state, local, or non-U.S. jurisdiction in which the Company conducts its activities. In addition, an Investor’s distributive share of the Company’s
taxable income, gain, loss, deduction and credit is normally included in the income reported to the state, local and non-U.S. jurisdiction(s) in which the Investor is a resident or does business. Prospective investors should consult their own tax advisors about state, local and non-U.S. taxes.