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[Glossary] Spin-off

M&A Tax

A spin-off is a type of corporate reorganization where consideration (i.e. shares in a newly established company set up for the purpose of carving out a certain business, or shares in its wholly owned company) is distributed on a proportional basis from a company engaged in various businesses to its shareholders by way of an incorporation-type corporate division or distribution-in-kind of all shares in its wholly owned company.

Spin-off

A spin-off is a type of corporate reorganization where consideration (i.e. shares in a newly established company set up for the purpose of carving out a certain business, or shares in its wholly owned company) is distributed on a proportional basis from a company engaged in various businesses to its shareholders by way of an incorporation-type corporate division or distribution-in-kind of all shares in its wholly owned company.

However, spin-offs have generally been treated as non-tax qualified corporate reorganizations under Japanese corporate tax law. Therefore, concern had been raised that the non–tax qualification acted as an impediment to restructuring, as the potential value of each business would be realized by engaging in a spin-off. Also, it is generally expected that spin-offs will resolve any conglomerate discount (i.e. where market capitalization is less than the sum of its parts) and achieve the maximization of share value, which further led businesses to call for tax reform for some time.

In response, the 2017 Japan Tax Reform released by the Japanese Ministry of Finance on March 31, 2017 mentions that spin-offs will be treated as tax qualified corporate reorganizations under certain conditions as follows:

1. Incorporation-type corporate divisions in order to run a business in newly established company

Among certain incorporation-type corporate divisions carried out solely by a transferor company which is not owned and not expected to be owned more than 50 percent by any parties before or after the corporate reorganization, and where consideration is limited to shares in the newly established company, the following are required in order to be treated as a tax qualified corporate division: No consideration other than proportional shares, management continuity, transfer of the key assets/liabilities, employee retention of 80% or more and business continuity.

2. Distributions-in-kind of all shares in a wholly owned company in order for distributor and subsidiary to operate independently

Among certain distributions-in-kind of all shares in a wholly owned company carried out by a distributing company which is not owned and not expected to be owned more than 50 percent by any parties before or after the corporate reorganization, and where all of the shares in a wholly owned subsidiary are distributed to shareholders, the following are required in order to be treated as a tax qualified distribution-in-kind of all shares in its wholly owned company: No consideration other than proportional shares, management continuity, employee retention of 80% or more, and business continuity.

(As of April 1, 2017)

This article is general in nature and is not intended to provide any tax advice on specific transactions. This article may not be relied upon by anyone and we accept no liability to anyone who took actions based on this article.

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