Summary
With Presidential Decree No. 6791 published in the Official Gazette on February 14, 2023, the withholding rate on the amounts deemed to be dividends distributed in relation to the stock buybacks by Turkish resident companies has been reduced to zero.
Stock Buybacks in General
A stock buyback occurs when a company uses its accumulated cash to repurchase its shares from the market. Also known as a share repurchase, a stock buyback allows a company to re-invest in itself.
Stock buybacks can be motivated by a variety of factors. One of the main motives is that the company thinks the market is lowballing the share price; in other words, the market price doesn't reflect the company's actual value, which may be, among others, due to an economic crisis, politics, or a natural disaster.
After the buyback, the company may cancel the repurchased shares, thereby reducing the number of outstanding shares on the market. In this case, as fewer shares are afloat, each investor's proportional ownership interest increases. In this way, the company retains or increases its share price, defending itself against the volatility in the market. A company may also execute a share repurchase to improve its financial ratios that investors generally use to determine the value of a company, such as return on assets (ROA) and return on equity (ROE).
Background of the Presidential Decree
In the three days following the catastrophic earthquake on February 6th, the Turkish stock market had dropped 15%.
On February 8th, trading on Istanbul's stock exchange was halted after the main index dropped 7% in early trading, prompting the exchange to issue two circuit breakers to prevent panic selling.
In anticipation of a bleak morning upon the re-opening of the stock exchange, the withholding tax waiver was announced the day before the re-opening, with the goal of incentivizing stock buy-backs and thus halting the decline in share values and supporting the Istanbul Stock Exchange 100 Index.
Turkish Tax Treatment of Stock Buybacks
In accordance with Article 94/4 (enacted in 2020) of the Income Tax Code, the following events that may occur after stock buybacks executed by Turkish resident companies are treated as deemed dividend distributions:
- Capital reductions: In the event of cancellation of repurchased shares by a capital reduction, the difference between the repurchase price and the nominal value of the cancelled shares is treated as deemed dividend distributed on the date the capital reduction decision was registered in the Trade Registry.
- Sales below the repurchase price: If the repurchased shares are sold for less than the repurchase price, the difference between the repurchase price and the sale price is treated as deemed dividend distributed on the date of sale.
- Retention for more than two years: If the repurchased shares are not disposed of within two years of the date of the repurchase or cancelled via a capital reduction, the difference between the repurchase price and the nominal value of the shares is treated as deemed dividend distributed on the last day of the period of two full years from the date of repurchase.
Prior to the enactment of the Presidential Decree, these deemed distributions were subject to a 15% withholding tax.
With the enactment of Presidential Decree No. 6791 on February 14, 2023, the withholding rate has been reduced to 0%.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.