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What did the US Senate said about Luxembourg in the hearing that took place last 11 September

The Permanent Subcommittee on Investigations had scheduled a hearing, "Dividend Tax Abuse: How Offshore Entities Dodge Taxes On U.S. Stock Dividends," on Thursday, September 11, 2008, at 9:30 a.m., in Room 106 of the Dirksen Senate Office Building. The Subcommittee examined how some financial institutions have designed, marketed, and implemented transactions to enable foreign taxpayers, including offshore hedge funds, to dodge millions of dollars of taxes on U.S. stock dividends.

In the report, the Luxembourg financial center is quoted several times.

It is the center where officials feel protected enough to
- state it is not there duty to control if the taxpayer was honest ,
- be willing to protect the interest of the financial center instead of focusing on the relevant issue which is what is to be done to correct the dysfunctions which definitely harm the reputation of the financial center,
- etc.

Extract of the report :

Page 13

In the transactions reviewed by the Subcommittee, U.S. financial institutions engaged in
dividend-related swap and loan transactions with a variety of sophisticated non-U.S. investors,
including offshore hedge funds, foreign financial institutions, certain Luxembourg mutual funds, and large institutional investors such as pension funds, insurance companies, and private equity funds

Page 59

An employee in Merrill’s Global Tax group in New York responded with several ideas
for financial transactions to enable clients to dodge payment of U.S. dividend taxes on the
Microsoft dividend, including transactions involving stock loans, total return swaps, and options.
He observed:
“We had in place a 97-66 structure out of our SNCFE-Hong Kong entity, as it related to
our Luxembourg SICAV funds. This structure was put on hold because the systems
infrastructure supporting the trade did not work as anticipated. We also know that
Morgan Stanley had a 97-66 facility for a couple of years, and our 97-66 thing was an
internal response to that. … I also heard that the IRS is looking into this issue as part of
the single stock futures project and there is some concern that whatever rules they devise
as part of that could adversely impact the 97-66 trades. Other thoughts - …[t]ypical total
return swaps or collars to avoid [withholding] tax.”

Page 63

Project Gemini initially provided “dividend enhancements” to a Luxembourg mutual
fund controlled by Merrill called Merrill Lynch International Investment Fund (MLIIF), whi
was already executing the proposed stock loan transaction “with several of Merrill Lynch’s

In its presentation, Merrill described MLIIF as a SICAV fund incorporated in Luxembourg, having only non-
U.S. investors, and whose investments were managed by Merrill Lynch. SICAV stands for Societe d’Investissement à Capital Variable, “a Luxembourg based public limited liability company whose capital is at any time equal to the net value of its assets.” Merrill wrote that, in 2005, MLIIF had “approximately $28 billion of assets, with roughly 25% invested in US equities.” It indicated that these U.S. securities were subject to a 30% dividend tax

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