COVID-19: Tax Implications on Business Restructuring

Tax Guardian

Chong Mun Yew
WHO issued the above statement on 11 March 2020, which officially characterised the COVID-19 outbreak as a pandemic. Following this, many countries around the world went into lockdowns with the hope of curbing the spread of the virus. The lockdowns followed by social distancing have increased the risk of companies going into insolvency, no matter how established they are. Companies are struggling to keep their financial wheels turning, which has created unprecedented business liquidity issues.

The Financial Times reported on 25 May 2020 that the “V, U, W, L: are just some of the letter-shaped recoveries that investors have put forward as paths for the US economy once the worst of the crisis is over. The idea of a Nike swoosh recovery has taken hold, implying a rebound in economic activity that is flatter and slower than the drop. The most optimistic forecast – the V-shaped rebound – has been dismissed suggesting a much less robust resurgence after what may well be the worst downturn since the Great Depression.”

Given the many tax issues which the pandemic has created, for this article, we will only focus on the tax implications arising from business restructuring.

To weather the impact of the COVID-19 situation, many companies are looking into restructuring and reorganising their businesses.

What businesses should know if they intend to restructure? Are there any tax implications on the methods used to restructure or reorganise their businesses?


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 - How does it work?

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”.


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Our Expert

Chong Mun Yew
Mun Yew Chong
Location: Kuala Lumpur