ACCA Taxation (F6) Practice Exam

What occurs during a paper for paper takeover concerning shares?

1. A gain is immediately recognized

2. A gain occurs only if cash is involved

3. No gain occurs at the time of takeover

4. The takeover is taxable immediately

The correct answer is: No gain occurs at the time of takeover

In a paper for paper takeover, shareholders exchange their existing shares for new shares in another company, which means that the consideration they receive consists of shares rather than cash. In this context, the tax treatment of this kind of transaction is crucial to understand. When shares are exchanged in a takeover where both sets of shares are paper (i.e., non-cash), the transaction is typically treated as a capital gain deferral situation. This means that no immediate gain is recognized at the time of the takeover. The rationale behind this treatment is that the shareholders have not realized any cash or cash-equivalent assets; instead, they have merely changed their investment from one type of equity to another. By deferring the gain, the tax system allows the shareholders to postpone any tax liability until they dispose of the new shares they received in the takeover, at which point they will be taxed on the difference between the sale proceeds and their adjusted cost basis for the new shares. This deferral aligns with the general principle of tax neutrality in such corporate transactions, fostering a smoother transition and preserving equity investment continuity for shareholders. In contrast, scenarios involving cash or cash equivalents would typically trigger a tax event, as those would realize actual economic value received.