The capital gain taxation has always been an issue of concern
for those who wish to transfer their shares in a company with the
benefit of tax exemptions under the current Income Tax Law and
Corporate Tax Law. The Draft Income Tax Law (the
"Draft Law"), which is still pending
before the Turkish Parliament, intends to merge the Income Tax Law
and the Corporate Tax Law into one single text and capital gain
taxation is one of the hot topics on which material changes are
expected. Indeed, it should not be regarded as an overstatement to
argue that time is running out for the potential sellers who try to
avoid higher tax implications.
A. Current Position
1. Corporate Tax Law
In case a legal entity intends to transfer the shares that it
owns in another company, the capital gains derived by such legal
entity as a result of the said share transfer transaction will be
subject to corporate taxation at a rate of 20%. However, according
to the Corporate Tax Law, if such shares are being held for at
least two years by the legal entity shareholder, 75% of the capital
gains derived as a result of disposal of such shares are exempt
from corporate tax; provided that the said capital gains are
reserved in a special fund for a period of five years following the
share transfer. From the perspective of corporate taxation, there
is no difference as to the transfer of shares of a joint stock
company (anonimşirket) or a limited
liability partnership (limited şirket) and the said
exemption applies in both instances on the condition that the above
mentioned conditions are met.
2. Income Tax Law
If a natural person aims to transfer the shares that he/she
holds in a company, the income that is generated as a result of
such disposal of shares is subject to income taxation under the
Income Tax Law (currently, individual income and gains are subject
to income tax at progressive tax rates which vary between 15% and
35% and are calculated on a cumulative basis). That being said, the
capital gains derived by a natural person as a result of disposal
of shares in a joint stock company are exempt from income taxation,
if the shares are printed in share certificates / temporary share
certificates and if they are held by such natural person for more
than two years (this exemption does not apply during the transfer
of shares of a limited liability partnership).
B. What the Draft Law Says
The Draft Law brings material changes regarding the tax
exemptions on the capital gains generated from the transfer of
shares of companies. According to the Draft Law, the exemption
rates gradually increase depending on length of the period during
which the transferor holds the shares:
40%, if the shares are held for more than 2 years;
50%, if the shares are held for more than 3 years;
60%, if the shares are held for more than 4 years; and
75%, if the shares are held for more than 5 years.
The legal entities or natural persons which aim to benefit from
such exemption must reserve the said capital gains in a special
fund for a period of five years following the share transfer.
However, in terms of the application of the said exemption under
the Draft Law, it does not matter whether a joint stock company or
limited liability company is concerned, whether the shares are
printed in share certificates / temporary share certificates or
whether the transferor is a natural person or a legal entity.
The Draft Law aims to limit the scope of the tax exemptions in
connection with the capital gains for both legal and natural
persons/taxpayers. If the Draft Law is accepted in the Parliament
and enters into force as is, the natural persons and legal entities
will no longer benefit from the current tax exemptions in respect
of their capital gains and they will only be able to make advantage
of the above mentioned exemption rates that increase gradually for
each year. In addition to this, limited liability companies will
also be included within the scope of this exemption as opposed to
the current regime, which we think would result in joint stock
companies' losing their privilege in that sense. Therefore, it
would be wise to say that new transaction opportunities and/or
exits should be scheduled by taking the Draft Law into account.
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.
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The Cyprus Tax Department recently issued Forms T.D 38, T.D 38Qa and T.D 38Qb applicable to individuals being Cyprus tax residents but non-Cyprus domiciled.
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