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Structuring the Project

Muhammad Alifa Farhan 14410036

Factors to be considered in selecting the form of organization  The Number of Participants and the business objectives of each  The Project’s cost of capital and the anticipated earning paterns of the project  The requirements of the regulatory framework  The existing debt instruments and tax positions of the participant  The political jurisdiction in which the project located .

Unidivided Joint Interest  All property of the porject is owned directly by the particpants in common.  Co-owners appoint an operator (usually a co-owner) to manage the projects  A steering committee composed by representative of all owners is required fo major decisions.  Project cost and benefits are usually allocated in the same proportion as project ownership  Each co-owner is responsible for providing its pro-rata share of the capital cost of the project from its own financial resources .

revenue and operating expenses in its own financial statement.  All tax consequences of project are transferred directly to the co-owners  No limitation on the project deductions take by participants  Project income is taxed at co-owner level only. .Unidivided Joint Interest  The co-owners are the taxable entities  Can be used separate tax accounting methods by each coowners  Each participant reflects its proportionate share of the project assets.

. operate and maintain the project.  Frequently wholly owned by the project sponsor. own.  The equity owners (sponsor) are representated on the project corporation’s board of directors.  Project assets are owned by the corporation  The project corporation operates the project  Employee of the project corporation manage the project.Corporation  The project sponsors incorporate an entity to develop. construct.  Fund: sponsor’s equity and the sale of debt securities (senior debt or subordinated debt).

 The financial vehicle is the project company or a special purposes corporate. the project company issues debt securitites secured with the project company assets and sales contracts.  Liability limited to equity invested expect otherwise agreed.Corporation  Costs and benefits are allocated by the contracts between the project corporation and other parties interested (the contracts cover completion. . supplemental arrangements covering the project debt obligation. purchase and sale input and outputs.  Equity funds are submitted by the sponsors.

with perhaps of tax levels.  Project assets and liabilities are not reflected on equity holder’s balance sheet.Corporation  Project company is the taxable entity  The tax accounting method is elected by the project company  Project usually affects taxable income of equity holders only to the extend of dividends received from the project  Porject incom is taxed at the project corporation level. 7 .  Tax consequences do not flow through directly to sponsors unless there is full consolidation  Taxation of income at the corporation and shareholder level.

.Partnership  Project assets are owned by the partnership  The project partnership operates the project  One of the the general partner is usually designated as a manager of partnership operations.  In the partnership agreement is specified which parnet will operate the project and which partner will manage the project  The Partnership agreement specifies the right and obligations of each partner.

.  Liability unlimited for general parnters. The partnership issues debt securities secured with the partnership assets and contract  Project assets and liabilities are not reflected on equity holder’s balance sheet or on sponsor’s balance sheet  If the sponsor contribution is material one (with equipments) in the financial statements of the sponsor there can be a footnote mentioning this contrbution.Partnership  Project cost and benefits are typically allocated in proportion to project ownership. limited liability for equity investor (limited partners)  Sponsor provide equity in the form of partner’s capital contributions.

.  Project incomes is taxed at partner level only.Partnership  Special Purpose Corporate subsidiary is the financing vehicle (SPV is owned 100% by the partnership)  Tax consequences flow through directly to sponsors  Election of tax accounting methods is made by partners.

Example .Partnership .

Limited Liability Company     Project asset are owned by the project company The project company operates the project Employees of the projet company manage the project The equity owners are represented on the project company’s board of directors  Allocation of costs and benefits is determined by the contracts between the project company and the other parties involved. .

 Equity funds are contributed by the sponsors.  Liability limited to equity invested except as otherwise agreed.Limited Liability Company  Equity owners have no direct liability for project obligations except as spesifically defined in contractual undertakings.  The Project company issues debt secured with the project assets and sales contracts  The financing vehicle is the project company or a SP corporate subsidiary. .

 Shareholders in the project company is taxable entity  The project company elect the tax accounting methods  Project income is taxed at shareholder level only.Limited Liability Company  Project assets and liabilities are not reflected on equity holder’s/sponsor balance sheet. .

.Conclusion  The choice of legal structure can have important tax implications on the project.  It can also affect the availability of funds to a project and the cost of raising project financing.  Financial and legal advisers will contribute to evaluate the best legal structure.  The choice of legal structure affects the risk – return allocation between the parties involved in the project.