A Study on Taxation of the Qualified Spin－Off in Korea
Asian Tax Journal Vol. 21 No. 2 (2020), pp. 35-59
Abstract
In spin－off, the divesting parent company establishes a new subsidiary, transfers some of its assets to the subsidiary, and owns 100% of the shares in the subsidiary. If this spin－off is qualified, taxation on the built－in gain of the assets transferred from the parent to a new subsidiary is deferred. There are two ways to defer taxation：one is to evaluate assets transferred to a new subsidiary with the its book value, and the other is with its market price. Currently, Korean tax law adopts a method of evaluating by market price. We presents the problems of the market price valuation method and argues that it should be converted to the book value valuation method. The reasons for our claim are as follows. First, after examining tax laws in various countries, including the United States, Japan, and Germany, we found that all countries are adopting a market valuation method in the qualified spin－off. Second, another method of corporate reorganization in Korea, such as qualified mergers and splits, is also adopting the book value evaluation method. Therefore, if the market valuation method is adopted only in the qualified spin－off, it will be inconsistent with the book value valuation method in other corporate reorganization methods. Finally, if another subsequent corporate restructuring occurs after spin－off, under the market price valuation method, taxpayers will pay more taxes comparing to the book value valuation method.
Keywords
- qualified spin－off
- market price
- book value
- deferred taxation
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