(JRJcEWAIERJ-tousE[mPERS I

CLASSIFICATION SHEET

This document relates to the following request:

BUREAU D'IMPOSITION SOC. 6

ENTREE

1 l November 2009

References: SELL/G8409003M-GP1

Zero Coupon Convertible Bonds

1. Key topics: functional cuJTency, convertible bond, back-to-back

2. Name of the advisor : PwC

3. Corporate group's name, or fund sponsor : GlaxoSmithKline Group
4. Name of the project: Zero Coupon Convertible Bonds
5. Amount intended to be invested: GBP 6.25bn
6. Date of receipt:

1 1 NOV. 2009

I
I

PriccwatcrhouseCoopcrs
Socictc rcsponsabillti limi1cc
IUviscur d'cntrcpriscs
400, route d'Esch
B.P. 1443
l.-1014 Luxembourg
Telephone~ 352 494848-1
Facsimile+352 494848-2900
www.pwc.com/lu
info@lu.pwc.com

For the attention of Mr Marius Kohl

Administration des Contributions Directes
Bureau d'imposition Socictes VI
18, rue du Fort Wedell
L-2982 Luxembourg

BUREAU D'IMPOSITION SOC. 6

ENTR~E

11 November 2009
References: SELL/G8409003M-GPI

Zero Coupon Convertible Bonds

Dear Mr Kohl,
In our capacity of tax consultant of the above-mentioned client, we discussed in our
meeting dated 19 October 2009 the tax treatment applicable to the transactions foreseen by
our client. This letter aims at confi rming the conclusions reached during this meeting and
will serve as a basis for the preparation of the tax returns of the Luxembourg companies
involved.

Ba ckground

A.I

Contemplated transactions
Further to the various transactions that occurred in 2008, GlaxoSmithKline
International (Luxembourg) SA ("GSK lL") invested USD I Obn on a short term
basis with GlaxoSmithKline Finance Pie ("GSK Fin"), a UK group treasury
company, by an investment in the group's commercial paper program.

GlaxoSmithKline Group now contemplates to undergo various transactions

involving the incorporation of a new Luxembourg company named
GlaxoSmithKline Holding (Luxembourg) Sari ("GSK NcwLuxCo") with a
minimum share capital denominated in GBP.

R CS I ucmbour~ ll h) 177

IVI\ I lll 7564447

Following this and planned for January 2010, OSKIL's USO I Obn investment in
commercial paper with OSK Fin will mature. On the same day, OSK fL wi ll change
its functional currency from USD to OBP (i.e. conversion of its accounts to OBP)
and the money received upon the maturity of the USD lObn commercial paper will
be lent at a fixed rate for two years to GSK Fin in an amount of approximately
OBP 6.25bn.

Further to the above, OSK NewLuxCo will issue Zero Coupon Convertible Bonds
("ZCCBs") to OSKIL in exchange for the OBP 6.25bn long-tc1111 receivable that
OSKIL holds towards OSK Fin.

The actual amounts of the transactions, expressed in GBP, will only be known
closer to implementation, as the OBP value is dependent on the exchange rate
prevailing at the time of the transaction and the surplus cash available in GSKIL.

In addition and before the issue of the ZCCBs, Setfirst Ltd, the parent company of
both OSKlL and OSK NcwLuxCo, will lend OBP 2bn to OSK UKNewCo. GSK
UK.NewCo will acquire group companies for a coITesponding amount. Setfirst Ltd
will contribute the GBP 2bn loan receivable from CSK UKNewCo to
GSK NewLuxCo which will in its tum contribute the GBP 2bn receivable to
OSK UKNcwCo in exchange for shares.

A.2

Contemplated structure

Setfirst Ltd
(UK)

GSK
NewluxCo
(Lux)

6.25bn loan

GSK Finance
(UK)

..- ---------ZCCB

GSKIL
(Lux)

GSK New UKCo

GSK TradeCo1

GSK TradeCo2

(2)

Applicable tax regime

B.1

Establishment of GSK NewLuxCo

GSK NcwLuxCo will have its registered office and its central administration in
Luxembourg. The shareholder's meetings as well as the meetings of the board of
directors will be physically held in Luxembourg on a regular basis. Furthermore,
bookkeeping and archives will be kept in Luxembourg. As a result,
GSK NewLuxCo will be considered as Luxembourg tax resident in accordance
with article 159 of the Luxembourg Income Tax Law (hereafter referred to as
"LITL"). Consequently, a tax residency certificate can be requested for and granted
to GSK NewLuxCo in the future.

B.2

Functional currency

Given that the majority of the assets and liabilities, as well as the underlying
investments, of GSK NewLuxCo and GSKIL are denominated in GBP,
GSK NcwLuxCo and GSKIL will be allowed to use GBP as functional currency for
tax purposes. This implies that the tax returns will be established on the basis of the
GBP-dcnominated yearly net profits converted into EUR by using the year-end
EUR/GBP market rate.

GSKIL currently uses a USD tax functional currency. The change from USO to
GBP as the functional currency for tax purposes will not have any Luxembourg tax
consequences since GSKIL is already using a tax functional currency.

B.3

Qualification of the ZCCBs issued by GSK NewLuxCo as debt for Luxembourg

tax purposes

I0

As described in more details in Appendix 4, the main characteristics of the ZCCBs

will be as fo llows:
a. no profit-related return,
b. no voting rights,
c. privileged ranking over the share capital,
d. no rights in the profits or liquidation surplus of the issuer,
e. short tc1m ([2 years] maturity)

11

Based on the above, the ZCCBs are to be treated as debt

purposes.

B.4
12

f(.)f

Luxembourg tax

Lending activity financed by the ZCCBs

In course of January 2010, GSK NewLuxCo will issue ZCCBs to GSKIL with a
GBP 6.25bn subscription price in exchange for the GBP 6.25bn loan receivable
towards GSK Fin.

(3)

13

GSK NewLuxCo wiJJ hold an interest bearing receivable against GSK Fin in the
amount of approximately GBP 6.25bn. Interest charges will accrue yearly (through
amortization of the ZCCBs) at the level of GSK NewLuxCo but will only be
incurred upon conversion of the ZCCBs.

14

GSK NewLuxCo will therefore be in a lending activity financed by borrowings for

an amount of approximately GBP 6.25bn. As noted above, the exact amount will
only be known at the time the transaction takes place.

15

In view of facts described above, GSK NewLuxCo will bear a very limited risk on
this financing activity. Therefore, provided GSK NewLuxCo would be in a lending
activity financed by borrowings in an amount of at least the GBP equivalent of
EUR 6.25bn, a minimum gross margin of 1/64% p.a. of the total principal amount
in the financing activities of GSK NewLuxCo would be considered to be an
appropriate and acceptable profit with respect of article 164 LITL.

16

However, if GSK NewLuxCo was in a lending activity financed by bo1Towings for

an amount below the GBP equivalent of EUR 6.25bn, a minimum gross margin of
1/32% p.a. of the total principal amount in the financing activities of
GSK NewLuxCo would be considered to be an appropriate and acceptable profit
with respect of article 164 LITL.

17

The GBP/EUR foreign exchange rate that will be relevant in determining the EUR
equivalent of the GBP 6.25bn receivable held by GSK NewLuxCo will be the one
applicable at the time the contemplated transaction takes place (i.e., rate applicable
when step 4 is implemented).

18

The margin will be subject to corporate income tax and municipal business tax in
the hands of GSK NewLuxCo. In case the taxable commercial profits of
GSK NewLuxCo would exceed this minimum margin, they would be subject to tax
on said higher taxable basis. On the contrary, in case the commercial profits of
GSK NewLuxCo would be lower than the minimum margin described above, this
margin should still be subject to tax.

19

Finally, the margin as described above is to be understood as a gross margin.

Therefore, reasonable expenses incurred by GSK NewLuxCo will be deductible for
Luxembourg tax purposes from this taxable spread.

20

For net wealth tax purposes, since the receivable and debt of GSK NewLuxCo will
match in value, there will be no impact on the unitary computation. The taxable
basis for the net wealth tax would therefore be constituted by the taxable profit (i.e.,
the margin) realized for tax purposes over the years (if not distributed or reinvested
in exempt assets).

(4)

B.S

Tax treatment in the hands of GSKIL

- Over the life of the ZCCBs

21

From an accounting point of view, the ZCCBs will continue to be recognized at

cost over the term of the ZCCBs in the hands of GSKIL, on the basis that the loan
note carries a zero coupon. Therefore, no interest will arise to the holder under the
tenn of the ZCCBs.

22

Since tax treatment follows accounting treatment according to article 40 LITL, no

income will be recognized in the hands of GSKlL from a Luxembourg tax point of
view over the life of the ZCCBs.

- At the time of the ZCCBs conversion

23

At the level of OS KIL, the conversion of the ZCCBs into shares will be carried out
either at market or at book value from an accounting point of view. The accounting
treatment is yet to be confinned. This implies that a profit might be recognized by
OSKlL upon conversion of the ZCCBs.

24

from a tax point of view, and irrespective of the accounting treatment applied, the
conversion of the ZCCBs will be carried out at book value based on article 22bis
LITL:

no gain will be realized and thus no taxation will arise at the level of
OSKJL upon the ZCCBs' conversion;

there will be a roll-over of the holding period on OSK NewLuxCo's

participation at the level of GSKIL.

25

Therefore, the conversion of the ZCCBs will be tax neutral at the level of OSKIL.
ln computing the holding period for participation exemption purposes, the shares of
OSK NewLuxCo, issued to GSKlL upon conversion, will be deemed to have been
acquired by OSKIL at the date of subscription of the ZCCBs. The anti-abuse
provision related to article 22bis LITL included in the Grand Ducal Decree dated
21 December 200 I should not apply as GSKIL exchanged a bond with participation
and not a non-qualifying participation for a qualifying participation.

26

According to the terms of the ZCCBs, in case the value of OSK New LuxCo shares
would have dropped in value prior to conversion, OSK.IL would have the option to
redeem the ZCCBs for nominal value. In this situation, the repayment would
constitute a balance sheet entry at the level of OSKIL, without further tax impact.

27

On the other hand, it would imply that the interest expenses accrued by
OSK NewLuxCo would be written-back, thus generating a taxable income.
Nevertheless, this taxable income should be decreased by any expenses booked in
OSK NcwLuxCo's accounts, generated by decrease in value of OSK NewLuxCo's
assets.

(5)

B.6 Net Wealth Tax

28

Further to the above described transaction (sec point A.2), GSKIL's functional
currency will be denominated in GBP.

29

The contemplated change of functional currency from USD to GBP will entail a
corresponding change of function currency from USO to GBP at the level of the
existing llish non-trading branch of GS KIL.

30

Additionally, the interest free receivable between GSKIL and its Irish non-trading
branch will be rcdcnominatcd from lObn USD to approximately 6.25bn GBP.

We remain at your disposal should you need any further info1111ation and would like to
thank you for the attention that you will give to our letter.
Yours sincere!y,

:1J~
Jeraldine Piat
Partner

Appendices
Appendix 1:
Appendix 2:
Appendix 3:

Description of GlaxoSmithKline Group

Restructuring steps
Characteristics of the Zero Coupon Convertible Bonds

This tax agreement is based on the facts as presented to PricewaterhouseCoopers Si1rf as 111 the date the advice was
given. The agreement is dependent on specific facts and circ11111sta11ces and may 1101 be appropriate to any party other
than the one for which it was prepared. This tax agreemetll was prepared with only 1he imeres1.1 of GlaxoSmithKline Pie
in mind. and was not planned or carried out in contemplation of any use by any other par~y. PricewaterliouseCoopers
Sari, its partners. employees and or agents, neither owe nor accepl any duty of care or any responsibilily lo any 01/ier
party, whether in contract or in fort (including withoul /imitation, negligence or breach of s1at11tory duty) however
arising. and shall no! be liable in respect of any loss. damage or expen.~e of whatever nat11re 1vhich is caused 10 any other
party.

(6)

Appendix 1
Description of GlaxoSmithKline group
OSK is a world leading research-based pharmaceutical company.
2

Headquartered in the UK with operations based in many countries of the world

including the US, GSK group is one of the industry leaders, with an estimated
seven per cent of the world's phannaceutical market.

GSK was formed on 27 December 2000 by the merger between Glaxo Wellcome
and SmithKlinc Beecham Groups. The Group has been present in Luxembourg
since 1999 through the company, GSK (International (Luxembourg) SA, formerly
called SB International (Luxembourg) SA.

(7)

Appendix 2
Restructuring steps
Step 1: A new Luxembourg company is set-up as a sister company of GS KIL ("GSK
NewLuxCo"). This company will be incorporated under the form of a Sari with a GBP
share capital and will be named GlaxoSmithKline Holding (Luxembourg) Sari. It will hold
its accounts in GBP.
Step 2: Setfirt Ltd will contribute a GBP 2bn loan receivable from GSK UKNcwCo to
GSK NewLuxCo in exchange for shares, which will in its tum contribute the GBP 2bn
receivable from GSK UKNewCo to GSK UKNewCo in exchange for shares.
Step 3: Effective January 2010 reffective date yet to be determinedl, the USD 10bn
commercial paper held by GSKIL towards GSK Finance will mature.
On the same day, GSKIL will convert its functional cun-ency and its share capital from
USD to GBP (i.e. conversion of all its assets and liabilities to GBP). Additionally, the
money received upon maturity of the Commercial Paper will be lent to GSK Finance i.e.
approx . GBP 6.25bn.
Step 4: GSK NewLuxCo will issue a Zero Coupon Convertible Bonds ("ZCCBs") to
GSKJL in exchange for the existing GBP 6.25bn loan receivable.
At maturity of the ZCCBs, GSKIL will receive shares in GSK NcwLuxCo unless OSK
NewLuxCo shares have dropped in value: in such a case, GSKIL could ask for repayment
of the ZCCBs for nominal value.

(8)

Appendix 3
Characteristics of the Zero Coupon Convertible Bonds
C urrency:

GBP (Great Britain Pound).

Amount of Subscription:
Type of Securities:

[GBP 6,000,000,000 (six billion Great Britain Pounds)].

zero coupon convertible registered bonds.

Series of ZCCBs:
nominal value of

l.

[I] Series l Zero-Coupon Convertible Bonds with a

[GBP I,000,000,000] each;

2.

l1] Series 2 Zero-Coupon Convertible Bonds with a nominal value of

[GBP l ,000,000,000] each;

3.

[1] Series 3 Zero-Coupon Convertible Bonds with a nominal value of

[GBP 1,000,000,000] each;

4.

[1] Series 4 Zero-Coupon Convertible Bonds with a nominal value of

[GBP 1,000,000,000] each;

5.

[l] Series 5 Zero-Coupon Convertible Bonds with a nominal value of

[GBP I,000,000,000] each;

6.

rt] Series 6 Zero-Coupon Convertible Bonds with a nominal value of

[GB l ,000,000,000] each.

Trading and offering:

at the date of issue, the ZCCBs are not and are not intended to be
at any moment in the future quoted, listed, traded or dealt in any
stock exchange, over the counter market or other securities
market.

Transfer restrictions:

the ZCCBs shall not be transferred, except with the prior

consent of the shareholder(s) of the Issuer.

lssue Date:

[l ...] January 20101.

Maturity Date:

[2 years from the Issue Date].

lssuc price:

the ZCCBs shall be issued in aggregate for [GB 6,000,000,000],

which shall be paid in full on or prior to the Issue Date in kind,
by transfer, from the Subscriber to the Issuer, of a loan
receivable held against GSK Finance Pie of a total amount of
l GBP 6,000,000,000] (the "Loan").

C onversion

At maturity:
at Maturity Date, each series of ZCCBs will be converted into
[ ... ] shares of the Issuer, each having a par value of GBP [ ... ].
(9)

Early conversion prior to Maturity Date:

in the event that there is any change in applicable law,
regulation, treaty, policy, tax or accountancy rules or application
thereof, to the extent that there is a matetial adverse change for
either the Subscriber, the bondholder's group, the Issuer or the
Issuer's group, either the Issuer or the Subscriber may give
written notice to the other to terminate all (and not some only)
outstanding ZCCBs with immediate effect (the "Tcnnination").
ln case of termination, the number of shares to be issued (the
"Termination Shares") shall be calculated by application of the
following Termination Conversion Ratio:
[Tennination Shares = (number of outstanding ZCCBs of the
related Series) + ([X]) x number of calendar days elapsed since
the Issue Date I Y)
In the above fomrnla:

Redemption:

"X" shall correspond to the difference between the

number of ordinary shares to be issued at Maturity
Date and initial number of ZCCBs of the related
Series; and

"Y" shall correspond to the calendar days

corresponding to the lapse of time between Issue Date
and Maturity Date.l

Optional redemption at Maturity:

the Subscriber may by notice to be sent to the Issuer request the
redemption of the then outstanding ZCCBs, the Issuer should
therefore in this hypothesis redeem all (but not some) of the then
outstanding ZCCBs at nominal value. The Issuer may elect to
repay the nominal value of the ZCCBs either in cash or by the
re-assignment of the Loan to the Subscriber.
Redemption in case of Distressed Situation:
the Subscriber should be entitlcd to be redeemed any and all
outstanding ZCCBs at nominal value if any of the following
events occurs , in which case the Issuer may elect to repay the
nominal value of the ZCCBs either in cash or by the reassignment of the Loan to the Subscriber:
a) any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Issuer; or
b) the cessation by the Issuer of payment of its debts or of
carrying on of its business of the threat by the Issuer to stop
payment of its debts, or to carry on its business; or
c) the appointment of a receiver, administrative receiver or
similar official in respect of the whole or a substantial part of
the undertaking and assets of the Issuer; or
(10)

d) any distress or execution (or similar process) is levied upon

or enforced against all or a substantial part of the assets or
property of the Issuer and is not fully paid out or discharged
within fifteen days; or

c) any process or event with an effect analogous to any of those

refeITed to in the below paragraphs (c) and (d) (inclusive)
happens to the lssuer in a jurisdiction outside Luxembourg,
provided that a written demand specifying the event 1s
received by the Issuer while the event is continuing,
Redemption upon an Event of Default:
the Subscriber may ask for the redemption of any ZCCBs at
nominal value if no remedy 15 days after notification of failure
by the issuer to comply with any of its obligations related to the
ZCCBs and if such failure is materially prejudicial to the
Subsc1iber. The Issuer may elect to repay the nominal value of
the ZCCBs either in cash or by the re-assignment of the Loan to
the Subscriber.
Redemption upon Termination:
in case of Termination, the Subscriber may send a notice to the
lssuer asking for the redemption of all (and not some only)
outstanding ZCCBs at nominal value (less any applicable taxes).
The Issuer may elect to repay the nominal value of the ZCCBs
either in cash or by the re-assi!,'11ment of the Loan to the
Subscriber.
Mortgage:

the ZCCBs are secured by way of mortgage of the Loan

pursuant to a mortgage agreement entered into by and between
the Issuer as m011gagor and the Subscriber as mortgagee dated
[.] and governed by English law.

Conditions Precedent:

The Parties having signed, delivered and executed the

Subscription Agreement.
The approval by the shareholders of GlaxoSmithKline Holding
(Luxembourg) Sarl of the ZCCBs Issue.
The approval by the board of managers/directors of both the
lssuer and the Subscriber of the entering into the present
Subscription Agreement and the transaction contemplated
therein.
The approval by the board of directors of the Subscriber of the
assignment to the Issuer of all its rights, title and interest in and
under the Loan Agreement amounting to the value of six billion
Great Britain Pound (GBP [6,000,000,000] m exchange for
ZCCBs for the same notional amount.
(11)

The approval by the board of managers of the lssuer of

assignment by way of mortgage to the Subscriber of all its
rights, title and interest in and under the Loan Agreement
amounting to the value of six billion Great Britain Pound
(GBP [6,000,000,000] as security for the ZCCBs.
The execution and delivery of the Loan Agreement, the First
Loan assignment, the First Loan assignment Notice, the
Mortgage Assignment and the Mortgage Assignment Notice.

Governing law:

Luxembourg law.

(12)

LE GOUVERNEMENT
DU GRAND- DUCHE DE LUXEMBOURG
Administration des contribu tions directes
Bureau d'imposition
Societes 6

For the attention of Mrs Geraldine Piat

PricewaterhouseCoopers
400, route d'Esch
B.P. 1443
L-1014 Luxembourg

Companies involved:
- GlaxoSmithKline International (Luxembourg) S.A

2001 2203 870

- GlaxoSmithKline Holding (Luxembourg) S.a r.I.

in the process of incorporation

11 November 2009

Dear Sir,

Further to your letter dated 11 November 2009 and reference SELL/G8409003M-GPI relating to
the transactions that the group GlaxoSmithKline would like to conduct, I find the contents of said
letter to be in compliance with current tax legislation and administrative practice.

It is understood that my above confirmation may only be used within the framework of the
transactions contemplated by the abovementioned letter and that the principles described in
your letter shall not apply ipso facto to other situations.

\
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