This article explains the distinction between split-type and spin-off-to-subsidiary-type splits, the four statutory categories of qualified split, and their tax effects. It does not list every Cabinet Order condition, such as the joint-business and independence requirements.

Statutory definition

A company split transfers a business into another company. There are two types, distinguished by who receives the consideration. First, consider the split-type definition.

Means the following company splits.
(a)
A split in which all consideration assets received by the splitting corporation (shares in the successor corporation, including equity interests, and other assets delivered by the successor; the same applies through item 12-11) are delivered to the splitting corporation’s shareholders, etc. on the split date, or in which all consideration assets are delivered directly to those shareholders, etc.
(b)
A split with no assets delivered as consideration (hereinafter referred to in this and the following item as a “split without consideration”) where, immediately before the split, the successor corporation holds all the splitting corporation’s issued shares, etc., or the splitting corporation holds no shares in the successor corporation.

In a split-type split, consideration such as successor shares goes to the splitting corporation’s shareholders rather than the corporation itself. It resembles carving out a division and distributing shares in the new company to shareholders. Next is the spin-off-to-subsidiary-type definition.

Means the following company splits.
(a)
A split, other than one without consideration, in which the consideration assets received by the splitting corporation are not delivered to its shareholders, etc. on the split date.
(b)
A split without consideration where, immediately beforehand, the splitting corporation holds successor shares, excluding cases where the successor holds all the splitting corporation’s issued shares, etc.

In a spin-off-to-subsidiary-type split, consideration goes to the splitting corporation itself, rather than its shareholders. It retains the successor shares, resembling a business carved out as a subsidiary. For the place of company splits within reorganization taxation, see Overview of Reorganization Taxation You can check with.

Overview

What Makes a Company Split Qualified?

For either type of split, qualified status determines treatment of transferred assets and liabilities. A qualified split is defined as follows:

A split falling within any of the following categories in which consideration consists solely of shares in one corporation that is either the successor or its parent (a corporation in a relationship prescribed by Cabinet Order involving direct or indirect ownership of all the successor’s issued shares, etc.); for a split-type split delivering such shares, limited to one allocating them in proportion to each shareholder’s number of splitting-corporation shares (or amount of equity interests) relative to its total issued shares, etc.

First, consideration must consist exclusively of shares in either the successor or its parent, with no other assets included. The split must then fall into one of the following categories.

The first is a split where the splitting corporation and successor have a wholly controlling relationship through either corporation, or another prescribed relationship. This covers splits within a group linked by wholly owned control.

The second is a split where the splitting corporation and successor have a controlling relationship through either corporation, or another prescribed relationship. This is less stringent than wholly owned control. It additionally requires transfer of principal assets and liabilities, continued engagement of approximately eighty percent or more of employees, and continuation of the split business.

The third is a split prescribed by Cabinet Order for a joint business between the splitting corporation and successor (or, for an incorporation-type split, between that splitting corporation and another splitting corporation). It covers splits outside the first two control categories that meet joint-business conditions. The fourth is a split prescribed by Cabinet Order for independent conduct, by a newly established successor, of the splitting corporation’s pre-split business, limited to a split-type split involving only one splitting corporation. This covers a company separating its business into a newly established independent company. Application of the detailed requirements depends on each transaction’s circumstances, so this article presents only the statutory framework. For similarities and differences from qualified-merger requirements, see Requirements for a Qualified Merger I am organizing with.

A split-type split meeting these conditions is a “qualified split-type split,” and a spin-off-to-subsidiary-type split meeting them is a “qualified spin-off-to-subsidiary-type split.”

Means a split-type split that is a qualified split.

Means a spin-off-to-subsidiary-type split that is a qualified split.

How Do the Effects of the Two Qualified Split Types Differ?

As a general rule, assets and liabilities transferred in a split are treated as transferred at fair value when calculating income.

Where a domestic corporation transfers its assets or liabilities to a surviving or successor corporation through a merger or split, its income for each business year shall be calculated as if those assets and liabilities were transferred at their value at the time of the merger or split.

Articles 62-2 and 62-3 create exceptions, using distinctly different wording for the two qualified split types. For qualified split-type splits, the word is “succession”:

Where a domestic corporation transfers assets or liabilities to a successor through a qualified split-type split, notwithstanding paragraph 1 of the preceding article, its income for each business year shall be calculated as if the successor succeeded to those assets and liabilities at their book values immediately before the split.

For qualified spin-off-to-subsidiary-type splits, the word is “transfer”:

Where a domestic corporation transfers assets or liabilities to a successor through a qualified spin-off-to-subsidiary-type split, notwithstanding Article 62, paragraph 1 (Transfers of Assets, etc. at Fair Value through Mergers and Splits), its income for each business year shall be calculated as if those assets and liabilities were transferred at their book values immediately before the split.

Both use immediately preceding book values, so neither taxes the difference from fair value. The difference is the characterization: succession for the split-type and transfer for the subsidiary-type. Because consideration goes to shareholders in a split-type split, shareholder taxation is also relevant; its treatment is discussed in Reorganizations and Shareholder Taxation You can check with.

What If Only Part of the Split Consideration Goes to Shareholders?

The statutes distinguish the two types clearly, but only part of the consideration may actually be delivered to shareholders. Article 62-6 governs this situation.

Where a split delivers only part of the consideration assets under Article 2, item 12-9(a) received by the splitting corporation to its shareholders, etc. (excluding incorporation-type splits involving two or more splitting corporations), both a split-type split and a spin-off-to-subsidiary-type split shall be deemed to have occurred.

If only part of the consideration goes to shareholders, both types are deemed to occur. The shareholder-distributed portion is treated as split-type; the portion retained by the splitting corporation is treated as subsidiary-type.

Points that require care in practice

• Classification depends on whether consideration is delivered to shareholders on the split date or directly to them, not on how the business itself is carved out.
• Splits without consideration are also classified between the two types according to shareholding relationships immediately before the split.
• Qualified status and split-type classification are separate tests. Both must be established to identify the applicable qualified split category.
• The statutory effects are described as “succession” for split-type and “transfer” for subsidiary-type, but both use immediately preceding book values.
• Where only part of the consideration goes to shareholders, both classifications coexist within one split.
• Wholly controlling or controlling relationships and joint-business or independence conditions must be checked by applying Cabinet Order provisions to the specific facts.

Legal basis

• Corporation Tax Act, Article 2, Item 12-9 (Definition of Split-Type Split)
• Corporation Tax Act, Article 2, Item 12-10 (Definition of Spin-Off-to-Subsidiary-Type Split)
• Corporation Tax Act, Article 2, Item 12-11 (Definition of Qualified Split)
• Corporation Tax Act, Article 2, Item 12-11(a) (Qualified Splits Within Wholly Controlled Groups)
• Corporation Tax Act, Article 2, Item 12-11(b) (Qualified Splits Within Controlled Groups)
• Corporation Tax Act, Article 2, Item 12-11(c) (Joint-Business Requirements for Qualified Splits)
• Corporation Tax Act, Article 2, Item 12-11(d) (Independence Requirements for Qualified Splits)
• Corporation Tax Act, Article 2, Item 12-12 (Definition of Qualified Split-Type Split)
• Corporation Tax Act, Article 2, Item 12-13 (Definition of Qualified Spin-Off-to-Subsidiary-Type Split)
• Corporation Tax Act, Article 62, Paragraph 1 (Transfers of Assets, etc. at Fair Value through Mergers and Splits)
• Corporation Tax Act, Article 62-2, Paragraph 2 (Succession to Assets, etc. at Book Value in Qualified Split-Type Splits)
• Corporation Tax Act, Article 62-3, Paragraph 1 (Transfers of Assets, etc. at Book Value in Qualified Spin-Off-to-Subsidiary-Type Splits)
• Corporation Tax Act, Article 62-6, Paragraph 1 (Splits Delivering Shares, etc. to Both the Splitting Corporation and Its Shareholders)