Yahoo reveals it will spin off Alibaba holdings to avoid taking tax hit

Internet giant still owns a 15 per cent stake in Alibaba

Executives from Yahoo Inc on Tuesday said the company is planning a tax-free spinoff of its holdings in Chinese company Alibaba Holding Ltd during its fourth quarter earnings report.

The spin-off company will own all remaining shares that Yahoo has in Alibaba, which are valued at $40 billion, the Wall Street Journal reported. Yahoo still will run its main business and hold onto its 35.5 per cent stake in Yahoo Japan. The company will take on no debt in the deal and keep its cash on hand.

Despite Yahoo also reporting drops in earnings and revenue in the fourth quarter, company shares rose 6 per cent in afterhours trading. Yahoo’s state in Alibaba is about 85 per cent of the company’s market value.

Alibaba raised $25 billion from its initial public offering back in September, the biggest IPO in history. In the IPO, Yahoo sold 140.4 million shares for more than $9.5 billion.

By creating an entirely new company in the spin off, Yahoo will avoid paying capital gains tax on the divested business. The newly created company, flush with holding in Alibaba, will become its own publicly traded company with its own executives and management.

Yahoo said on Tuesday that its management has recommended a plan that would spin off the stake into a newly formed investment company. Stock of the new company will be issued on a pro rata basis, meaning that Yahoo shareholders will be an equivalent stake in the new company.