Tax-Free Spinoff

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.



comments powered by Disqus
Hot Definitions
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  2. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
  3. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  4. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  5. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
  6. TIMP (acronym)

    'TIMP' is an acronym that stands for 'Turkey, Indonesia, Mexico and Philippines.' Similar to BRIC (Brazil, Russia, India and China), the acronym was coined by and investor/economist to group fast-growing emerging market economies in similar states of economic development.
Trading Center