Spin-off

What it means

A spin-off is a new company created by separating part of an activity, a technology or a team from an existing company, university or research institute. The parent organisation often keeps a stake in it, provides know-how or remains its first customer.

In academia these are mainly companies that commercialise research results, such as a patent or software developed at a faculty. In the corporate world a spin-off appears when a company wants to develop an activity separately because it does not fit the core business or needs its own investors.

Legally it can take various forms. It may be a company division by hive-down, a sale of part of the business to a new company, a contribution of part of the business into a newly founded company or an entirely new firm using the technology under a licence.

How it works in practice

For university spin-offs the key is sorting out intellectual property rights. The university usually remains the patent owner and grants it to the new company under a licence agreement in exchange for royalties or equity. Unclear ownership of rights later deters investors.

Once founded, a spin-off behaves much like a startup: it looks for its first customers and for funding, often from business angels or venture capital funds. Investors will want to see a clear ownership structure and independence from the parent organisation.

For accounting and tax, the chosen form matters. A hive-down can be tax-neutral if the conditions are met, a sale of part of the business is taxed at the seller, and a contribution of part of the business has its own rules for valuation and continued depreciation. The form is best chosen after comparing the consequences.

What to watch out for

Employees moving to the new company need attention. When part of a business is transferred, the rules on the transfer of employment rights and obligations apply and employees keep their existing terms, which affects the new company's costs.

Dealings between the spin-off and the parent, such as premises rental, shared services or licences, should be set at arm's length. If the companies are related, the tax authority may review transfer prices and adjust those that are not at market level.