COVID-19: Tax Implications on Business Restructuring

A company undertakes a restructuring exercise to modify the financial and operational aspects of the company significantly. This happens when the business is facing financial pressures. Restructuring involves considerably modifying the debt, operations or structure of a company as a way of limiting financial harm and improving the business.

Briefly, business restructuring can happen in the following manner:

(i) Operational restructuring Operational restructuring is a corporate action taken to significantly modify the structure or the operations of the company, which usually happens when a company is facing significant problems and is in financial jeopardy.
(ii) Debt restructuring Debt restructuring is a process wherein a company or an entity experiencing financial distress and liquidity problems refinances its existing debt obligations to gain more flexibility in the short - term and make their debt load more manageable overall.

Operational restructuring comes in handy when a company is faced with an “out of cash” situation. The relevant company does not have a positive cash flow from its operations because of disruption in its income stream. Globally or locally, the COVID-19 pandemic has forced many companies to experience this kind of situation. So, what are the options available to these companies? In the worst case scenario, a company may be forced to shut down to avoid being in a continuous loss-making situation. In the case of a group of companies, merging businesses could be a step to reduce the operating cost of the group. Selling of assets and properties may also be on the cards to generate cash flow.

Let us look at some of the ways operational restructuring can be done and explore the tax implications of each method:

(i) Consolidation / Merging of businesses Consolidating or merging of businesses could be an option for groups of companies to mitigate the overall operating

In conclusion, this pandemic has surely affected every business. Even the larger corporations have been impacted by the lockdowns imposed as well as the social distancing practice thereafter. Business strategies should be reassessed in order to survive the short - term and long - term impact of this pandemic. The government, financial institutions, tax authorities and all relevant parties should render their utmost support to businesses to help them out through this struggle. With cooperation from all parties, the country’s economy can be revived and shaped back in a faster scale. It should be remembered that each of us are definitely not alone in combating this battle and we will surely overcome this. As the saying goes, “Every cloud has a silver lining, so is this COVID-19’s cloud”.