VALLAURIS II CLO PLC - Irish Stock Exchange

the OID is de minimis). A U.S. Holder will not be eligible for the dividends received deduction with
respect to such income or gain. In addition, any losses of the Issuer in a taxable year will not be
available to such U.S. Holder and may not be carried back or forward in computing the Issuer’s
ordinary earnings and net capital gain in other taxable years. An amount included in an electing U.S.
Holder’s gross income should be treated as income from sources outside the United States for U.S.
foreign tax credit limitation purposes. However, if U.S. Holders collectively own (directly or
constructively) 50 per cent. or more (measured by vote or value) of the Subordinated Notes, such
amount will be treated as income from sources within the United States for such purposes to the
extent that such amount is attributable to income of the Issuer from sources within the United States.
If applicable to a U.S. Holder of Subordinated Notes, the rules pertaining to a controlled foreign
corporation or a foreign personal holding company, discussed below, generally override those
pertaining to a PFIC with respect to which a QEF election is in effect.
In certain cases in which a QEF does not distribute all of its earnings in a taxable year, U.S.
shareholders may also be permitted to elect to defer payment of some or all of the taxes on the
QEF’s income subject to an interest charge on the deferred amount. In this respect, prospective
purchasers of Subordinated Notes should be aware that it is expected that the Collateral Debt
Obligations may be purchased by the Issuer with substantial OID, the cash payment of which may be
deferred, perhaps for a substantial period of time, and the Issuer may use interest and other income
from the Collateral Debt Obligations to purchase additional Collateral Debt Obligations or to retire
the Notes. As a result, the Issuer may have in any given year substantial amounts of earnings for
U.S. federal income tax purposes that are not distributed on the Subordinated Notes. Thus, absent an
election to defer payment of taxes, U.S. Holders that make a QEF election with respect to the Issuer
may owe tax on significant ‘‘phantom’’ income.
In addition, it should be noted that if the Issuer invests in obligations that are not in registered
form, a U.S. Holder making a QEF election (i) may not be permitted to take a deduction for any
loss attributable to such obligations when calculating its share of the Issuer’s earnings and (ii) may be
required to treat income attributable to such obligations as ordinary income even though the income
would otherwise constitute capital gains. It is possible that some portion of the investments of the
Issuer will constitute obligations that are not in registered form.
The Issuer will provide, upon request, all information and documentation that a U.S. Holder
making a QEF election is required to obtain for U.S. federal income tax purposes.
A U.S. Holder of Subordinated Notes (other than certain U.S. Holders that are subject to the
rules pertaining to a controlled foreign corporation with respect to the Issuer, described below) that
does not make a timely QEF election will be required to report any gain on disposition of any
Subordinated Notes as if it were an excess distribution, rather than capital gain, and to compute the
tax liability on such gain and any excess distribution received with respect to the Subordinated Notes
as if such items had been earned rateably over each day in the U.S. Holder’s holding period (or a
certain portion thereof) for the Subordinated Notes. The U.S. Holder will be subject to tax on such
items at the highest ordinary income tax rate for each taxable year, other than the current year of the
U.S. Holder, in which the items were treated as having been earned, regardless of the rate otherwise
applicable to the U.S. Holder. Further, such U.S. Holder will also be liable for an additional tax
equal to interest on the tax liability attributable to income allocated to prior years as if such liability
had been due with respect to each such prior year. For purposes of these rules, gifts, exchanges
pursuant to corporate reorganizations and use of the Subordinated Notes as security for a loan may
be treated as a taxable disposition of the Subordinated Notes. Very generally, an ‘‘excess distribution’’
is the amount by which distributions during a taxable year with respect to a Subordinated Note
exceed 125 per cent. of the average amount of distributions in respect thereof during the three
preceding taxable years (or, if shorter, the U.S. Holder’s holding period for the Subordinated Note).
In addition, a stepped-up basis in the Subordinated Note upon the death of an individual U.S.
Holder may not be available.
In many cases, application of the tax on gain on disposition and receipt of excess distributions
will be substantially more onerous than the treatment applicable if a timely QEF election is made.
ACCORDINGLY, U.S. HOLDERS OF SUBORDINATED NOTES SHOULD CONSIDER
CAREFULLY WHETHER TO MAKE A QEF ELECTION WITH RESPECT TO THE
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