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TAX TREATMENT OF SHARE EXCHANGE AND REDEMPTION OF PREFERRED SHARES
In respect to a M&A transaction whereby an acquiring company issues preferred shares to the shareholder of a target company in exchange for shares of the target company, and agrees to re-deem the preferred shares within a specified time period, the Ministry of Finance issued an inter-pretation on 7 February 2007 to address the re-lated tax issues as follows.
Shareholders of the target company, at the time of a share exchange conducted in accordance with Article 29 of the M&A Act, transfer their shares in the target company in exchange for the preferred shares issued by the acquiring com-pany. Thus, if the value of the preferred shares exceeds the cost of the shareholders' original acquisition cost of the shares in the target com-pany, the difference is capital gain from a secu-rities transaction. Subsequently, when the ac-quiring company redeems the preferred shares, any amount paid to the shareholders in excess of the value of the preferred shares in the acquired company should be deemed dividend income (investment income), and as such is subject to income tax accordingly.