1.BLC, a British Leasing Company Entered Into a Long-Term Leasing Agreement with White

CASE STUDY #3

Facts

1.BLC, a British leasing company entered into a long-term leasing agreement with White Wings Air Co. (“White Wings”), a Polish private low-fare airline, to lease 4 used Boeing 737 aircrafts to White Wings for a period of 5 years, for a leasing fee in the cumulated amount of $16 Million per year. The leasing agreement provides for quarterly payments of the leasing fees by White Wings to a bank account of BLC maintained at the Citibank, Warsaw.

2.Hoping to increase its business with low-fares airlines in Eastern Europe, BLC also decided to open a small office in Warsaw, purpose of which is to provide information about the aircraft leasing opportunities, financing and the available aircraft fleet to potential customers, and to collect information about the aircraft leasing markets in Eastern Europe. BLC office in Warsaw employs only three persons, two managers, both British nationals and a Polish secretary. The managers receive PLN 120,000 per year gross, whereas the secretary receives PLN 60,000 gross per year.

3.As it turned out, after a first year of operations White Wings made losses and was temporarily unable to perform leasing payments under the long-term leasing agreement with BLC and, as a result, suspended its business operations, but did not declare bankruptcy yet. BLC decided to terminate agreement with White Wings and the 4 used Boeing 737 aircrafts previously leased to White Wings have been re-leased to Eastern Virgin, another private low-fare airline based in Hungary, under the same business conditions as previously agreed with White Wings. Eastern Virgin pays the leasing fees to a bank account of BLC maintained at the Citibank, London.

4.BLC, in order to recover its receivables due from White Wings, sold the entire amount of receivables to BCC Bank Plc, private a British Bank based in London for 80% of its nominal value. BCC Bank Plc, over the period of three years, managed to recover 90% of the nominal value of the receivables plus a penalty interest for late payments.

5.In order to finance the purchase of the aircrafts subsequently leased – first to White Wings, and later, to Eastern Virgin, BLC took up a $48 Million credit from the European Bank for International Commerce S.A., based in Lichtenstein, for five years. The credit shall bear a 5.2% p.a. interest during first two years and 4.5% p.a. interest during the remaining three years of the loan. The major shareholder in BLC holds 44.5% in the European Bank for International Commerce S.A. The current $-Libor rate for 12 months is 3.8% p.a.

6.In order to operate the 4 aircrafts leased from BLC, Eastern Virgin needed to obtain a license to use the special global air-navigation software manufactured by a US-based company American Software Technologies Inc. based in Palo Alto, California, for regular quarterly payments in the amount of $100,000.

7.Eastern Virgin turned up to be an instant success and made profits already in its first year of operation. Therefore, the shareholders of Eastern Virgin decided to increase the share capital of Eastern Virgin by the amount of net profits ($8.0 Million) to be able to acquire two small used but reliable jets, manufactured in 1999 by US-based Piper Inc., for business executive air taxi services. Due to the existing excellent business relations with BLC, Eastern Virgin decided to purchase those two small jets through BLC for a total amount of $7.5 Million, payable upon delivery.

8.As Eastern Virgin continued its business success during the two next financial years and the cumulated net profits amounted to $7.5 Million, the shareholders of Eastern Virgin decided to distribute a dividend to themselves. There are only three shareholders of Eastern Virgin:

A - an individual (being a resident of Canada), holding 28% of the shares;

B – a Polish company based in Warsaw, holding 22% of the shares, and

C - a Czech company, holding 50% of the shares

Despite the different shareholdings, each of the three shareholders shall receive the same amount of $2.5 Million as a dividend. The Canadian shareholder decided to receive the funds at a bank located in Toronto, Canada, whereas Polish shareholder and the Czech shareholder decided to receive the funds at Citibank, London.

9.As the business of BLC in the Eastern Europe bloomed, BLC awarded each of the two British managers based at the Warsaw Office of BLC with hefty bonuses of $150,000 each. One British manager decided to receive the funds through a bank located in UK, whereas the other British manager decided to receive the funds directly in Warsaw.

Questions

Please indicate all items of taxable income and applicable taxes - from the perspective of Polish, Hungarian, Canadian, US, UK and Lichtenstein tax authorities, assuming that: (i) corporate income tax rate is 30%; (ii) personal income tax rate is 40%; (iii) in all countries involved the withholding tax rate on dividends, interest and royalties is 20%; (iv) there are OECD-type double taxation treaties in force between Poland and, respectively, UK, Hungary and US; and (v) there are no foreign exchange restrictions, which would impair any of the contemplated cross-border payments. Please remember that Poland, Hungary, and UK are EU members.

WARSAW 195101 v3 (2K) / -1-