Golden Queen - Summary of Information on a Passive Foreign Investment Company or PFIC

Summary of Information on a
Passive Foreign Investment Company (PFIC)

Based upon an analysis of our assets as at December 31, 2006 and income for the year 2006, during 2006, we were a PFIC for United States federal income tax purposes. Although we intended to conduct our business activities in a manner to reduce the risk of our classification as a PFIC, we have substantial passive assets in the form of cash and cash equivalents, and can provide no assurance that we will not continue to be classified as a PFIC for 2006 or any future tax year. The determination of whether we would continue to be a PFIC would be principally based upon:

• the composition of our assets, the amount of which will depend, in part, on our total net assets and the market value of our Class A common shares, which is subject to change; and
• the amount and nature of our income from time to time.

We have limited control over these variables. To the extent we do have control over these variables; we may take steps to reduce the material and adverse effect that our PFIC classification may have on our business, financial condition and results of operations.

In general, we will be a PFIC with respect to a U.S. holder if, for any taxable year in which the holder owns Class A common shares:

• at least 75% of our gross income as defined in the applicable Treasury regulations for such taxable year is passive income;
• or at least 50% of our assets, measured by value on a quarterly average basis, produce or are held for the production of passive income.

For this purpose, passive income generally includes dividends, interest, rents, royalties, other than certain rents and royalties derived in the active conduct of a trade or business, annuities, gains from assets that produce passive income, net income from notional principal contracts and certain payments with respect to securities loans. If we own, directly or indirectly, at least 25% by value of the stock of another corporation, we will be treated as owning our proportionate share of the assets of the other corporation and as receiving directly our proportionate share of the other corporation’s income. Subject to the discussion of the mark to market election and qualified electing fund, or QEF, election below, if we were a PFIC for any taxable year during which the investor held Class A common shares, the investor would be subject to special tax rules, regardless of whether we ceased to be a PFIC at a later date, with respect to:

• any excess distribution by us to the investor, which means any distributions, possibly including any return of capital distributions, received by the investor on the Class A common shares in a taxable year that are greater than 125% of the average annual distributions received by the investor in the three preceding taxable years, or the investor’s holding period for the Class A common shares, if shorter; and
• any gain realized on the sale or other disposition, including a pledge, of Class A common shares.

Under these special tax rules:

• the excess distribution or gain would be allocated ratably over the U.S. holder’s holding period for the Class A common shares;
• the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a PFIC would be treated as ordinary income;
• the amount allocated to each of the other years would be taxed as ordinary income at the highest tax rate in effect for that year; and
• the interest charge applicable to underpayments of tax would be imposed with respect to the resulting tax attributable to each prior year in which we were a PFIC.

If we are a PFIC in any year, you will be required to make an annual return on Internal Revenue Service, or IRS, Form 8621 regarding distributions received with respect to the Class A common shares and any gain realized on the disposition of the Class A common shares. As an alternative to the special rules, a U.S. holder may elect to treat our Class A common shares that constitute marketable stock as if those Class A common shares were sold and immediately repurchased by the U.S. holder at the close of each taxable year, a mark to market election. If the election is made, the U.S. holder would be required to include as ordinary income the amount of any increase in the market value of the Class A common shares since the close of the preceding taxable year, or the beginning of the U.S. holder’s holding period, if such holding period began during the taxable year. Likewise, the U.S. holder would be allowed an ordinary deduction for the amount of any decrease in the market value of the Class A common shares since the close of the preceding taxable year, up to the amount of any prior increase in the Class A common shares’ market value that has not previously been taken into account in calculating allowable deductions. The U.S. holder’s basis in our Class A common shares would be increased by the amount of any ordinary income, and reduced by the amount of any deduction, arising under the mark to market election. In the case of a sale or other disposition of Class A common shares as to which a mark to market election is in effect, any gain realized on the sale or other disposition would be treated as ordinary income.

Any loss realized on the sale or other disposition would be treated as an ordinary deduction, up to the amount of any prior increase in the Class A common shares’ market value that has not previously been taken into account in calculating allowable deductions, and as a capital loss to the extent of any excess. PFIC shares, other than shares held by certain regulated investment companies, are considered marketable only if the foreign exchange or market on which the shares are regularly traded is designated by the U.S. Treasury Department as a qualified foreign exchange or market. Under the Treasury Regulations, the Class A common shares would be considered to be regularly traded on a qualified foreign exchange or market if (i) the ordinary shares are traded at least 15 days during each calendar quarter of the relevant calendar year in more than de minimis quantities, and (ii) the foreign exchange or market on which the ordinary shares are regularly traded is subject to regulation or supervision by a governmental authority of the country in which such exchange or market is located and the exchange has financial disclosure, surveillance and other requirements designed to prevent fraudulent and manipulative practices and remove impediments to the mechanism of a free and open, fair and orderly market and the rules of the exchange effectively promote active trading of listed stocks.

We expect that the Class A common shares to be marketable within the meaning of the Treasury Regulations. As a second alternative, a U.S. holder can make a QEF election to include annually our pro rata share of a PFIC’s earnings and net capital gains currently in income each year, regardless of whether or not dividend distributions are actually distributed. This means a U.S. holder could have a tax liability for the earnings or gain without a corresponding receipt of cash. The U.S. holder’s basis in the common stock will be increased to reflect the amount of the taxed but undistributed income. Distributions of income that had previously been taxed will result in a corresponding reduction of basis in the common stock and will not be taxed again as a distribution to the U.S. holder. Each U.S. holder who desires QEF treatment must individually make a QEF election. To make a QEF election you will need to have an annual information statement from the PFIC setting forth the earnings and capital gains for the year. As a PFIC, we would supply the PFIC annual information statement to any shareholder or former shareholder who requests it. In general, a U.S. holder must make a QEF election on or before the due date for filing its income tax return for the first year to which the QEF election will apply. U.S. holders will be permitted to make retroactive elections in particular circumstances, including if the U.S. holder had a reasonable belief that the foreign corporation was not a PFIC and filed a protective election. Investors should consult their tax advisors as to the consequences of making a protective QEF election or other consequences of the QEF election.

PFIC−related information is available under a link entitled "Summary of Information on a Passive Foreign Investment Company or PFIC" in the Financial Statements and Information - Corporate Information section (under the Info tab) on our corporate website which you may access at http://www.goldenqueen.com.

Although we generally will be treated as a PFIC as to any U.S. holder if we are a PFIC for any year during a U.S. holder’s holding period, if we cease to satisfy the requirements for PFIC classification, you may avoid such classification for years after such cessation if (1) you have made a QEF election in the first taxable year in which you own the Class A common shares, or (2) you elect to recognize gain based on the realized appreciation in the Class A common shares through the close of the tax year in which we cease to be a PFIC.

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