ACCA Taxation (F6) Practice Exam

Which of the following allows for a tax-free gain during a takeover?

1. If shares are exchanged for cash

2. If shares are held for longer than 5 years

3. If shares are exchanged for new shares

4. If the company goes public

The correct answer is: If shares are exchanged for new shares

When shares are exchanged for new shares during a takeover, this is typically recognized as a tax-free gain under certain tax provisions, such as those related to share-for-share exchanges. In many jurisdictions, this allows for deferring any tax liability until the new shares are disposed of, which means that no immediate capital gains tax is incurred upon the exchange of shares. This is based on the premise that the investor is not realizing a cash profit but instead continuing their investment through new shares, allowing for the continuation of the investment rather than a realization of a gain. In contrast, exchanging shares for cash would result in an immediate taxable event where any gain is realized and subject to taxation. Holding shares for longer than a specific period does not inherently confer tax-free treatment upon exchange; tax liabilities depend more on the nature of the transaction involved. Lastly, a company going public may provide opportunities for gains but does not guarantee or specify tax-free treatment in the same manner as a share-for-share exchange during a takeover.