Page 300 - DCOM508_CORPORATE_TAX_PLANNING

Unit 13: Tax Treatment for Business Restructuring

13.1 Business Restructuring Notes

One of the dictionary meanings of the word “restructuring” is “rearrangement”. Thus, business
restructuring refers to a rearrangement of the corporate structure. In today’s world, along with
increasing focus on globalisation and liberalisation, there is free competition amongst businesses.
As a result, corporates are trying to identify opportunities so that they can command a presence

in the market. They are redefining their strategies, looking at core competency and trying to
create a value for the shareholder in a competitive business environment. This has given rise to
business restructuring.

Corporate restructuring is the process of redesigning one or more aspects of a company. The
process of reorganising a company may be implemented due to a number of different factors,
such as positioning the company to be more competitive, survive a currently adverse economic
climate, or poise the corporation to move in an entirely new direction. Here are some examples of
why corporate restructuring may take place and what it can mean for the company.

Restructuring a corporate entity is often a necessity when the company has grown to the point
that the original structure can no longer efficiently manage the output and general interests of

the company.

Example: A corporate restructuring may call for spinning off some departments into
subsidiaries as a means of creating a more effective management model as well as taking advantage
of tax breaks that would allow the corporation to divert more revenue to the production process.
In this scenario, the restructuring is seen as a positive sign of growth of the company and is often
welcome by those who wish to see the corporation gain a larger market share.

13.1.1 Types of Business Restructuring

Corporate restructuring may take place as a result of the acquisition of the company by new
owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger
of some type that keeps the company intact as a subsidiary of the controlling corporation. When
the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of
the company, selling off properties and other assets in order to make a profi t from the buyout.
What remains after this restructuring may be a smaller entity that can continue to function, albeit
not at the level possible before the takeover took place.
In today’s era Mergers, Amalgamations, takeovers has become day to day activity. Many mergers
and amalgamations are taking place all over the world. We all are well acquainted to these
words. When two or more companies are added together to form a new entity for better synergy,
we terms it as merger or amalgamation. But there are many types of corporate restructuring
which people combine under the umbrella of words mergers and amalgamation. Let us try to
understand the difference between these terms and also take a look on different types of business
restructuring given as under:
1. Amalgamation and Merger: The words merger and amalgamation are always
interchangeably used. Many interpret mergers and amalgamations as synonyms. Indian
Companies Act, 1956 does not differentiate between the words Merger and Amalgamation,
however there is slight difference in merger and amalgamation. Merger is combination
of two or more companies which can be done either by way of amalgamation or by way
of absorption. Amalgamation is the process where two or more companies dissolve their
identity to form a new entity.

Example: Merger of Brooke Bond and Lipton has formed a new entity called Brooke
Bond Lipton India Limited.

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