This is just my opinion, but if Yahoo has figured out and easy way for corporations to directly exempt themselves from capital gains taxes, this may be their most significant contribution to the world yet. And Warren Buffett should be very thankful!
Didn't Warren Buffet do something similar by trading P&G stock for Duracell stock a while back, thereby avoiding (deferring) capital gains taxes?
Buffett does find creative ways to aviod taxes, but they usually involve the company he owns stock in buying that stock from him in a tax-free exchange. In that case, Buffett exchanged his $3bn worth of P&G stock for $3bn worth of a stake in Duracell. That had allowed him to re-establish his tax basis at the value of Duracel, and avoid cap gains on what he had made on buying P&G earlier.
In short: 0) the spinout will also run some (non-important) businness and so won't be a pure holding company 1) the spinout is less likely to sell the Alibaba shares and squander out the proceeds, 2) eventually Alibaba itself could buy out the spinout, and then it would have no need to sell its own shares.
Surely shareholders would still have to pay capital gain taxes when the spinned-out company gets acquired at a premium, but presumably at a rate better than the 40% Yahoo would have to pay.
Let's say Yahoo were to sell the stock, it would first have to pay corporate tax (35-40%), after which a dividend could be declared (another 15-25% in the hands of the shareholder) The total tax rate as such would be between 45-60% for individual tax payers.
Using SpinCo, Yahoo will not have to pay the corporate tax, and investors will only have to pay capital gains tax because they can directly sell SpinCo shares. I'd assume SpinCo shares to trade at a discount to BABA.
Re-establishing the tax base would have been better, but I think that one is much harder to do.
Another thing to consider is that some non US investors might be holding Yahoo stock through some sort of holding or investment company that can benefit from a participation exemption regime. This means that capital gains are tax exempt at the corporate level, and that no taxation will occur until they make a distribution to shareholders.
Yahoo isn't the first to do this; the article mentions a precedent. So, nothing new here.
Whee.