D6.208B Share for share exchange—conditions for earn-out to qualify for no disposal rule
Qualifying conditions for the no disposal rule to apply to earn-out rights
For the 'no disposal' rules to apply, the following conditions must be met:
(a) the deferred consideration must not be able to be taken in some other form (eg where a cash alternative is offered), and
(b) the right itself must be unascertainable1
These are explored in further detail below.
For losses arising on disposals of rights after 9 April 2003, see C2.107A.
Condition (a) – form of deferred consideration
The no disposal rules cannot apply unless the right to receive unascertainable deferred consideration can be discharged only by the issue of new shares or debentures. For rights conferred on or after 10 April 2003, the treatment of an earn-out right as a security is automatic when the conditions are met unless the taxpayer elects for the treatment not to apply. For rights conferred before 10 April 2003, it was necessary to make an election for the statutory treatment to apply.
However, if part of the right can only be satisfied by the issue of shares or debentures that part can be treated separately for the purposes of the legislation. Where there is a choice of having the unascertainable deferred consideration paid either in cash, shares or debentures, the no disposal rules can apply if the right to receive such consideration might under the terms of his contract be settled only by the issue of shares or debentures.
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