The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
This guidance note gives an overview of the steps and tax implications of a statutory demerger. For an overall introduction to demergers, see the Demergers ― overview guidance note.
One of the key aspects when carrying out a demerger, from a tax perspective, is to mitigate or avoid any tax charge from splitting up the business or group. Statutory demergers provide businesses with a mechanism to demerge in a tax efficient manner, but because of the strict conditions that must be met the application of statutory demergers is limited. For example, the statutory demerger route cannot apply to non-trading businesses or where arrangements are in place at the time of the demerger to sell the demerged or successor company. In addition, there are rules (the chargeable payments rules) that can result in a tax charge if certain events take place within five years after a statutory demerger. In practice, these rules can make statutory demergers unattractive.
For cases where the statutory demerger route is suitable, and provided the relevant conditions are met, the demerger should not trigger charges to income tax, capital gains tax or corporation tax, either at shareholder or company level.
There are three types of statutory demerger are permitted by the legislation, which are explored in further detail below (see types 1 to 3 below).
The most common scenarios where a statutory demerger are likely to be used are where the target company:
is carrying on two or more trades
has two or more trading subsidiaries, or
is carrying on one or more trades and also has one or more trading subsidiaries
Where the statutory demerger route is not suitable, it may be necessary to consider one of the non-statutory demerger routes (ie the capital reduction or liquidation demerger options). See the Capital reduction demerger ― tax analysis and Demerger via a liquidation ― overview guidance notes for further details.
A direct statutory demerger (also known as a direct dividend demerger) involves the target
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