The Law on the Restructuring of Certain Receivables and Amendments to Certain Laws No. 7256 ("Law No. 7256") published on the Official Gazette No. 31307 on November 17, 2020 introduced several amendments to the tax legislation including restructuring of public receivables and wealth amnesty. Apart from this, one of the major amendments introduced by the Law is the amendment made under Article 94 of Income Tax Law no. 193 which introduces a new withholding tax regime for the share buyback transactions to be conducted by full liable equity companies. Within this scope, in this Newsletter Article, the new withholding tax regime will be evaluated in terms of its reasoning and problematic issues that may come up during the implementation of this new rule.
Share Buybacks within the Scope of Turkish Commercial Code No. 6102 ("TCC")
Before mentioning the withholding tax regime introduced by Law No. 7256, the rules for share buyback introduced by the TCC should be considered briefly and in general terms.
As a rule, it is forbidden for a joint stock company to buy back its own shares as per the TCC. Specific cases where the company is allowed to buy back its own shares are share buybacks through the decision of the general assembly (Article 379 of TCC), share buybacks in order to prevent a close and serious loss (Article 381 of TCC), share buybacks in exceptional cases (Article 382 of TCC) and gratuitous acquisition (Article 383 of TCC).
As a rule, for a joint stock company to buy back its own shares within the scope of the TCC, the board of directors must be authorized by a decision taken by the general assembly. The validity period of the general assembly resolution on this matter is limited for five years as per the TCC.
However, as per Article 381 of the TCC, companies are allowed to buy back their shares without the decision of the general assembly, in cases where it is necessary to prevent an imminent and serious loss provided that other conditions are met.
In addition, it is required to have a certain financial ability in order to buy back its own shares. This financial ability requirement is expressed as the net assets of the company remaining after deducting the prices of the shares to be bought back, not less than the total of the reserves that are not allowed to be distributed with the capital.
Joint stock companies may buy back their shares up to 10 percent provided that the above-mentioned & summarized conditions are met. In some exceptional cases stipulated under the TCC (Article 382), it is possible for the company to buy back its own shares without seeking any of the conditions such as a limitation of 10 percent, the decision of the general assembly, the payment of all share prices: (i) The company buy backs its own shares in order to destroy it for capital decrease, (ii) share buybacks as a requirement of complete succession, (iii) share buybacks based on the purchase obligation arising from a law provision, (iv) share buybacks by force or for the purpose of collecting the company receivables from the shareholder, and (v) if the company is a securities company.
New Taxation Rules Regulated Through the Law No. 7256
As per to the amendment made in Article 94 of the ITC, withholding tax at the rate of 15% is envisaged regarding share buyback transactions to be conducted by full liable equity companies for the below mentioned conditions:
- If the acquired shares were redeemed via capital decrease, withholding tax will be applied over the difference between the purchase price and the nominal value of the shares (to be withheld on the registration date of the capital decrease)
- If the acquires shares are disposed with a value lower than the purchase price, withholding tax will be applied over the difference between the acquisition and disposal price (to be withheld on the disposal date)
- If the acquired shares are not disposed within two years starting from the date of purchase or not redeemed by decreasing the capital, withholding tax will be applied over the difference between the purchase price and the nominal value of the shares (to be withheld on the termination date of the 2 years period)
The referred withholding tax cannot be offset from any other taxes. Additionally, the President is granted authorization to reduce the withholding rate to zero or to increase it up to one fold, individually or together, depending on whether (i) the company's shares are traded in Borsa Istanbul, (ii) the ratio of the traded shares in the total shares, (iii) the repurchases shares are among the shares traded in Borsa Istanbul, (iv) whether they are repurchased from the fully liable companies and (v) the total amount of the annual sales revenue and other income of the fully liable capital company.
The Reasoning of the New Withholding Tax Regime
In the reasoning of the regulation, it is stated that the aim of this new rule is to prevent full liable equity companies to distribute dividend to its shareholders in a tax free way. Accordingly, it is stated that the new withholding tax regime is regulated as a "tax security tool".
Criticism points alleged against the regulation
TCC does not qualify the payments made in relation to share buyback transactions as dividend. Therefore, it is seen that, this new regulation creates another inconsistency between the TCC and the tax legislation just like the capital replenishment fund applications. This new regulation creates another inconsistency within the ITC due to the fact that it re-evaluates a gain item, already defined as "capital gain" in terms of shareholders, as dividend payment. Additionally, it should be noted that the referred 15% withholding tax will be in the nature of a "one-sided withholding liability". Therefore, it may be alleged that this new regulation will not have a reformative effect on the companies' equity. 1
As it is summarized above, the new withholding tax regime is based on the assumption that there is a dividend distribution during the share buyback transactions. Accordingly, we believe that no withholding tax liability should occur on the amounts to be paid to the full liable corporate taxpayers due to the fact that no withholding tax liability is envisaged for dividend distributions to be made between full liable corporate taxpayers. 2
Apart from this, the calculation method of the 2 years' time period indicated in the Law is not clarified yet. It is also unclear whether the new rule will be implemented to the former share buyback transactions concluded before the promulgation of the Law no. 7256. Taxpayers also require additional explanations regarding the implementation of the new rule in terms of restructuring projects such as mergers and spin-offs.
The purpose of the regulation, introduced by the Law No. 7256 and envisaging withholding tax for share buyback transactions, is stated in the justification of the aforementioned regulation as preventing fully taxpayer capital companies from distributing their profits without tax through share buybacks. However, the TCC does not define payments made by the company to its shareholders during share buybacks as dividend. Therefore, it is thought that a new inconsistency has been created between the TCC and tax practices through the new regulation.
In addition to this, the withholding tax in the rate of 15% envisaged by the regulation will essentially be a one-side withholding tax that companies will make themselves. Therefore, it is open to discussion whether the said regulation is a tax security institution in the real sense as it is stated in the justification of the article.
Finally, the calculation method of the 2 years' time period indicated in the Law and the application of this new withholding tax regime between full liable taxpayers should be clarified.
1 Kahraman, Abdülkadir: "Yeni Bir Vergi Güvenlik Önlemi", https://www.vergidegundem.com/tr_TR/makale?categoryName=Vergide&publicationNumber=12&publicationYear=2020&publicationId=4946944 (Access Date: 02.12.2020).
2 Saglam, Erdogan: "Torba yasada tartismali hüküm: Kendi hisselerini satin alan sirketler bazi durumlarda yüzde 15 vergi ödeyecek", https://t24.com.tr/yazarlar/erdogan-saglam/torba-yasada-tartismali-hukum-kendi-hisselerini-satin-alan-sirketler-bazi-durumlarda-yuzde-15-vergi-odeyecek,28634 (Access Date: 02.12.2020).
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