Mergers and Acquisitions

Mergers and Acquisitions

Turkish market’s high reputation and steady growth over the years drive an increase in M&A activities in Turkey. There were approximately 300 deals which total amount is bigger than 10 Million $ in 2017. This number exceeds 8 Million $ in the first half of 2018.

Mergers

The absorption of one or more companies into another company where the transferred companies are deemed to be dissolved without liquidation is defined as a merger in Turkish Commercial Code. According to the Code companies can merge in two ways;

When a company takes over another company, that’s called “merge in a form of takeover”,

When companies come together to form a new company, that’s called “merge in a form of a new organization”.

As a result of merger, the assets of the transferor company will be inherited by either transferee company or a new organization depends on the merger type.

  • In the case of merge in a form of takeover

When both the transferor and transferee companies are tax residents and the transferee company incorporates all assets and liabilities of Transferor Company into its balance sheet on carryover basis, this type of takeover recognized as a tax free merger by Turkish Corporate Tax Law.

Transferor Company is subject to usual taxation rules for profits up to date of the merger. Any profit gained from the merger itself is not subject to tax.

Transferee Company undertakes all known and unknown tax liabilities of the transferor company with the merger.

Tax loses of the transferor company can be transferred to the transferee company, if the transferee company continues the business activities of the transferor company minimum for five years following the date of the merger. But, tax losses that can be transferred to the transferee company are limited to the shareholders equity of Transferor Company as of the date of the merger.

Tax free merger does not affect the tax liabilities of the transferee company.

  • In the case of merge in a form of a new company

The assets of the transferor companies are deemed to have been transferred at the market value to the new company which leads to taxable capital gains. The new company is entitled to book the assets at their market values as their tax basis for depreciation purposes.

The tax loses of the transferor companies cannot be transferred to the new company. But, transferor companies can offset their existing tax losses against the capital gains arising from the transfer of assets through merger.

Acquisitions

Foreign company can acquire Turkish company by acquiring either the assets or shares of the chosen company.

Acquisition of assets can be only done through a Turkish company or a Turkish branch of a foreign company. Transfer of the assets should be conducted at the fair value and the transfer between related parties should be documented according to transfer pricing requirements. Assets can be depreciated by purchased company. The sale of assets of an entity is subject to corporate tax on the gains realized from the sale of the assets. Losses arising from the sale of assets can be either deducted or carry forward. Transfer of the assets via asset purchase agreement is subject to VAT. Asset purchase agreement is subject to stamp tax duty at 0.948% over the contact value.

An acquisition of the shares by the foreign company has no immediate income tax but in case of selling the shares to another company or an individual can be a subject to tax.

If the shares of a company are held by an individual shareholder for more than two years; the capital gain is exempt from income tax and there is no value added tax (VAT) payable. If the shares are held by an individual shareholder for less than two years, the capital gain is subject to income tax at progressive rates of up to 35% and there is no VAT payable for Joint Stock Companies but there is VAT payable for Limited Liability Company.

If the shares are held by a corporate shareholder, the capital gain will be booked as taxable income and the net income is subject to corporation tax at 22% and no VAT is payable. Losses are available to off-set income from other activities of the company.

The share transfer agreement is subject to stamp tax at 0.948% over the sale and purchase price.

% 50 of the gains realized from the sale of real estate property can be exempted from corporation tax in case of the real estate has been held for at least two years and gains are retained in a special reserve account in the Balance Sheet for at least five years. And in the case transfer of real estate property is exempt from VAT.

An acquisition of the shares by the foreign company has no immediate income tax but in case of selling the shares to another company or an individual can be a subject to tax.

Taxation of share transfer has many determinants:

It is related with;

Share Type: Shares to be transferred could be limited liability company share or joint stock company share or share certificate published representing joint stock company shares.

Holding Period: Taxation will be different according to holding period of shares for the owner. There are special holding period limits affecting taxation for non-residents also in Double Taxation Treaties.

This issue is one of the most complex issues in our legislation. Therefore, cases for this have to be examined specifically.

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