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[Glossary] Tax Qualified Share Exchange

M&A Tax

Tax qualified share exchange is a statutory share exchange that falls under any of the following, provided that only shares of the acquiring corporation are issued to the shareholders of the target corporation. (i) A share exchange within a 100% related group, (ii) A share exchange within a more than 50% but less than 100% related group and (iii) A share exchange for the purpose of joint business.

Tax Qualified Share Exchange

Tax qualified share exchange is a statutory share exchange that falls under any of the following, provided that only shares of the acquiring corporation are issued to the shareholders of the target corporation.

(i) A share exchange within a 100% related group

(ii) A share exchange within a more than 50% but less than 100% related group

(iii) A share exchange for the purpose of joint business

Requirements for each type of tax qualified share exchange are as follows;

Requirements for tax qualified share exchange

(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 share exchange that the current relationship (i.e. 100% relationship or more than 50% but less than 100% relationship) will continue.

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Employment continuity

Approximately 80% or more of the employees of the target corporation should continue to be employed by the target corporation.

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Business continuity

The main business of the target corporation should continue to be carried on after the share exchange.

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Business relatedness

The main business of the target corporation must be related to any one of the businesses of the acquiring 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, none of the specified officers (e.g. managing director) of the target corporation should resign following the share exchange.

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Continuous holding of shares

Shareholders of the target corporation should continue to hold the shares in the acquiring corporation received as consideration of the share exchange (only applicable where the number of shareholders of the target corporation is less than 50).

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Continuity of parent - subsidiary relationship

The wholly owned relationship between the acquiring corporation and the target corporation should continue after the share exchange.

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In a tax qualified share exchange, neither the target corporation nor its shareholders recognize any taxable gain or loss upon the share exchange. In a non-tax qualified share exchange, the target corporation is subject to mark-to-market taxation and its shareholders may also be taxed.

Contrary to a merger and other corporate reorganizations where assets and liabilities are directly transferred to another corporation, there is no limitation for the target 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

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