Tax-Free Spinoff

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DEFINITION of 'Tax-Free Spinoff'

A corporate action in which a publicly traded company spins off one of its business units as an entirely new company. The spun off company becomes its own publicly traded corporation with its own ticker symbol, board of directors, management team, etc. This type of transaction is deemed to be "tax free" because the parent company is still able to divest the business it wants to separate from; however, the company does not incur capital gains tax on the divestiture, which would be the case in an outright sale of the business unit to another company.

INVESTOPEDIA EXPLAINS 'Tax-Free Spinoff'

There are typically two ways that a company can undertake a tax-free spin off of a business unit. First, a company can choose to simply distribute shares of the spun off company to existing shareholders on a pro rata basis. For example, if you owned 3% of ABC corporation and it was spinning off XYZ corporation, you would receive 3% of the shares issues for XYZ.

Secondly, a company may choose to undertake the spin off by issuing an exchange offer to current shareholders. With this method, current shareholders are given the option to exchange shares of the parent company for shares of the spun off company.

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RELATED FAQS
  1. How do spinoffs differ from initial public offerings (IPOs)?

    A spinoff is when a public parent company organizes a subsidiary and distributes shares to current stockholders for the new ... Read Full Answer >>
  2. How do spinoffs impact investors in the both the parent and subsidiary companies?

    A spinoff is when a company takes a portion of its operations and breaks it off into a separate entity. In a spinoff, shares ... Read Full Answer >>
  3. How is taxation treated for both the parent and subsidiary company during a spinoff?

    A common separation strategy used by corporations includes divestiture activities that segment a portion of a company's operations, ... Read Full Answer >>
  4. How do the bull and bear markets affect the value of a spinoff company's stock?

    A spinoff is a type of divestiture in which a company cedes its ownership interest in a business unit by distributing 10 ... Read Full Answer >>
  5. Can anyone own common stock in a company?

    Any investor on the stock market can purchase common stock. However, in some ways common stock owners have fewer rights than ... Read Full Answer >>
  6. How do you transfer common stock from one broker to another?

    Common stock shares are most commonly transferred from one broker to another by a system known as the Automated Customer ... Read Full Answer >>
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