Corporate Turnaround/Bankruptcy Reorganization

Appropriate tax planning by tax professionals is necessary because tax treatments regarding gains from forgiveness of debt and net operating loss in reorganization process are extremely complicated. Our professionals well versed in reorganization business will provide services to assist our client.

Phase1: Analysis of tax risks

• Analysis of tax risks at the restructuring company

Tax due diligence plays an important part in the development and evaluation of the turnaround plan of a distressed company. Proper understanding of the tax history of the distressed company and the associated tax risks and tax benefits is essential for the various stakeholders to assess the residual value of the company’s assets and the prospects for restoring the company to long-term viability.

Phase2: Turnaround planning assistance

• Tax advice related to the waiver of debt
• Tax advice on liquidation or reorganization

Minimizing the adverse tax consequences of debt forgiveness by the current creditors is a significant issue in turnaround planning. As the waiver of debt is taxable to the debtor, special rules on net operating losses and valuation losses are commonly utilized to mitigate the debtor’s tax cost. The tax consequences of such methods must be examined taking into account a potential subsequent company liquidation or bankruptcy reorganization. The calculation method for liquidation income was changed from residual assets basis to normal income basis. This change requires more careful tax analysis in turnaround planning. 

Phase3: Services provided upon execution of deals

• Preparation of tax returns
• Tax advice on the sale of a business

The tax personnel at financially distressed companies usually have little experience with turnaround/bankruptcy reorganization procedures and are unaware of the special tax rules and requirements that apply. We can often assist our clients in preparing tax returns and in meeting their other tax compliance requirements. When the sale of a business or shares takes place under the turnaround plan, we advise our clients on the tax implications. Analyzing the tax issues and their consequences can help ensure that the subsequent sale will proceed smoothly. 

Phase4: Tax advice on the implementation stage of the turnaround planning

• Advice on reorganization
• Advice on tax consolidation rules

In the initial stages of executing the turnaround plan, the financially distressed company typically will have no taxable income after net operating losses from previous years are used. In the future, as the restructuring process progresses, taxable income will be generated as a result of the successful implementation of the turnaround plan and the additional partial debt waiver that may result from accelerated repayment of the new loan. Therefore, tax-efficient structural alternatives such as a reorganization or tax consolidation should be considered in the long term.