LILO’s are a form of lease financing where the owner of a power plant leases his plant to a US equity, which subleases it back. Because of differences in the rent patterns under the head lease and the sublease, the US equity ends up with net rent deductions in the early years that look like accelerated depreciation. Meanwhile, the lessee is able to pocket a net upfront cash payment of as much as 8 or 9% of the asset cost.

Most LILO’s involve assets owned by foreign governments or US municipalities. The problem with assets belonging to US private companies is the lessee cash benefit is treated as prepaid rent for US tax purposes and would be taxed immediately in the US.

This development is a huge potential break-through. However, US Treasury officials say long-anticipated final regulations under section 467 — which will require that the LILO product be retooled — will be issued by year end.

THE NEW COLOMBIAN GOVERNMENT proposed a series of tax reforms that are expected to take effect next January 1, assuming they are approved by Congress in December.

Among the changes that would affect infrastructure investments in the country are the following. Colombia currently collects a 10% withholding tax on payments to foreigners for technical services performed offshore but 35% for such services performed in Colombia. The rate would be set at 10% for all technical services payments.

Dividends paid to foreigners are subject currently to withholding taxes at a 7% rate, but the tax is waived to the extent earnings are reinvested in Colombia for at least five years. The reforms would forego the need to pay a dividend and reinvest to qualify for this benefit. It would be enough if earnings are merely retained in a Colombian company.

The reforms would subject electricity to VAT. It is currently exempt. The general VAT rate would be set at 15% from November 1999.

Colombian companies would also be able to deduct interest paid to Colombian banks as the interest accrues rather than waiting until the interest is actually paid.

INSTITUTIONAL EQUITY PARTICIPANTS fret about whether they give states a nexus to subject them to income taxes by investing in a project company set up as a partnership or LLC.

A new survey suggests that most states say yes for partnerships and for LLCs treated as partnerships. However, a handful of states does not assert a nexus to tax for limited partners who lack full rights to participate in management. States in this category are New Jersey, Rhode Island, Tennessee, Kansas, New York and Virginia.

Almost all states assert a nexus to tax where the entity is an LLC that the owner has elected to treat as “disregarded” for federal income tax purposes. The survey also found states are less likely to assert a nexus for imposing net worth and franchise taxes than for income taxes.