Page 301 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes 2. Absorption: It is the other type of merger which is nothing but dissolution of a company’s
identity into other company’s identity. As the name suggest, in absorption a company
absorbs other company to form a new larger entity.
3. Demerger: Demerger is also a type of corporate restructuring which results in formation
of two entities. The entity which undertakes demerger is termed as Demerged Company
and the new entity formed is called as Resulting Company. Companies adopt demerging

strategy to sell subsidiaries or to get rid of non-profit making division of company.
Demerger takes place in the form of spin off, split off, split up, sale off, etc.
(a) In spin-off, company distributes its shareholding in subsidiary to its shareholders
thereby not changing the ownership pattern.

Example: Air India formed Air India Engineering Services Limited by spinning off its
engineering department.
(b) Split-off is the form of demerger where shareholders of existing company form a new

company to takeover specific division of existing company.
(c) When existing company is dissolved to form few new companies, it is called a Split-
up.
(d) Sell-off takes place when company sells its non-profit making division.

4. Reverse Merger: When financially weak company absorbs financially strong company it

is corporate restructuring made in the form of Reverse Merger. Merging of large sized
company into small sized company is also form of Reverse Merger.
Example: Merger of Corus with Tata: Now-a-days, public companies opt route of reverse
merger for merging with private companies to avoid lengthy procedure of merger.

5. Takeovers: Takeover is another type of restructuring. When a bidder company takeover
the management of target company with permission of its Board, it is termed as Friendly
takeover. When a company secretly acquires the control over Target Company against
wish of their management, it is termed as Hostile takeover.
6. Joint Venture: Joint Venture is an entity formed by two or more companies for a specifi c

period with a specific objective. Joint ventures are useful for a company to enter into new
segment of market. Joint venture creates a new entity, however Strategic Alliance allows
companies to remain independent while perusing agreed goal.
7. Management Buyout: When a group of people buy the controlling stake in a company
through leveraged (borrowed) funds, it is Leveraged Buyout. When such buyout is carried
out by management, strategy is termed as Management Buyout.

Did u know? Buy-back is also used as restructuring strategy so as to increase Earning Per
Share (EPS) of the company.
Strategy used to increase market price of share is called as Subdivision of shares, which is also
type of corporate restructuring. Thus the minute differences between various restructuring
techniques must be considered while selecting the best suitable technique of restructuring for a
company. However in doing so the tax implications of each type of business restructuring should
be kept in mind.

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