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.

BREAKING DOWN '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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  1. How can a company execute a tax-free spin-off?

    The two commonly used methods for doing a tax-free spinoff are either to distribute shares of the spinoff company to existing ... Read Full Answer >>
  2. Why are some spin-offs taxable and some are tax-free?

    The manner in which a parent company structures the spinoff and divests itself of a subsidiary or division determines whether ... Read Full Answer >>
  3. Where exactly do dividends come from?

    Companies pay dividends in cash, which typically come from the companies' cash flows from operations by selling goods and ... Read Full Answer >>
  4. What happens to the company stock if a subsidiary gets spun off?

    When a subsidiary gets spun off, the company's stock tends to drop. However, the investor in the stock does not lose any ... Read Full Answer >>
  5. What are some common cash-debt strategies that occur during a spinoff?

    Cash-debt strategies that are commonly used to in a spinoff to enable the parent company to monetize the spinoff are debt/equity ... Read Full Answer >>
  6. What are the tax implications for both the company and investors in a divestiture ...

    In finance, divestiture is defined as a reduction of a company's assets as a result of asset closures or the selling of business ... Read Full Answer >>

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