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Yahoo Calls Off Alibaba Spin-Off

by Mike Godfrey,, Washington

11 December 2015

US search engine company Yahoo! Inc. has announced that it has decided to stop work on its plan to spin-off its remaining shareholding in Alibaba Group, the Chinese online marketplace, following concerns about the market's perception of tax risk surrounding the transaction.

Yahoo intended to create a new independent, publicly traded, non-diversified, closed-end management investment company, Aabaco Holdings, which would have received Yahoo's remaining holdings of around 15 percent in Alibaba. Aabaco shares worth around USD25bn would have been distributed to Yahoo's shareholders on a pro-rata basis.

The spin-off was intended to avoid a capital gains tax bill on Yahoo, which would amount to 40 percent of the value of its Alibaba shareholding if the shares were to be sold.

In a bid to satisfy the Internal Revenue Service's (IRS's) tax-free spin-off rules that the transaction be carried out for a business purpose, with the requirement that a new entity should house an "active trade or business," Aabaco would have also controlled Yahoo Small Business, which helps US merchants set up websites.

However, the stake in Alibaba would still initially have accounted for over 95 percent of Aabaco's total assets, and the IRS confirmed in September this year that it is studying issues with regard to such spin-offs, particularly where "the active business is small relative to other assets, or in which there is a substantial amount of investment assets."

As it was also uncertain whether Yahoo would be able to obtain an IRS ruling on the transaction, the company has now confirmed that it is "suspending work on the Aabaco spin-off. Among other factors, we were concerned about the market's perception of tax risk, which would have impaired the value of Aabaco stock until resolved."

It is instead considering a reverse spin-off, under which Yahoo's assets and liabilities other than the Alibaba stake would be transferred to a newly formed company, the stock of which would be distributed pro rata to Yahoo shareholders, resulting in two separate publicly traded companies.

TAGS: capital gains tax (CGT) | compliance | tax | investment | business | tax compliance | commerce | law | mergers and acquisitions (M&A) | equity investment | Internal Revenue Service (IRS) | tax authority | e-commerce | transfer pricing | United States | regulation

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