ACCA Advanced Taxation (ATX) Practice Exam

How are Qualifying Corporate Bonds (QCB) treated under a share takeover?

1. Tax is charged immediately upon takeover

2. No gain is chargeable at the point of takeover, gain deferred until sold

3. Gain is immediately recognized at market value

4. Gains are taxed annually until sold

The correct answer is: No gain is chargeable at the point of takeover, gain deferred until sold

Qualifying Corporate Bonds (QCB) are treated specially in the context of a share takeover. Specifically, when a takeover occurs, any gains associated with these bonds are not immediately taxed. Instead, the tax on any gain is deferred until the bonds are sold. This means that if an investor holds QCBs during a takeover and does not sell them, they will not recognize a gain for tax purposes at that moment. The rationale behind this treatment is to provide continuity and avoid immediate tax implications that could discourage investment or lead to liquidity issues for investors. By deferring the gain until the QCBs are sold, the tax system allows the investor to only pay tax when they realize a profit from the actual sale of the bonds, rather than bootstrapping the investor with a tax liability based purely on the corporate action of a takeover. This stands in contrast to immediate recognition of gains, which would impose a tax burden regardless of whether the investor has liquidated their investment. The other options suggest scenarios where gains could be taxed at the point of takeover or on an annual basis, which does not align with the QCB treatment, designed to create favorable conditions for bondholders during corporate transitions.