The Spin-Off as a Corporate and Tax Planning Tool
Five years after having enacted Law 85 of November 22nd 2012, which supplements the concept of spin-off of corporations to the Code of Commerce of Panama, still not many know the appeals that it has as a legal tool. Let us begin with a definition.
A spin-off consists in the partial or whole division or separation of the equity or capital (including assets, liabilities and capital) of a corporation, which is contributed as a whole, whether to other existing corporations or to a new corporation. The legal effect that is achieved through this is the segregation or transfer of assets of a corporation (called “spun-off corporation”) to the acquiring or beneficiary corporation of said assets.
There are multiple reasons for which the shareholders of a corporation may opt for the spin-off: reasons of an administrative, investment or taxation nature: for example, when there are disputes between directors or shareholders that irremediably lead to decide the division of the business, without implying the liquidation of the company, or when -due to strategic decisions- a simple transfer of assets is used.
Nevertheless, tax planning is perhaps the most attractive feature of the spin-off.
Thus, we see that Article 505-F of the Code of Commerce establishes that the transfer of assets by reason of a spin-off of a corporation shall not be deemed as a disposal for tax purposes, provided that said transfer be of equal value as such assets show in the accounting records of the spun-off company, and that the beneficial corporations have the same partners or shareholders that the spun-off company or have the latter as its shareholder.
That said, through the spin-off of companies, all kinds of assets, real or personal property, may be transferred under the conditions established above, taking advantage of the tax benefits provided by the law.
In other words, the spin-off is a useful corporate tool, which allows corporate groups to reorganize its equity through the division and transfer of its assets, liabilities and capital to other companies, without it being deemed a disposal.
It also allows the creation of new companies without resorting to new capital stock contributions or the liquidation of the existing corporation.