New Development
The exemption rate applied to capital gains arising from sales of participation shares, which is regulated in Article 5/1-(e) of Corporate Income Tax Law No. 5520 ("Corporate Income Tax Law"), has been reduced from 75% to 50% by Presidential Decree No. 9160 ("Presidential Decree"). The Presidential Decree was published in the Official Gazette dated 27 November 2024 and numbered 32735.
What Does the Presidential Decree Mean?
Under Article 5/1-(e) of the Corporate Income Tax Law, 75% of the capital gains arising from sales of participation shares held in corporations' assets for at least two full years, as well as founder shares, redeemed shares, preemptive rights held for the same period, and the participation shares of the investment funds that constitute the source of the exemption gains within the scope of Article 5/1-a of the Corporate Income Tax Law, were exempt from corporate income tax, provided that the following three conditions are met:
- The gains obtained from the sale is kept in a special fund account for five years;
- The sale price is collected by the end of the second calendar year following the year of sale;
- The gains that had to be kept in a special fund account should not be transferred to another account (except for addition to capital), not withdrawn from the business and not transferred abroad by limited taxpayer corporations within five years.
According to the second paragraph of the mentioned article, the President was authorized to reduce the rates in this article to zero or increase them to the corporate income tax rate (25% for 2024). The President was also authorized to reduce or increase other rates, separately or together, to zero or to 100%. Based on this authority, the Presidential Decree reduced the exemption rate for capital gains arising from disposal of participation shares from 75% to 50%.
The Presidential Decree came into force on its publication date, which was 27 November 2024.
Conclusion
Since the Presidential Decree came into force on its publication date, 27 November 2024, and no transitional provisions were provided, it is unclear whether the new exemption rate will also apply to sales made in 2024 but before 27 November 2024. We believe it would be useful to follow the Revenue Administration's forthcoming announcement on this issue.
Additionally, although we do not agree with it due to the fact that it is a conditional exemption, as per the Turkish Revenue Administration's opinion, in the event of a loss arises from a sale of participation shares that have been held for more than two years, it is not possible to deduct 75% of these losses from the earnings arising from other activities of the corporation. With the new amendment, in case of losses arising from the sale of participation shares, only 50% of the losses from the sale of participation shares should be considered as non-deductible expenses according to the current position of the Turkish Revenue Administration.
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