With the “Presidential Decree No.9160 on the Amendment of the Exemption Rate in Paragraph (e) of the First Clause of Article 5 of the Corporate Tax Income Law (the CIT) No. 5520” published in the Official Gazette dated November 27, 2024 and numbered 32735, the exemption rate under Article 5/1-e of the CIT Law has been reduced from 75% to 50%.
According to the subparagraph (e) of the first paragraph of Article 5 of the CIT, this exemption covers the capital gains arising from the sale of the participation shares of the corporations that have been included in their assets for at least two full years and the founding shares, redeemed shares, preemptive rights 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 CIT.
In addition to a minimum 2-year holding period condition, there are other conditions in the CITL for this exemption as follows:
- The sales gains benefiting from the exemption is kept in a special fund account in the liabilities until the end of the 5th year following the year of sale.
- The sales amount is collected until the end of the second calendar year following the year of sale.
- The exempted income should not be transferred to any other account or withdrawn from the enterprise or transferred to the headquarters by limited taxpayer institutions within five years, except for addition to capital.
It should be noted that the corporates can benefit from this exemption in case all conditions are met.
This regulation which reduces the exemption rate to 50% has entered into force as of November 27, 2024, the date of its publication, and has been effective as of this date.
The participations of corporates subject to the scope of this exemption are detailed in the Corporate Income Tax General Communiqué Serial No. 1 and explained in our international tax bulletin under separate sections below.
- Scope of Exemption
This participation exemption which is applicable for corporate taxpayers covers:
- Participation shares, founding shares and redeemed shares,
- Pre-emptive rights and
- participation shares of investment funds that generate income exempt under Article 5/1-a of the CIT Law.
Each of them is separately discussed in the below section.
- Participation shares, founding shares and redeemed shares
The term “participation shares” under the Article 5 refers to the shares and partnership interests included in the securities portfolio. These can be listed as follows:
- Partnership shares or stocks of joint stock companies (including stocks of investment trusts established in accordance with the Capital Markets Law),
- Participation shares of limited liability companies,
- Partnership shares belonging to the commanding partners of limited partnership companies whose capital is divided into shares,
- Partnership interests in joint ventures and ordinary partnerships andPartnership shares of cooperatives.
Participation certificates of funds subject to the regulation and supervision of the Capital Markets Board are not considered as participation shares under the current CIT legislation.
- Pre-emptive rights
In the event that joint stock companies and limited partnership companies increase their capital, the corporations holding the shares of these companies in their assets may participate in this capital increase with or without consideration and may also sell the pre-emptive right coupons (preferential purchase right) to others. With the new change, only 50% of the gains derived from the sale of such preemptive rights will be eligible for exemption.
- Participation shares of investment funds that generate income exempt under Article 5/1-a of the CIT Law
According to the capital markets legislation, investment funds are defined as non-legal entities established for the purpose of operating a portfolio of capital investments on behalf of shareholders, according to the principles of fiduciary ownership, with the money or participation shares collected from qualified investors in return for participation shares. Accordingly, 50% of the gains from the sale of participation shares of investments funds operating with the permission of the Capital Markets Board will be exempt from corporate tax, provided that other conditions are met.
- Take Away
It should be noted that with the amendment of Presidential Decree No.9160, there has not been provided grandfathering period and it is applicable as of 27 November 2024. This means that in case participation shares and other in-scope shares are currently disposed, corporate taxpayers cannot benefit from the previous rate of 75% exemption even if they are holding those participations for more than 2 years. Based on this, in all sales to be made, the exemption rate will be applied as 50% regardless of the date of acquisition of the participation. However, this could be challenged by some of corporate taxpayers and potentially open to legal disputes.
Please reach us for your queries on the recent tax changes on the exemption applicable corporate’s participation shares including issues stated in our international tax bulletin.
