HANGZHOU, Aug. 13-- Alibaba Group Holding Ltd. said Wednesday it is selling its small business lending arm to the Small and Micro Financial Services Company, the parent of payment platform Alipay, for 518 million U.S. dollars in cash and annual fees for seven years.

This marks the spin-off of Alibaba's last remaining financial business ahead of its highly anticipated initial public offering (IPO) in New York later this year.

In an updated prospectus to the U.S. Securities and Exchange Commission (SEC), the e-commerce giant said that the move is to avoid same-business competition with the Small and Micro Financial Services Company.

Alibaba said it will focus on Internet business while Small and Micro Financial Services Company, which also has stakes in a fund management firm and an insurance company, will focus on financial services.

In 2011, Alibaba shed its PayPal-like affiliate Alipay to make it a domestic company in order to meet regulatory requirements for third-party payment licenses. Alibaba then agreed to use Alipay on preferential terms.

More than 78 percent of purchases on Alibaba's platforms in 2013 were processed through Alipay, the world's largest third-party payment platform with a payment volume of 519 billion U.S. dollars (84.3 billion U.S. dollars) in 2013.

The two companies also agreed to eliminate the cap on the one-time cash compensation Alibaba would receive for its 37.5-percent shareholding interests in Small and Micro Financial Services Company if the financial company were to go public in the future.

According to an earlier agreement after Alipay split off, the payment firm must pay Alibaba 49.9 percent of annual pretax profits until total payment meets the value of Alibaba's interests. This value was previously capped at 6 billion U.S. dollars with a 2-billion-U.S.-dollar minimum.

The new agreement states that the Small and Micro Financial Services Company will only be allowed to go public after its market capitalization tops 25 billion U.S. dollars.

According to the new agreement, Alibaba could receive a 33-percent stake in the Small and Micro Financial Services Company if it forgoes the cash compensation.

The changes to the agreement are subject to domestic regulatory approvals.

In the updated prospectus, Alibaba said founder and chairman Jack Ma's stake in the Small and Micro Financial Services Company will not be higher than 8.9 percent, the percentage of shares he holds in Alibaba.

Alibaba first filed an IPO document to the U.S. SEC in early May. The New York IPO, which could raise up to 20 billion U.S. dollars, could be the biggest in the tech sector since Facebook's 16-billion-U.S.-dollar offering in 2012.

Sources said the company is expected to launch IPO roadshows in cities including New York, London and Hong Kong next month.

Hong Kong was once the top choice for Alibaba's IPO, but the plan was aborted in part because of Hong Kong's Securities and Futures Commission's opposition to Alibaba's unique corporate structure.

Under Alibaba's statutes, the company's partners are able to nominate and control the board, which is a challenge to the "one share, one vote" standard applied in Hong Kong.