On January 21, 2020, the board of directors of Vantage Drilling International (“VDI,” “we” or “us”) approved a change to VDI’s tax status, and on January 22, 2020, VDI filed an election (the “Election”) with the Internal Revenue Service (the “IRS”) to be treated as a partnership, rather than a corporation, for U.S. federal income tax purposes, with an effective date retroactive to December 9, 2019.
Certain U.S. Federal Income Tax Considerations
The following is a discussion of certain material U.S. federal income tax considerations that may be relevant to holders of our ordinary shares in connection with the Election and in respect of holding equity interests in an entity treated as a partnership for U.S. federal income tax purposes. This discussion is based upon provisions of the Internal Revenue Code of 1986, as amended (the “Code”), legislative history, applicable U.S. Treasury Regulations (“Treasury Regulations”), judicial authority and administrative interpretations, all as in effect on the date of this Current Report, and which are subject to change, possibly with retroactive effect, or are subject to different interpretations. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below.
This discussion is limited to shareholders who hold their ordinary shares as capital assets for U.S. federal income tax purposes. This discussion does not address all tax considerations that may be important to a particular shareholder in light of the shareholder’s circumstances, or to certain categories of shareholder that may be subject to special tax rules (including brokers or dealers in securities or currencies, traders in securities that have elected themark-to-market method of accounting for their securities, U.S. Holders (as defined below) whose functional currency is not the U.S. Dollar, persons holding our ordinary shares as part of a hedge, straddle, conversion or other “synthetic security” or integrated transaction, certain U.S. expatriates, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, controlled foreign corporations, passive foreign investment companies, partnerships (including entities or arrangements treated as partnerships for U.S. federal income tax purposes), persons that actually or under applicable constructive ownership rules own 10% or more of our ordinary shares (by vote or value), individual retirement accounts and other tax deferred accounts and, except to the extent discussed below,tax-exempt organizations).
If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. Partners in partnerships holding our ordinary shares should consult their tax advisors to determine the appropriate tax treatment of the Election and the partnership’s ownership of our ordinary shares.
This discussion does not address any U.S. estate tax considerations, the Medicare tax on net investment income, the alternative minimum tax, or tax considerations arising under the laws of any state, local ornon-U.S. jurisdiction. Each shareholder is urged to consult its tax advisor regarding the U.S. federal, state, local and other tax consequences of the Election and the ownership or disposition of our ordinary shares.
As used in this Current Report, a “U.S. Holder” is a beneficial owner of our ordinary shares as of the effective date of the Election that is, for U.S. federal income tax purposes, (i) a citizen or individual resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) that was organized under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or such trust has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person for U.S. federal income tax purposes.
As used in this Current Report, a“Non-U.S. Holder” is a beneficial owner of our ordinary shares as of the effective date of the Election (other than a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder.
Tax Treatment of the Election
While VDI was previously treated as a corporation for U.S. federal income tax purposes, VDI has elected to be treated as a partnership for U.S. federal income tax purposes, effective as of December 9, 2019. Under the Code, the change from corporate to partnership tax status should be treated as a deemed taxable liquidation of VDI under Section 331 of the Code and a distribution of all of our assets and liabilities to our shareholders immediately before the close of December 8, 2019, immediately followed by a deemed contribution by our shareholders of our assets and liabilities to a newly formed