LCP Proudreed PLC - Irish Stock Exchange

Withholding tax in respect of the Commercial Mortgage Loans
In the event that any withholding or deduction for or on account of tax is required to be made from any
payment due to the Issuer under the Commercial Mortgage Loans, the relevant Borrower making that
payment will be obliged to gross up that payment so that the Issuer will receive the same cash amount that
it would have received had no such withholding or deduction been required to be made. If the relevant
Borrower is obliged to increase any sum payable by it to the Issuer as a result of that Borrower being
required by a change in tax law to make a withholding or deduction from that payment, that Borrower
will have the option (but not the obligation) to prepay its Commercial Mortgage Loan in full. If that
Borrower chooses to prepay its Commercial Mortgage Loan, the Issuer will then be required to redeem
the Notes in part (or, if that Borrower is the sole Borrower with an outstanding Commercial Mortgage
Loan, in full). If a Borrower does not have sufficient funds to enable it to gross up payments to the Issuer,
the Issuer’s ability to meet its payment obligations under the Notes could be adversely affected.
Introduction of International Financial Reporting Standards
For accounting periods beginning on or after 1 January 2005, the accounts of United Kingdom companies
with listed debt (such as the Issuer) are required to comply with International Financial Reporting
Standards (‘‘IFRS’’) or with new UK Financial Reporting Standards (‘‘new UK FRS’’) which are based
on IFRS. In the following, unless otherwise stated, references to IFRS include references to new UK FRS.
It is not clear whether the tax position of special purpose companies such as the Issuer will be the same
under IFRS as it would have been under UK GAAP as it applied for accounting periods ending on or
prior to 31 December 2004 (‘‘old UK GAAP’’). HMRC have indicated that, as a policy matter, they do
not wish the tax neutrality of securitisation special purpose companies in general to be disrupted as a
result of the transition to IFRS and that they are willing to work with the industry to identify appropriate
means of preventing such disruption.
As a first step, the Finance Act 2005 contains legislation creating a special interim corporation tax regime
for ‘‘securitisation companies’’. The effect of this legislation is to allow securitisation companies to
prepare tax computations on the basis of old UK GAAP as applicable up to 31 December 2004 for all
accounting periods beginning on or after 1 January 2005 and ending before 1 January 2007, notwithstanding
any requirement to prepare statutory accounts under IFRS. The Finance Act also contains a
power to make regulations to establish a permanent regime for securitisation SPVs.
In order for a company to qualify as a securitisation company, it is necessary for the company to satisfy
a number of tests as at the closing of any relevant securitisation and the results of applying those tests
therefore cannot be finally determined until the Closing Date. Provided, however, that the Notes are
issued as envisaged in this Offering Circular, the Issuer will qualify as a ‘‘securitisation company’’ for these
purposes.
Assuming that the Issuer qualifies as a securitisation company for the purposes of the interim regime, this
should allow the Issuer to avoid any impact of IFRS on its tax computations for any accounting period
ending before 1 January 2007 (which means that the interim regime should apply to the Issuer up to and
including its accounting period ending 31 March 2006). Further, provided that HMRC adhere to the policy
objectives that they have indicated in this area and which they have confirmed in Budget Notice REV 13
of 16 March 2005, it is expected that secondary legislation will be put in place pursuant to enabling
legislation in the Finance Act 2005 to ensure that the taxation treatment of companies such as the Issuer
does not change as a result of the introduction of IFRS so as to give rise to any incremental unfunded tax
liabilities. If, however, such expectations are not met and the tax position of the Issuer is adversely
affected by the introduction of IFRS, this could ultimately cause a reduction in the payments the
Noteholders receive on the Notes.
It is also considered that each of the Borrowers will qualify as a securitisation company for the purposes
of the interim regime (although the secondary legislation referred to above is unlikely also to extend to
the Borrowers). Assuming that the Borrowers qualify as securitisation companies for the purposes of the
temporary regime, this would allow them to avoid any impact of IFRS on their tax computations for any
accounting period ending before 1 January 2007 (which means that the interim regime should apply to the
Borrowers up to and including their accounting periods ending 31 March 2006, in the case of LCP Real
Estate, and ending 31 December 2006, in the case of Proudreed Real Estate). However, the Borrowers are
expected in any event to avoid any impact of IFRS on their tax computations (provided they do not adopt
the fair value accounting rules in the Companies Act 1985) until such time as IFRS is applied generally
to all UK companies (which is expected to be for accounting periods beginning on or after 1 January
2007). The tax treatment of the Borrowers is unclear in certain respects for accounting periods ending on
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