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[Glossary] Tax Qualified Investment in kind

M&A Tax

Tax qualified investment in kind is an investment in kind that falls under any of the following, provided that only shares of the receiving corporation are issued to the transferring corporation. (i) An investment in kind within a 100% related group, (ii) An investment in kind within a more than 50% but less than 100% related group and (iii) An investment in kind for the purpose of joint business.

Tax Qualified Investment in kind

Tax qualified investment in kind is an investment in kind that falls under any of the following, provided that only shares of the receiving corporation are issued to the transferring corporation.

(i) An investment in kind within a 100% related group

(ii) An investment in kind within a more than 50% but less than 100% related group

(iii) An investment in kind for the purpose of joint business

Notwithstanding the above, certain cross-border investment in kind, i.e., (i) a domestic corporation transferring onshore assets/liabilities to a foreign corporation and (ii) a foreign corporation transferring offshore assets/liabilities to a domestic corporation, are treated as non-tax qualified.

Requirements for each type of tax qualified investment in kind are as follows;

Requirements for tax qualified investment in kind

(i) 100% related group (ii) More than 50% but less than 100% (iii) Joint business

Continuity of controlling relationship

There is an expectation at the time of the investment in kind that the current relationship (i.e. 100% relationship or more than 50% but less than 100% relationship) will continue.

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Assumption of principal assets/liabilities

Principal assets/liabilities in relation to the business under investment in kind (hereinafter “split business”) should be transferred to the receiving corporation.

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Assumption of employees

Approximately 80% or more of the employees engaged in the split business should continue to work in the receiving corporation.

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Assumption of business

The split business should continue to be carried on by the receiving corporation after the investment in kind.

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Business relatedness

The split business must be related to any one of the businesses of the receiving corporation.

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Scale/ Specified officer  requirement

Scale (sales, number of employees, etc.) of the two businesses identified in the “Business relatedness” requirement must be within a 1 to 5 ratio. Alternatively, at least one of the officers of the transferring corporation and one of the specified officers (e.g. managing director) of the receiving corporation must participate in post-investment in kind management of the receiving corporation as specified officers.

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Continuous holding of shares

The transferring corporation should continue to hold the shares in the receiving corporation received as consideration of the investment in kind.

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In a tax qualified investment in kind, assets and liabilities are transferred at their book value and therefore the transferring corporation does not recognize any taxable gain or loss upon investment in kind. 

Under certain circumstances, there may be limitations for the receiving corporation on the use of its net operating loss or deductibility of capital loss, etc. on specified assets.

(As of June 2015)

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.

M&A Tax Glossary

Please click here to see more M&A Tax terms.

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