ADT 2011 Annual Report Download - page 118

difficulties could have a material adverse effect on our financial condition, results of operations or cash
flows.
If the distributions or certain internal transactions undertaken in anticipation of the spin-offs are
determined to be taxable for U.S. federal income tax purposes, we or our shareholders could incur significant
U.S. federal income tax liabilities.
We will request a private letter ruling from the IRS substantially to the effect that, for U.S. federal
income tax purposes, (i) the distributions of our North American residential security and flow control
common shares to our shareholders, except for cash, if any, received in lieu of fractional shares, will
qualify as tax-free under Sections 355 and/or 361 of the Internal Revenue Code of 1986, as amended
(‘‘the Code’’) and (ii) certain internal transactions undertaken in anticipation of the distributions will
quality for favorable treatment under the Code. Our receipt of the private letter ruling is critical to the
completion of the spin-offs. The private letter ruling will be based on certain facts, assumptions,
representations and covenants provided by us regarding the past and future conduct of our respective
businesses and other matters. If any of the facts, assumptions, representations or covenants provided in
connection with the private letter ruling is inaccurate or incomplete or is violated in any respect, then
we might not be able to rely on the ruling. Furthermore, the IRS will not rule on whether the spin-offs
satisfy certain requirements necessary for tax-free treatment under Section 355 of the Code. Rather, the
private letter ruling will be based on representations provided by us that those requirements have been
or will be satisfied, and any inaccuracy in those representations could invalidate the ruling. The 2012
Separation will also be conditioned on our receipt of an opinion of outside counsel, in form and
substance satisfactory to us, that confirms the tax-free status of the distributions. The opinion will rely
on, among other things, the continuing validity of the private letter ruling and certain facts,
assumptions, representations and covenants provided by us which, if inaccurate or incomplete in any
respect, could jeopardize the conclusions reached by such counsel in its opinion. The opinion will not
be binding on the IRS or the courts, and there can be no assurance that the IRS will not challenge the
conclusions stated in the opinion or that any such challenge would not prevail.
If, notwithstanding receipt of the private letter ruling and opinion, the spin-offs are determined to
be taxable for U.S. federal income tax purposes, each U.S. holder of our common stock who is subject
to U.S. federal income tax who receives shares of our North American residential security and flow
control businesses would generally be treated as receiving taxable distributions of property in an
amount equal to the fair market value of the shares received. Those distributions would be taxable to
each such stockholder as a dividend to the extent of our current and accumulated earnings and profits.
For each such stockholder, any amount that exceeded our earnings and profits would be treated first as
a non-taxable return of capital to the extent of such stockholder’s tax basis in our shares of common
stock with any remaining amount being taxed as a capital gain. In addition, internal transactions
undertaken in anticipation of the spin-offs are ultimately determined to be taxable, we could incur
significant U.S. federal income tax liabilities.
The tax sharing agreement that we will enter into with the North American residential security and
flow control businesses prior to the completion of the spin-offs will allocate for any taxes that arise if
the spin-offs or certain internal transactions are determined to be taxable.
If the 2012 Separation is determined to be taxable for Swiss withholding tax purposes, we could incur
significant Swiss withholding tax liabilities.
Generally, Swiss withholding tax of 35% is due on dividends and similar distributions to our
shareholders, regardless of the place of residency of the shareholder. Beginning on January 1, 2011,
distributions to shareholders out of contributed surplus accumulated on or after January 1, 1997 are
exempt from Swiss withholding tax. Accordingly, based on the Swiss Federal Withholding Tax Act, the
Distribution should not be subject to Swiss federal withholding tax. Prior to the completion of the
2011 Financials 15