HOW ARE THE TAX APPLICATIONS ON SHARE TRANSFERS IN JOINT STOCK AND LIMITED COMPANIES? 18 May 2021

WHAT ARE THE ISSUES TO CONSIDER ABOUT INCOME TAX ON SHARE TRANSFERS IN JOINT STOCK AND LIMITED COMPANIES?

As it is known, many financial regulations have recently been introduced in order to encourage foreign capital to invest in the developing Turkish economy and thereby contribute to the country's economy. In this context, it is a known fact that domestic companies and investors operating in our country are seeking foreign capital to contribute to their economic activities. However, some difficulties are faced in the transfer of some shares of Turkish companies, which is one of the primary ways of incorporating foreign capital into the country's economy, to foreign persons or companies.

As a matter of fact, the change in the opinion of the Revenue Administration regarding the transfer of shares in companies that have transformed from a limited company to a joint stock company causes hesitations about Turkish shareholders transferring their shares in joint stock companies. In this context, in this article, the recently changed income tax application in the transfer of company shares that changed the type from limited company to joint stock company shall be explained.

1. IS INCOME TAX APPLIED IN THE TRANSFER OF SHARES OWNED BY LIMITED COMPANIES?

Pursuant to the repetitive Article 80 titled "Gain from appreciation" of the Income Tax Law No. 193, it has been stipulated that the gains arising from the disposal of securities and partnership rights or shares shall be accepted as gain from appreciation. In the continuation of the relevant article, the term "disposal" is defined as the sale of the relevant goods and rights, their transfer and assignment in return for a consideration, their barter, exchange, expropriation, nationalization, and the capitalization of commercial companies.

Accordingly, the term "partnership right or share" refers to the shares in all kinds of capital companies and sole proprietorships; In this context, gains arising from the transfer of shares representing the partnership right of limited companies are accepted as “gain from appreciation” in accordance with Article 80 and are subject to income tax.

In addition, as shall be explained below, although some exceptions are set forth under the repetitive Article 80 of the Income Tax Law, the gains of a limited company partner in the event of a share transfer due to the inability of the limited partnership shares to be linked to the shares are accepted as the gain from appreciation without any exceptions. Accordingly, no matter how long time passes after the acquisition of a limited company share, income tax shall have to be paid on the gains arising from the transfer of the relevant share.

2. WHAT ARE THE INCOME TAX EXCEPTIONS IN THE TRANSFER OF SHARES OWNED BY JOINT STOCK COMPANIES?

Gains obtained from the transfer of shares owned by real persons in joint stock companies are, as a rule, subject to the repeated Article 80 of the Income Tax Law. Accordingly, the income that a real person shall earn from the transfer of his/her shares in a joint stock company is, as a rule, the subject of income tax.

Repeating Article 80, subparagraph (1) defines "gains from the disposal of securities or other capital market instruments, excluding the stocks that are acquired gratuitously and those belonging to fully taxpayer institutions and held for more than two years" as the gain in value. Within the scope of the relevant article, an exception has been introduced for stocks that are held for more than two years and it has been stipulated that the gains arising from their disposal shall not be subject to income tax without any limitation on the amount. Accordingly, the gains obtained by real persons from the disposal of shares held in joint stock companies for more than two years are not subject to income tax.

However, in the current situation, there is an opinion given by the Revenue Administration in 2018 regarding the date on which the said “holding for more than two years” period shall start in the shares of the company that changed the type from limited company to joint stock company and caused hesitation; at this point, due to the change of opinion, shareholders cannot benefit from the income tax exemption they previously benefited from by converting limited companies into joint stock companies.

3. IS INCOME TAX APPLIED IN THE TRANSFER OF SHARES BELONGING TO COMPANIES THAT CHANGE TYPE FROM A LIMITED COMPANY TO A JOINT VENTURE?

1. What was the Opinion of the Revenue Administration on Income Tax Application?

As explained above, in order to benefit from the income tax exemption in share transfer, the related shares must be joint stock company shares. However, it is known that the traditional tendency to establish limited companies in Turkey is high, so the number of limited companies established is quite high compared to the number of joint stock companies. In this context, until recently, in the projects in which the transfer of shares with high amounts was foreseen in practice, it was accepted to immediately transform the limited companies whose shares shall be sold into joint stock companies in order to benefit from the income tax exemption in the share transfer of joint stock companies.

The established opinion of the Revenue Administration until recently was that the two-year holding period of the shares subject to sale in companies transformed from a limited company to a joint stock company in accordance with the legislation was to be calculated by taking into account the shareholding periods in the limited company.

Accordingly, in the tax ruling pool on the official website of the Revenue Administration; As it is clearly stated in many tax rulings such as tax ruling of Ankara Tax Office dated 11/11/2011 and numbered B.07.1.GİB.4.06.16.01-125 [19-11/3] -983, and tax ruling of Istanbul Tax Office dated 18/05/2010 and numbered B.07.1.GİB.4.34.16.01-KVK 19-106, It was accepted that the date of the participation of the relevant partner in the capital of the limited company should be taken into account as the acquisition date of the shares that the shareholders of the limited liability company, which changed their type in accordance with the existing legal regulations, shall acquire from the joint stock company as a result of the change in type. However, as shall be explained further below, it is observed that the said opinion has been changed recently by the Revenue Administration.

2. What Is the Legal Basis of The Opinion That the Period of Shareholding During the Limited Company Period Shall Be Taken into Consideration?

As explained above, the established opinion of the Revenue Administration that the shareholding period passed during the limited company period shall be taken into account in the share transfer in the joint stock company is also compatible with the existing legal regulations. Since, in accordance with Article 19 of the Corporate Tax Law No. 5520;

“(1) In the implementation of this Law, mergers realized under the following conditions are considered as transfer:

a) The legal or business centers of the institution dissolved as a result of the merger and the institution merged are located in Turkey.

b) The acquisition of the balance sheet values ​​of the dissolved institution on the date of transfer by the merged institution as a whole and transferring them to the balance sheet exactly.

(2) Changes of the type of institutions within the above conditions are also subject to transfer.”

regulation has been included. In addition, in the titled “19.3.3. Acquisition date of the shares acquired in the transfer and division” section of the Corporate Tax General Communiqué no.1; It has been stated that in cases of transfer and division (including partial division), the date of acquisition of the shares given to the shareholders of the transferred or divided company should be based on the date of acquisition of the shares of the transferred or divided company.

As a result of the joint evaluation of these articles: the repetitive 80th article of the Income Tax Law, the 19th article of the Corporate Tax Law and the 19.3.3. article of the Corporate Tax General Communiqué no.1, it is necessary to accept that the partners of the limited company hold the shares that they shall obtain from the joint stock company as a result of the change in type, starting from the date of their participation in the capital of the limited company. Therefore, it should be accepted that a shareholder who completes a period of two years from the date of shareholding in a limited company until the date on which the joint stock company share shall be transferred can benefit from the exemption stipulated in accordance with the repetitive Article 80 of the Income Tax Law.

However, since it is known that both tax inspectors and Report Evaluation Commissions take into account the most recent opinion during a possible tax inspection, the last opinion of the Revenue Administration on the subject in 2018 causes the company shares changed from limited company to joint stock company not to benefit from the income tax exemption in the transfer of shares.

4. CAN IT BE BENEFIT FROM INCOME TAX EXEMPTION BY TYPE CHANGE IN THE SCOPE OF THE NEW OPINION OF THE REVENUE ADMINISTRATION?

As explained above, the current legal regulations and the implementation of the Revenue Administration until 2018 are that companies that change the type from limited company to joint stock company can benefit from income tax exemption with two years from the first acquisition date in the limited company.

However, the established opinion has been changed with the tax ruling of Istanbul Tax Office dated 14/02/2018 and numbered B.07.1.GİB.4.34.16.01-120-154561; It has been stated that in the company, which has turned into a joint stock company due to the change of type, the date of acquisition of the shares given to the shareholders due to the change in type should be taken as basis.

Accordingly, in accordance with the opinion of the Revenue Administration dated 2018, which contradicts both the previous views and the current legal regulations, a company shareholder who has transformed from a limited company to a joint stock company shall have to wait two years, starting from the date of issue of the joint stock company shares, in order to benefit from the capital gain exception.

Whereas, in accordance with the legislation referred to above, the type changes of trading companies are accepted as transfer; the date of acquisition of the shares in the event of transfer is the date on which the shares of the transferred company are acquired. Therefore, accepting the date of acquisition as the date of acquisition of limited company shares in joint stock companies that change the type from limited company shall be in accordance with the existing legal regulations and the established opinion.

5. CONCLUSION

In the light of the above explanations, considering that there are many limited companies in our country, the opinion put forward by the Istanbul Tax Office's tax ruling dated 14/02/2018 and numbered B.07.1.GİB.4.34.16.01-120-154561 is against the legislation. As a result of its amendment, the possibility of benefiting from the capital gain exemption granted for the transfer of joint stock company shares by the repetitive Article 80 of the Income Tax Law has been made difficult to a great extent. However, it is seen that the current legal regulations permit the calculation of the holding period of two years based on the acquisition date of the limited company shares in the event of the transfer of the shares of the company that has been transformed from a limited company to a joint stock company. In accordance with the hierarchy of norms, opinions contrary to the law and notification should not be applied.