Tax effects of mergers in Turkey

According to the article 18/1-2 of the corporate tax law; Merging of one or more corporations with another corporation is, as for the corporations that dissolve upon such merger, a dissolution. However, in mergers, the merger profit shall be the tax basis rather than the liquidation profit.

The provisions on the liquidation profit shall also apply to the determination of the merger profit. However, the assets that would be given to the shareholders or the owners of the dissolving corporation or corporations directly or indirectly shall be considered as the assets distributed in cases of winding-ups. The assets received from the post-merger corporation shall be treated according to the principles stated in the Tax Procedure Law.

On the other hand, the article 19 of the corporate tax law gives opportunity to a tax free merger called “take over” or “transfer” provided that two below requirements are satisfied.

1- Both of the acquiring and the acquired (dissolved) companies should be resident in Turkey (full taxpayer),

2- All the assets and the liabilities of the acquired (dissolved) company should be transferred to the acquiring company, at their book-values.

Exemptions on Taxes and Fees in case of a Tax Free Merger

a. Application of Corporate Tax Code

If the legal residence or headquarters of the absorbed entity and surviving entity are within the Republic of Turkey and the balance sheet values of the absorbed entity are taken over completely by the surviving entity where such values have been extracted by the surviving entity's balance sheet "as it is", such type of merger would be deemed as "take over" according to the Corporate Tax Code. Thus, only the earnings of the absorbed entity as of the date of the takeover shall be taxed; profits arising directly from the merger shall not be calculated or taxed.

The merging entities must submit to the relevant Tax Office a jointly signed statement within 30 days of the date of merger to which the takeover balance sheet shall be attached. The surviving entity needs to submit a further statement in connection with the tax debts undertaking the payment of any tax debts which have been incurred or will incur in connection with the absorbed entity. Moreover, the surviving entity will commit that it will fulfil other obligations of the absorbed entity that may arise in the future.

            a.1. Loss deduction in the case of transfer and division

In case of a transfer or complete division, corporates that took over the assets have the opportunity of deduction (discount) for the losses of divided or acquired institution under the restrictions stated below.

Accordingly, the transferee corporation can deduct losses occurred in the company;

. Losses under the equity value of the acquired institutions by the transfer date in the case of transfer,

. Losses under the equity value of the divided institution after the complete division,

from their incomes.

In case of division and transfer, carry-over loss is limited to the equity capital of the acquired or divided institution. In full-division process, the amount not exceeding the acquired equity of the acquired institution and loss proportional to inherited value can be deducted from losses of the divided institution.

b. Application of Value Added Tax ("VAT") Code

According to Article 17/4-c of the Value Added Tax Code, the merger that is deemed as a takeover according to the Corporate Tax Code as mentioned above is excluded from VAT. However, the transactions related with the merger which are exempted in this respect would not benefit from VAT deductions in full. Accordingly, at the end of the merger, the VAT's imposed on and not deducted by the absorbed entity will be made by the surviving entity subject to deduction by avoiding any duplication thereof.

In practice, the general tendency of the Ministry of Finance is to include the takeover procedures within the scope of full exemption. In fact, in previous applications regarding this issue it has been noted that the Ministry has issued rulings stating that the VAT's that were not deducted by the absorbed entity will be deductible by the surviving entity. A great number of merger operations in the past have been conducted based on such rulings.

c. Application of Stamp Tax Code

Any document issued in relation with the merger that is contemplated according to the Corporate Tax Code is exempted from tax duty due to the Schedule (II)-Section IV paragraph (17) annexed to the Stamp Tax Code No. 488.

Based on the aforementioned information there’s no obstacle or disadvantages arising from tax laws against the tax free merger provided that the requirements are satisfied.