What is the Continuity of Interest Doctrine?

The Continuity of Interest Doctrine (CID) is a tax principle whereby an acquisition is qualified as a tax-deferred transaction (reorganization) if the shareholders of the acquired company hold an equity stake in the acquiring company. This means that the stockholders of the acquired firm must own a certain percentage of stock in the acquiring firm. CID is otherwise referred to as Continuity of Proprietary Interest. This tax doctrine was created to ensure that there is Continuity in the ownership of interest by the stockholders of an acquired company even after an acquisition transaction is complete. In reality however, this taxation doctrine has little or no impact on the Continuity of Interest given that stockholders can sell off their stake in an acquired company after an acquisition.

How Does the Continuity of Interest Doctrine Work?

The Continuity of Interest Doctrine (CID) is one of the new regulations of the IRS to determine what companies qualify for tax-deferred treatment after an acquisition. The CID differs from other doctrines because it's focus is on the shareholders of the acquired company. According to this doctrine, shareholders of the acquired company must be allowed to hold a percentage stake in the acquiring company before the transaction is deemed tax-deferred. The requirement for CID is often determined bad in the type of contract signed between the companies and the price the acquiring company purchased the stock of the target company.