How Arnold Schwarzenegger Deals With Tax Exposure


A. Contractor and Artist have entered into an Actor Loanout Agreement dated as of Jun 6, 2001 (the "Agreement") pursuant to which, inter alia, Artist is rendering acting services in connection with the production of that certain feature length motion picture tentatively entitled "Terminator 3" (the "Picture").

B. A portion of the services of Artist to be provided under the Agreement may be rendered outside the United States.

C. As a material inducement to Artist to enter into the Agreement, and in partial consideration of the performance of services thereunder, Contractor has agreed to reimburse Artist on a fully "grossed up" basis for the payment of any taxes (including, without limitation, income tax, social security tax, payroll taxes and other social charges, the value added tax and any penalties and interest on any of such taxes) to any foreign country or subdivision thereof imposed on Artist by reason of Artist's rendering of services to Contractor in any foreign country under the Agreement (the "Subject Taxes"), all on the terms and subject to the provisions more particularly set forth hereinbelow.

D. The parties' intention in entering into this Tax Reimbursement Agreement is to put Artist in the same economic after-tax position as Artist would have been in had all of Actor's services under the Agreement been performed solely in California through a U.S. "loanout" corporation, and this Tax Reimbursement Agreement shall be interpreted consistent with that intention.

E. The parties' current expectation is that, based on current law and facts, Contractor will not be obligated to make any payments under this Tax Reimbursement Agreement (but such expectation shall have no bearing on the parties= respective rights and obligations under this Tax Reimbursement Agreement).

NOW, THEREFORE, on the basis of the foregoing facts, and in reliance thereon, the parties hereto hereby covenant and agree as follows:
1. Obligation to Reimburse.

(a) Subject to the conditions contained herein, Contractor hereby covenants and agrees to reimburse Artist for an amount (the "Reimbursement Amount") for any calendar year equal to the sum of (i) the amount determined by dividing the difference between the amount determined in Paragraph 1(a)(i) and the amount determined in Paragraph 1(a)(ii), by the number determined in Paragraph 1(a)(iii), plus the amount determined in Paragraph 1(a)(iv):

(i) the sum of the Subject Taxes and the aggregate amount of taxes Artist is required to pay to the United States and any state, city or subdivision thereof, for such year (after taking full advantage of all credits, deductions, offsets and exemptions to which Artist would have been legally entitled under the laws of any of the same); less

(ii) the aggregate amount of taxes which Artist would have been required to pay to the United States and any state, city or subdivision thereof for such year (after taking full advantage of all credits, deductions, offsets and exemptions to which Artist would have been legally entitled) if all of the services by Actor with respect to the Agreement had been performed wholly in California through a domestic "loanout" corporation; divided by

(iii) the excess of one (1) over the actual combined state, city and federal marginal income tax rate of Actor (including the effects of any surtax, plus 1.45% to reflect the hospital insurance portion of FICA) (after taking full advantage of all credits, deductions, offsets and exemptions to which Actor would have been legally entitled) for the year in which the Reimbursement Amount is paid to Artist; plus

(iv) the amount of any professional fees and costs incurred by Artist to obtain foreign tax advice in connection with the Picture, if any.

(b) In computing the Reimbursement Amount, all allowable exemptions, credits, deductions and offsets against the Subject Taxes shall be taken into account and, except as provided to the contrary in Paragraph 4(b), below, Artist shall be deemed to be resident of the United States and the State of California irrespective of Artist's actual residence. The Reimbursement Amount shall not include any amounts solely and directly resulting from actions or omissions on the part of Artist (except to the extent such actions or omissions are undertaken (or not undertaken, as the case may be) consistent with the Tax Reimbursement Agreement, with the Agreement or with the prior written approval of Contractor).

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