Question

In general, for an acquisition to be regarded as tax-free acquisition, these conditions should be met:
I- Shareholders of the target firm must receive an equity interest in the acquisition
II- The acquisition should be for business purpose and not to avoid taxes
III- The acquiring firm should offer cash payment for the equity of the target firm
IV- Continuity of equity interest

1)	I, II and III only

2)	I, II and IV only

3)	II, III and IV

4)	All of the above

Answer 1

Correct answer is option (2). I, II and IV only

Explanation;

Followings 4 conditions must be met for an acquisition to be regarded as tax-free acquisition;

·        Continuity of ownership interest (Shareholders of the target firm must receive an equity interest).

·        Continuity of business enterprise (The acquirer must continue the business)

·        Valid business purpose (The acquisition should be for business purpose and not to avoid taxes.)

·        Step-transaction doctrine

Thus it is clear that statement (III) is incorrect option hence conditions (I, II and IV) should be met for an acquisition to be regarded as tax-free acquisition.