Cash-Rich Split-Off

A cash disbursement technique that mitigates tax

What is a Cash Rich Split Off?

A cash rich split off is a merger and acquisition technique where a seller exchanges the company’s stock for stock in a subsidiary of the company without incurring taxes, provided that the statutory requirements are met. The technique allows companies to dispose of non-core assets and emerge with cash without technically selling anything. Split-offs are deemed non-taxable since the deals only rearrange company’s assets in the corporate form.


cash rich split off transaction


An example of a cash rich split off is the case of Yahoo planning to sell its assets in Yahoo! Japan and Alibaba, without paying the huge capital gains tax.  The cost of the assets is approximately $20 billion, and if the company had to pay tax on this transaction, it would amount to more than $7 billion. However, with a cash-rich split-off technique, Yahoo would sell its Asian assets without paying the tax to the government.


How does a Cash-Rich Split-Off work?

For a cash-rich split-off transaction to be valid, a third party would have to set up a new company that comprises cash or cash equivalents greater than or equal to 66% of the company and operating assets. The operating assets include licenses, businesses, and other assets greater than or equal to 33% of the total value of the company. The company must have owned and operated the business for 5 years or more. This company would then be exchanged with the seller’s assets.

After the swap, the buyer will need to own and operate the new company for at least two years. However, the cash received can be used or monetized immediately.


What is the Benefit of a Cash Rich Split off?

The technique is beneficial to both the seller and the “cash rich” subsidiary of the company. The seller enjoys a tax-free disposition of the company’s assets for cash without necessarily selling anything. Also, the seller has a chance to negotiate with the subsidiary to contribute operating assets that the seller plans to acquire.

The subsidiary benefits from a cash-rich split-off by getting an opportunity to dispose of a non-core asset without incurring a tax expense. They also get a chance to repurchase shares at an attractive price.


What are the Challenges of a Cash-Rich Split-off?

Although the transaction would benefit the seller and the buyer, it would put a drain on Treasury Department, particularly when substantial investment assets are involved. This is because of the massive logistics involved and the regulatory issues to navigate.


Learn more about other tax-related strategies