Corporate law provides for a transaction commonly referred to as “spin-off”. The corporate enterprise is divided in (at least) two corporations. The stock of a controlled subsidiary will be distributed pro rata by a parent corporation to its shareholders which end up owning a brother/sister pair of corporate enterprises.
The Internal Revenue Code (IRC) in § 355 provides special rules for the distribution of stock and securities of a controlled corporation. The transaction is known as a “D reorganization”, if such a distribution follows the transfer by a corporation of all or a part of its assets to another corporation, § 368(a)(D) IRC. If the requirements of these sections are met, the Code allows tax free treatment on corporate as well as shareholder level.
The rules of § 355 IRC are rather complicated and give rise to an ongoing discussion on how to amend the Code to make the law less complex. The basic idea behind these provisions is to prevent tax avoidance schemes. In the context of § 355 IRC two principal concerns might be the driving forces: spin-offs could be used (1) to convert ordinary dividend income at the shareholder level into capital gain, and (2) to transfer appreciated property out of the corporation without triggering tax on the corporate level (“circumvent the purposes of General Utilities repeal”). Whether the current rules on the background of these concerns are convincing or amendments should be suggested will be discussed in this paper.
It might be helpful to compare the current U.S. law to the German tax code. German corporate law provides for a similar transaction referred to as “Abspaltung”. This corporate transaction allows the transfer of part of the assets of a corporation to a new or existing other corporation in exchange for stock in this corporation transferred directly to the shareholders of the transferor corporation. From a corporate perspective the results are the same as in case of a “D reorganization” within § 368(a)(D) IRC. § 15 German Transformation Tax Act (“Umwandlungssteuergesetz” – UmwStG) provides for tax free treatment on corporate and shareholder level, if its requirements are met. Although the requirements are similar to those of § 355 IRC they differ in part. Particularly § 15 (3) UmwStG, which contains a provision disallowing the transfer of stock of corporations taking part in the Abspaltung to third parties, might present new arguments to the discussion whether the current rules of § 355 IRC, especially the “device” rule and § 355(d), and (e) IRC, should be retained or amendments seem necessary.
The paper will describe the U.S. and German tax provisions. The advantages and disadvantages of the national rules will be discussed.
Date of Authorship for this Version
Suchan, Stefan W., "Taxation of Spin-off – U.S. and German Corporate Tax Law" (2004). Cornell Law School Graduate Student Papers. Paper 3.