13 Acquisition and Reorganization of Mining Projects

CHOICE OF ENTITY

ACQUISITION STRUCTURE

CAPITALIZATION OF ACQUISITION COSTS AND EXPLORATION AND DEVELOPMENT COSTS

AMORTIZATION OF GOODWILL AND EXPLORATION AND DEVELOPMENT COSTS

FINANCING AND INTEREST DEDUCTIBILITY

METAL STREAM TRANSACTIONS.

REORGANIZATION & LIQUIDATIONS

ACQUISITION AND REORGANIZATION OF MINING PROJECTS IN LATIN AMERIACQUISITION AND REORGANIZATION OF MINING PROJECTS IN LATIN AMERICACA

TOPICS TO BE ADDRESSEDTOPICS TO BE ADDRESSED

BRANCH VS. SUBSIDIARY

CORPORATION VS. PARTNERSHIP

HYBRID ENTITIES AND CHECK-THE-BOX

CONTRIBUTION TO COMPANY; SWITCHING FROM PARTNERSHIP TO CORP. AND VICE

VERSA

BENEFITS OF HOLDING COMPANY

TAX TREATY AVAILIBILITY AND BENEFITS

TRANSFER OF HOLDING COMPANIES ABROAD.

TAXATION OF INDIRECT TRANSFERS

CFC/PFIC RULES


CHOICE OF ENTITYCHOICE OF ENTITY


BENEFITS OF HOLDING COMPANY STRUCTURE: EXAMPLEBENEFITS OF HOLDING COMPANY STRUCTURE: EXAMPLE

Dual holding company structure allows eventual sale to be effected as sale of Barbados 2 by Barbados 1

No attribution of capital gain on Barbados 2 shares to Canco for Canadian CFC purposes if Barbados 2 shares are excluded property

No Colombian tax on sale of foreign entity under current law

Canada-Colombia treaty signed (but not yet in force) exempt surplus treatment on income generated by Colombia

Colombia-Barbados treaty expected to be reached in foreseeable future

Canco

(Canada)

Barbados1

(Barbados)

Barbados2

(Barbados)

Operating

Company

(Columbia)

Mining

Property


TAX TREATY AVAILABILITY AND BENEFITS: EXAMPLETAX TREATY AVAILABILITY AND BENEFITS: EXAMPLE

Example of using tax treaties to minimize local tax

Sale by Dutch Cooperative of Mex Holdco shares reduces Mexican capital gains rate from 30% down to 10% under Netherlands Mexico tax treaty

No Dutch taxation of gain under Netherlands law

No attribution of capital gain on Mex Holdco shares to Canco for Canadian CFC purposes if Mex Holdco shares are excluded property

Canco

(Canada)

Dutch Cooperative

(Netherlands)

Mex Holdco

(Mexico)

Mex Opco

(Mexico)

Mine


ACTIVE/PASSIVE INCOME: CANADIAN CFC RULESACTIVE/PASSIVE INCOME: CANADIAN CFC RULES

ECUADORCO

Mine MineBank

Deposit

Tax

Treaty

Interest

No immediate Canco taxation

of active business income of

Ecuadorco

No Canadian tax on dividend

received from Ecuadorco

No immediate Canco taxation of

active business income of Boliviaco

on dividend from Boliviaco, Canco

pays Canadian tax, reduced for

credit for foreign taxes paid by

Boliviaco

Canco taxed immediately

on passive interest income

earned by Passiveco,

subject to credit for foreign

taxes paid by Passiveco

BOLIVIACO PASSIVECO

CANCO

No

Tax

Treaty

U.S. Choice of Entity and Check-the-Box

ACQUISITION AND REORGANIZATION OF MINING PROJECTS IN LATIN AMERIACQUISITION AND REORGANIZATION OF MINING PROJECTS IN LATIN AMERICA.CA.

CHOICE OF ENTITYCHOICE OF ENTITY

US

ChileSpABranch

US US

ChileSpA

ChileLimitada

US

SpA

US

SA

STOCK PURCHASE VS. ASSET PURCHASE

HYBRID STOCK/ASSET PURCHASE (U.S. CHECK THE BOX OR SECTION 338

ELECTION)

CHARACTERIZATION OF MINING TITLES

COSTS OF INTANGIBLES

SALES OF TITLES UNDER LOCAL LAW AND DDT

SALES OF ON-GOING CONCERNS


STRUCTURE OF ACQUISITIONSTRUCTURE OF ACQUISITION

STOCK PURCHASE VS. ASSET PURCHASE


STRUCTURE OF ACQUISITIONSTRUCTURE OF ACQUISITION

ChileTarget

Seller Buyer

ChileTarget

Seller Buyer

CFC Sellers gain is subpart F income/passive except

to extent recharacterized as a dividend

Buyer has FMV basis in stock, no step up in asset

basis

Section 338(g) election Stock sale treated as asset

sale

Buyer no longer has FTC benefit

Buyer may benefit from elimination of Target

E&P

Caution if Target is CFC with

investments in US

Consider effects on Sellers FTCs

CFC Sellers gain is deferred/active (general

limitation) income to extent Targets assets are

active business assets

Buyer has FMV basis in assets but cannot use to

increase FTCs


CAPITALIZATION & AMORTIZATION CAPITALIZATION & AMORTIZATION

CAPITALIZATION OF ACQUISITION COSTS AND

EXPLORATION AND DEVELOPMENT COSTS

CAPITALIZATION AND AMORTIZATION OF

GOODWILL AND EXPLORATION AND

DEVELOPMENT COSTS


DEBT FINANCINGDEBT FINANCING

USE OF DEBT

INTEREST WITHHOLDING

RELATED VS. UNRELATED LENDER

FINANCIAL INSTITUTION LENDERS

TAX TREATIES

BACK-TO-BACK RULES

LIMITATIONS ON DEDUCTIONS

DEBT PUSH-DOWN


TYPICAL CANADIAN CFC FINANCING STRUCTURETYPICAL CANADIAN CFC FINANCING STRUCTURE

Foreign Opco pays interest to Financeco and deducts its

interest expense for local tax purposes

Financeco receives interest income, which for Canadian

tax purposes is characterized as active business income

since it is payable from another Canco foreign affiliate out

of income from its active business

Canco receives exempts surplus dividends from Financeco

which are entitled to a 100% dividends received deduction

Canco borrows money from a bank

and subscribes for shares in Financeco

Financeco loans the money to Foreign

Opco, which uses the money to purchase

a mine.

,

Structure

Bank loan Canco

equity

Financeco

(Barbados)loan

Foreign Opco

(Chile)

Mine

Operation

interest BankCanco

dividends

Financeco

(Barbados)

Foreign Opco

(Chile)

Mine

interest


METAL STREAM TRANSACTIONSMETAL STREAM TRANSACTIONS

Metal stream transactions are a particular form of mining transaction that typically sees a

producer sell secondary output (e.g., silver from a gold mine) to an arms length purchaser,

usually on the basis of an upfront payment plus a relatively low price per unit delivered

(considerably less than spot)

Represent an alternative form of financing

Structured so as not to be a royalty

Up-front payment often set up as a deposit so that receipt of deposit does not create

taxable income for producing corporation

If producers jurisdiction treats deposit as income, as ale to a related entity in a low tax

jurisdiction is sometimes used

ACQUISITION AND REORGANIZATIONACQUISITION AND REORGANIZATION OF MINING PROJECTS IN LATIN AMERICAOF MINING PROJECTS IN LATIN AMERICA

METAL STREAM TRANSACTIONSMETAL STREAM TRANSACTIONS

Purchaser enters into metal stream agreement with Interco

(located in a low-tax jurisdiction) and makes an initial

payment

Interco loans the upfront amount to Mexico, and enters into

an agreement to sell output to Intergo at spot prices

Interco sells output Purchaser under the metal stream

agreement

No Deposit Alternative

Canco

Mexico Interco

Operating

Mine

loan

Sale

agreement

metal stream

agreement

Purchaser

Initial

Payment

Purchaser pays initial amount to Peruco

as a deposit under the stream agreement

Peruco sells output under agreement

which depletes the deposit

,

Canco

Peruco

OperatingMine

metal stream

agreement

Purchaser

deposit

Deposit Alternative


REORGANIZATIONSREORGANIZATIONS

TAXABLE VS. TAX-FREE

TYPICAL REORGANIZATION STRUCTURES AND

CONSEQUENCES

CARRY-OVER OF LOSSES AND OTHER TAX

ATTRIBUTES

ACQUISITION AND REORGANIZATIONACQUISITION AND REORGANIZATION OF MINING PROJECTS IN LATIN AMERICAOF MINING PROJECTS IN LATIN AMERICA

REORGANIZATION STRUCTURES AND CONSEQUENCESREORGANIZATION STRUCTURES AND CONSEQUENCES

Potential Concerns on Reorganizations: often in mergers involving Latin America, identifying a particular participant as being the survivor is essential to preventing a local law taxable event from occurring

downstream mergers where a lower-tier entity is stated to be the surviving entity are sometimes helpful

Canco(Canada)

Canco(Canada)

Canco2(Canada)

Mineco(Mexico)

Canco2(Canada)

Canco3(Canada)

MineMine

Seller

Canco3(Canada)

Mineco(Mexico)

Canco2 buys Canco3

On Merger of Canco2and Canco3, Canco3is designated as thesurviving entity tomake clear that no saleof property occursunder Mexican tax law


LIQUIDATIONSLIQUIDATIONS

ENTITY LEVEL TAX

SHAREHOLDER LEVEL TAX

Documents

13 Acquisition and Reorganization of Mining Projects