Company division by spin-off or separation – which method to choose?
Capital companies and a limited joint-stock partnership may be divided in several different ways. However, if the goal is for the divided company to continue operating after the reorganization, in practice there are only two options: a demerger by spin-off or—only recently officially introduced into the Polish legal system—a demerger by separation.
In both cases, part of the assets of the demerged company is transferred to another entity. This may be either an existing company or a newly established company created for the purposes of the reorganization. On the side of the acquiring companies, there may be more than one entity; in particular, some of them may already exist before the demerger, while others may be established only as a result of it.
Differences in taking up shares and simplifications of the demerger plan by separation and spin-off
The most important difference between these two division modes concerns who acquires the shares or stocks in the company taking over the assets. In the case of a division by separation, these shares are transferred directly to the shareholders of the company being divided. In the case of a division by extraction, the situation is different – the shares in the acquiring company are taken up by the company being divided itself.
Further differences between these two methods of division become apparent at the stage of preparing the division plan. In the case of division by separation, its content is simplified, as there is no need to specify, among other things, the share exchange ratio or to describe the rights granted to the shareholders of the divided company. This follows from the very essence of this solution – since the shares in the company acquiring the assets are not transferred to the shareholders of the divided company, some of the traditional elements of the division plan simply lose their purpose.
Formal and reporting obligations in a demerger by spin-off and the separation of assets
Simplifications also occur on the side of formal obligations. In the case of a division by separation, the management boards of the companies participating in the process do not prepare a report justifying the division, and the division plan is not subject to examination by an expert. In the case of a division by spin-off, omitting these elements is possible only in specific situations provided for by law or with the consent of all shareholders of the companies participating in the division.
At first glance, it may therefore seem that a demerger by separation is an easier solution. In practice, choosing the appropriate type of demerger is rarely that straightforward. The decisive factors are the specific circumstances, such as the structure of the capital group, the legal situation of the company being divided, tax consequences, and actual business needs.
Practical application and tax consequences of a demerger by spin-off and a carve-out in business
For example, if a parent company wants to transfer part of its business to a subsidiary, a division by separation often proves to be a natural solution. However, if the company being divided benefits from the Estonian CIT regime and wants to retain this status, in practice the only available option will be a division by spin-off.
If you are planning a reorganization within your business, we invite you to contact us. We will advise you regardless of whether you are just analyzing possible scenarios or are already at the stage of implementing a specific solution.