Contract analysis

I. Executive Summary This memorandum analyzes whether the Foreign Investment in Real Property Tax Act of 1986 ("FIRPTA"), codified at Sections 897 and 1445 of the Internal Revenue Code of 1986, as amended (the "Code"), imposes withholding obligations on payments of merger consideration to non-U.S. stockholders of VeloPay Systems, Inc. ("VeloPay" or the "Company") in connection with the proposed acquisition of VeloPay

II. Transaction Overview A. Parties and Structure The transaction involves the following principal parties: HPE Fund IV. Harrowgate Private Equity Fund IV LP is a Delaware limited partnership with its principal office located at 300 King Street, Suite 4200, Wilmington, Delaware 19801. HPE Fund IV's employer identification number is 87-4231956. The general partner of HPE Fund IV is Harrowgate Capital Management IV LLC

III. Identification of Non-U.S. Stockholders A. Methodology. The identification of non-U.S. stockholders is essential to determining the scope and application of FIRPTA withholding under Section 1445 of the Code, non-FIRPTA withholding under Sections 1441, 1442, and 1446, and backup withholding under Section 3406. We employed the following methodology to identify non-U.S. stockholders within VeloPay's capitalization

IV. FIRPTA Analysis A. Statutory Framework The Foreign Investment in Real Property Tax Act of 1986, as amended, is codified principally at Sections 897 and 1445 of the Code. FIRPTA was enacted to ensure that non-U.S. persons who realize gain from the disposition of interests in U.S. real property are subject to U.S. federal income tax on such gain. Prior to FIRPTA's enactment, non-U.S. persons could, in many circumst

Section 897(a) — Treatment of Gain or Loss. Section 897(a) of the Code provides that gain or loss of a non-U.S. person from the disposition of a "United States real property interest" ("USRPI") is treated as if the non-U.S. person were engaged in a trade or business within the United States during the taxable year, and as if such gain or loss were effectively connected with such trade or business ("ECI"). This treatm

Section 897(c) — Definition of USRPI and USRPHC. Section 897(c)(1) of the Code defines a "United States real property interest" as (A) an interest in real property located in the United States or the U.S. Virgin Islands, and (B) any interest (other than an interest solely as a creditor) in any domestic corporation, unless the taxpayer establishes that such domestic corporation was at no time a "United States real pro

Section 897(c)(2) of the Code defines a "United States real property holding corporation" as any domestic corporation in which the fair market value of the corporation's United States real property interests equals or exceeds fifty percent (50%) of the sum of the fair market values of (i) its United States real property interests, (ii) its interests in real property located outside the United States, and (iii) any ot

Section 1445(a) — Withholding Obligation. Section 1445(a) of the Code provides that a transferee of a United States real property interest must deduct and withhold a tax equal to fifteen percent (15%) of the "amount realized" by the transferor on the disposition. In the context of a corporate acquisition, the "transferee" is the acquiring entity (or, in the case of a merger, the entity paying the merger consideration

V. Non-FIRPTA Withholding Analysis A. Section 1441/1442 Withholding (FDAP Income) Even in the absence of FIRPTA withholding, it is necessary to analyze whether other withholding provisions of the Code apply to payments made to non-U.S. stockholders in connection with the Merger. Statutory Framework. Section 1441 of the Code requires withholding agents (including corporations, partnerships, and paying agents) to deduc

Article XIII (Capital Gains). Under Article XIII of the U.S.-Canada Treaty, gains derived by a resident of Canada from the alienation of shares of a company are generally taxable only in Canada, unless the shares derive their value principally from real property situated in the United States (which would invoke the FIRPTA overlay). As we have concluded that VeloPay is not a USRPHC and that VeloPay's shares do not der

Article XV (Dependent Personal Services). Article XV of the U.S.-Canada Treaty addresses the taxation of compensation for dependent personal services (i.e., employment income). Where a Canadian resident employee earns compensation income from services performed in the United States, such income is generally subject to U.S. tax, but Article XV provides an exemption if (a) the recipient is present in the United States

Article 13 (Capital Gains). Article 13 of the U.S.-Portugal Treaty provides that gains from the alienation of shares of a company are generally taxable only in the state of residence of the alienator (i.e., Portugal), unless the shares derive more than fifty percent (50%) of their value from immovable property situated in the other Contracting State (i.e., the United States). As VeloPay's shares do not derive their v

Article 16 (Dependent Personal Services). Article 16 of the U.S.-Portugal Treaty contains provisions similar to Article XV of the U.S.-Canada Treaty, providing an exemption from U.S. tax on compensation income earned by Portuguese residents for services performed in the United States if certain conditions are satisfied. The same holder-by-holder analysis described above with respect to Canadian employees applies to P

Section 1446 of the Code requires a partnership that has income effectively connected with a U.S. trade or business ("ECI") to withhold tax on the allocable share of such ECI attributable to its non-U.S. partners. We note this provision for completeness, but it does not directly apply to the payments of merger consideration to VeloPay's stockholders. HPE Fund IV is a Delaware limited partnership and could, in princip

VI. Backup Withholding under Section 3406

Section 3406 of the Code requires "payors" (including paying agents distributing merger consideration) to deduct and withhold at a rate of twenty-four percent (24%) from "reportable payments" made to U.S. persons who fail to provide a correct taxpayer identification number ("TIN") on IRS Form W-9, or who have been notified by the IRS that they are subject to backup withholding due to prior underreporting of interest

VII. Form Collection and Withholding Procedures A. Required Tax Forms The following IRS tax forms are required to be collected from VeloPay's stockholders in connection with the Merger: IRS Form W-9 (Request for Taxpayer Identification Number and Certification). Form W-9 is required from all U.S. person stockholders, including U.S. citizens, U.S. resident aliens, domestic corporations, domestic partnerships, and dome

1. Collection Requirement. No merger consideration should be disbursed to any stockholder until a valid, properly completed and signed tax form (Form W-9 or applicable Form W-8) has been received by Keystone Pacific. The Letter of Transmittal should clearly state this requirement and include instructions for completion of the applicable form.

2. Withholding in Absence of Documentation. If a stockholder submits a Letter of Transmittal without a valid tax form, or if the submitted form is incomplete, expired, or otherwise deficient, Keystone Pacific should withhold the applicable amount from the merger consideration as follows: (a) twenty-four percent (24%) backup withholding for U.S. persons (or persons presumed to be U.S. persons) who fail to provide a va

3. Form Validation. Keystone Pacific should validate each submitted form for completeness, consistency, and authenticity. In particular, Forms W-8BEN and W-8BEN-E should be reviewed for proper completion of the country of residence, treaty claim (if any), FATCA classification, and taxpayer identification number (U.S. TIN, ITIN, or foreign TIN). Keystone Pacific should contact our office if any questions arise regardi

4. Escrow-Related Withholding. Keystone Pacific should coordinate with Garrison Trust Company regarding withholding obligations applicable to escr