The planned spin-off of shares of global company Yahoo in Alibaba Group Holding Ltd., China’s Internet titan, may entail an unexpected tax bill, Yahoo cautioned investors on Friday, July 17.
According to the statement issued by Yahoo for the new spin-off company Aabaco Holdings Inc., U.S. or Chinese tax regulators may reject its proposal for a tax free spin-off, which would result in the reduction of cash it has to distribute to investors.
The Wall Street Journal reported that since early this year when Yahoo announced the planned spin-off, tax concerns have haunted its investors. When the Internal Revenue Service (IRS) announced in May that it is considering changes to rules governing spin-offs, Yahoo shares started to slide in the market.
Yahoo Chief Executive Marissa Mayer, however, said at a tech conference last month that the proposed changes were not directed at Yahoo alone and that the IRS has reassured her that the changes would not affect the plan since it has already been filed.
Despite this, Yahoo does not discount the possibility that the IRS will reject the changes or whether Chinese authorities will qualify Yahoo from tax exemption, according to its registration statement for Aabaco. Yahoo also said it faces "uncertainties" around whether the plan will qualify for exemption of taxes by Chinese authorities.
According to the report, Yahoo's stock gains in the past three years werelargely due to investor's growing enthusiasm for Alibaba, and Mayer has committed to bring the billions of dollars to shareholders by completing the spin-off process.
The report said that once the spin-off is complete, Aabaco will own about 384 million Alibaba shares, which represents about a 15-percent stake in the Chinese e-commerce giant, and a 100-percent stake in a new entity that will own Yahoo Small Business. The shares are worth about $32 billion based on Alibaba's Friday closing price of $83.37 on the New York Stock Exchange, the report added.
Aabaco plans to invest at least 80 percent of its total assets in Alibaba shares under normal market conditions.