Overview of the U.S. Tax Situation

The following tax-related explanations cover the most important U.S. and Swiss (as well as German) assessment principles that are or may become significant for Swiss investors in connection with an investment in a U.S. limited partnership. These explanations are based on the assumption that the investors hold their interests in the limited partnership under U.S. law as part of their private assets and are neither U.S. citizens nor resident in the United States. No liability can be assumed for future changes in laws and double taxation conventions.

Taxation of L.P. Investors in Switzerland

As the tax requirements and the tax effects that result from an investment may vary greatly from canton to canton, investors who are tax-resident in Switzerland are advised to consult their personal tax advisors before investing in a limited partnership under U.S. law.

Taxation during the Operation Phase

With regard to current income from immovable property located in the United States, the right to levy taxes rests with the United States pursuant to the Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income signed on October 2, 1996 (DTC USA-CH). In Switzerland, such rental income is exempt from taxation [exemption with progression method (Progressionsvorbehalt)]. Under certain circumstances, the U.S.-source income may cause the income tax rate levied on the domestic income of an investor resident in Switzerland to increase.

In the United States, the pro-rata U.S. rental income (plus interest income, if any) of each limited partner that results from his or her investment in the limited partnership is subject to income tax. Each investor is obligated to file annual tax returns in the United States declaring the income attributable to him or her. U.S. tax advisors charge investors whose only U.S. income source is the ACRON investment a processing fee currently amounting to USD 120 annually. Each investor who has not yet been assigned a Taxpayer Identification Number in the United States must apply to the Internal Revenue Service to receive one. ACRON AG will be pleased to provide any corresponding documents needed.

As a rule, U.S. limited partnerships may immediately deduct current operating expenses that arise in connection with the maintenance of the investment properties and their ongoing administration and, among other things, for management, consulting and accounting services as well as for the preparation of annual financial statements. Costs incurred for the formation of the companies may be amortized as organization or start-up costs over a period of at least 15 years. Tax depreciation for wear and tear of the U.S. investment property is generally charged over a period of 39 years (with one exception currently being investments in properties in Tulsa, Oklahoma, where accelerated depreciation over 22 years is an option). The tax base for calculating depreciation for wear and tear is the acquisition cost of the building including any additional acquisition expenses. The pro-rata acquisition cost of the lot cannot be amortized. Usually ancillary borrowing costs may be amortized over the term of the loan agreement.

If the limited partnership were to incur rental losses, these losses cannot always be offset against other positive income by investors in the United States; however, they can be offset against taxable income from other U.S. real estate. Any remaining losses may be carried forward and, e.g., be offset against any subsequent gains from the sale of the property (rules governing carryovers of passive activity losses).

The U.S. limited partnership is required to withhold tax in the amount of the maximum federal income tax rate of currently 35 percent on its estimated annual net profit attributable to the investment company and remit the resulting amount to the U.S. tax authorities through quarterly prepayments. After the U.S. company has filed a tax return, the tax withheld in this way can be offset against the investors' personal U.S. income tax liability as a prepayment rendered by the limited partnership. Insofar as the ultimate personal income tax liability is lower than the prepayment, the U.S. tax authorities will refund the surplus to the company or the partners.

Progressive tax rates that depend on the taxable income of the taxpayer apply to federal income tax. In the United States, the tax rates applicable to natural persons differ according to whether the person in question is a single individual or a married individual filing separately. Foreign married investors cannot file jointly.

For 2008, the federal tax rate on income of up to USD 8,025 of unmarried investors is 10 percent and increases to up to 35 percent for income exceeding USD 357,700. Married investors filing separately are subject to the following tax rates for 2008: the rate varies between 10 percent on income up to USD 8,025 up to 35 percent for income exceeding USD 178,850. In addition, each individual investor is granted a personal exemption of currently USD 3,500 (for 2008), which is gradually phased out starting at income of over USD 119,975 (married individuals filing separately) and/or USD 159,950 (unmarried individuals).

The provisions relating to the alternative minimum tax (AMT) must be taken into account for calculating taxable income on U.S. tax returns. The AMT was designed to guarantee the minimum taxation of high-income taxpayers.

Taxation during the Disposition Phase

Pursuant to the DTC USA-CH, it is again the United States that is entitled to levy taxes on any gains from the sale of immovable property. The federal income tax rate on long-term capital gains (holding period of more than one year) is 15 percent. In the United States, the taxable gain from the disposition is calculated from the proceeds of the disposition less the book value of the real estate at the time of the sale. To calculate the tax that must be paid on the gain from the disposition, the gain is broken down into various amounts to which different tax rates apply. Upon their sale, tax at a rate of 25 percent is charged on any depreciation on buildings taken up to the time of the sale. From 2011, any additional taxable gains from the disposition will be subject to a tax rate ranging between eight percent and 20 percent (lower percentages applicable until 2011), depending on the holding period of the property and the total income in the year of disposition. As the law currently stands, the tax rate charged on the gain from the disposition is reduced to five percent for the individual investor provided his or her total taxable U.S. income (i.e., pro-rata rental income plus pro-rata gain from the disposition) falls under the 10 or 15 percent entry-level bracket of the tax rate schedule in the year of disposition.

However, the part of the gain from the disposition that is attributable to real estate depreciation taken up to that point (depreciation recapture) is not regarded as tax-favored long-term capital gains from the disposition and is taxed at a maximum rate of 25 percent. Any investment losses that have not been offset may reduce the gain from the disposition. Generally, Swiss private investors are not liable to pay taxes in Switzerland on their returns on capital and gains from the disposition. Commercial real estate deals could possibly be an exception; however, pursuant to Swiss law, it is not the number of properties traded that determines whether transactions qualify as commercial real estate deals, and final and binding provisions have not yet been laid down.

Estate / Gift and Capital Tax

In the United States, taxes are levied on an estate and all assets that form part of an estate which are subject to U.S. tax laws. With a view to investments in limited partnerships, this refers to the share of the U.S. real estate assets that is attributable to the testator. Real estate is appraised at fair market value. At federal level in the United States, the rates of estate tax depend on the degree of kinship and are progressive. For the year 2008, they range between 18 percent (up to an estate value of USD 10,000) and 45 percent (for amounts exceeding USD 1.5 million). In 2010, no estate tax will be levied in the United States. Pursuant to the U.S. Tax Reform Act of 2001, the estate tax will return to 2001 levels, i.e., to a top rate of 55 percent, unless there is further legislation extending these provisions by 2011. For each estate, a unified tax credit of USD 13,000 is granted. In mathematical terms, this means that the first USD 60,000 of the estate's value is tax-free. U.S. estate tax returns must be filed within a period of nine months. Property transfers are always subject to cantonal gift and inheritance tax in Switzerland. However, e.g., in the Canton of Zurich, spouses and descendants are exempt from this taxation. At federal level, no inheritance or gift taxes are levied in Switzerland. However, in most cantons property transfers are generally subject to inheritance and gift taxes, whereby cantonal provisions can sometimes vary considerably. In addition, the provisions included in the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Estates and Inheritances signed on July 9, 1951 must be observed.

The donation of real estate located in the United States is subject to U.S. gift tax. The donation of an interest in a partnership that holds real estate is treated like the donation of the pro-rata property. Basically the same taxation principles apply as those explained with regard to estate tax. However, the exemptions are generally lower.

The market value of the shares of the limited partnership must be declared as capital on the tax returns filed by Swiss investors. The Swiss net wealth tax does not fall under the scope of application of a double taxation convention between Switzerland and the United States. At the federal level, private assets of natural persons are not liable to net wealth tax. For cantonal purposes, the U.S. assets must be declared as capital on the tax returns filed by Swiss investors. Taxation and assessment follow the cantonal provisions of the canton of residence. The final calculation of the tax liability is under the purview of the respective canton – this requires an individualized calculation, which would exceed the scope of this presentation.

Disclaimer
This summary is based on currently applicable Swiss or German federal tax law (as of September 2008) and the Conventions between the United States of America and the Swiss Confederation and between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital. This summary does not provide specific tax advice but is merely a general presentation of the investment-related aspects of taxation. This information is presented according to the best of our knowledge and belief. No liability can therefore be assumed for the tax treatment that will be sought by the company and the investors.

Taxation of L.P. Investors in Germany