Exclusion of Immovables from the Scope of Tax-Free Partial Spin-off
Introduction
Law No. 7456 on Additional Motor Vehicle Tax for Compensation of Economic Losses Caused by the Earthquake on 6/2/2023 and on Amendments to Certain Laws and Decree-Law No. 375 (“Law No. 7456”) was published in the Official Gazette dated 15.07.2023 and No. 32249. Law No. 7456 introduced significant tax legislation amendments. The exclusion of immovables from the scope of a tax-free partial spin-off as of 01.01.2024 was one of these significant amendments. Within the scope of this article, the subject and process of the tax-free partial spin-off and the exclusion of immovables from the scope of the tax-free partial spin-off are evaluated.
Tax-Free Partial Spin-off in General
The spin-off process is regulated under Articles 159 to 180 of the Turkish Commercial Code No. 6102 ("TCC"). Pursuant to Article 159/1-b of the TCC, the following are stipulated:
In a partial spin-off, one or more parts of the assets of the company would be transferred to other companies, (i) the shareholders of the transferor company will acquire the shares and rights of the transferee companies, or (ii) the transferor company will form a subsidiary company by acquiring the shares and rights in the transferee companies in exchange for the transferred asset parts.
Article 19 and Article 20 of the Corporate Tax Law No. 5520 ("CTL") provide a tax advantageous regulation for partial spin-off transactions that meet certain conditions and cover only three types of assets. Partial spin-off transaction, which is regulated as a tax deferral mechanism under Articles 19 and 20 of CTL, enables the transfer of certain assets at their net book value. In addition, partial spin-off transactions are exempt from corporate tax, value added tax, stamp tax, and title deed fee.
Exclusion of Immovables from the Scope of Tax-Free Partial Spin-off
Pursuant to Article 19 of CTL, the assets that can be subject to tax-free partial spin-off are (i) immovables, (ii) participation shares held for more than two years, and (iii) manufacturing or service business lines. However, under the new amendments introduced with Law No. 7456, as of 01.01.2024, immovables are excluded from the scope of tax-free partial spin-off regulated under Article 19 and Article 20 of CTL.
Therefore, it is important that the companies who intend to transfer the immovables in their assets through partial spin-off should take this amendment into consideration. As a matter of fact, it would be beneficial for companies who will transfer immovable property through partial spin-off until 31.12.2023 to plan by taking into account the waiting periods and the methods of eliminating these periods, which are discussed in detail below.
While planning such a spin-off procedure, tax planning should be made by taking into account the criticisms of the Revenue Administration regarding the partial spin-off of immovable property. In addition, the capital changes to be made in the companies that are party to the spin-off are also very significant and should be evaluated in detail before the transactions are initiated. If a partial spin-off is to be carried out through a new establishment, the establishment procedures of the new company to be established should also be carried out separately.
Waiting Periods and Methods of Elimination
Pursuant to Articles 171 and 174 of TCC, there are waiting periods for the shareholders and creditors before the general assembly process regarding the partial spin-off transaction is carried out and before the trade registry procedure. Accordingly; periods for announcements regarding (i) shareholders with the right to review and (ii) creditors must be waited. Therefore, before the general assembly meeting, these two announcements must be published in the Turkish Trade Registry Gazette ("TTRG") and the waiting periods must be completed.
Shareholders' Right to Review and 2-Month Waiting Period
Pursuant to Article 171 of TCC titled "Right of Examination" stipulates that each of the companies participating in the spin-off must submit (i) the spin-off agreement or the spin-off plan, (ii) the spin-off report, (iii) the financial statements and annual reports of the last three years and interim balance sheets, if any, to the review of the shareholders of the companies participating in the spin-off, 2 months prior to the decision of the general assembly. The announcements of the right of review to the shareholders must be published in TTRG.
The 2-month waiting period for the shareholders' right of review may be waived if (i) the companies participating in the spin-off are small and medium-sized[1] enterprises and (ii) all shareholders waive the exercise of the review right with a declaration of acceptance. In the application of the registry, it is required to submit the financial advisor's report determining that the small and medium-sized enterprise criterion is met. However, the practice of each registry on the subject may vary; it would be beneficial to obtain confirmation from the relevant registry directorate before starting the process based on each transaction.
Announcement to Creditors and 3-month Waiting Period
Articles 174 and 175 of TCC, titled "Protection of Creditors" and "Securing the Receivables", stipulate the waiting period for securing the receivables of the creditors. Accordingly, Article 174 of TCC regulates that the creditors of the companies participating in the spin-off shall be called upon to notify their receivables and request for the provision of collateral by means of an announcement to be made three times at intervals of seven days each in the TTRG. Under Article 175/1 of TCC, within 3 months following the publication of these announcements, the claims of the claiming creditors must be collateralized.
Article 175/2 of TCC states that the obligation to guarantee the receivables of the creditors shall be canceled upon the proof that the receivables of the creditors are not jeopardized by the spin-off. To fulfil this condition in the registry practice; the following are sought:
- The capital must be increased by the same amount simultaneously with the capital decrease to be realized by the spin-off companies and the financial advisor report which determines that the net assets of the spin-off company are sufficient to cover all receivables should be provided; or,
- if there is no simultaneous capital increase in the spin-off process, a list of creditors must be included in the annex or content of the financial advisor report to be taken as a basis for the spin-off transaction and the letters of guarantee received with respect to the creditors included in this list must be submitted.
In these cases, the 3-month waiting period may be eliminated by making 3 announcements to the creditors. However, the practice of each registry on the subject may vary; it would be beneficial to obtain confirmation from the relevant registry directorate before starting the process on the based on each transaction.
Conclusion
Pursuant to the amendment made by Law No. 7456, as of 01.01.2024, immovables will be excluded from the scope of the tax-free partial spin-off regulated under Article 19 and Article 20 of CTL. Therefore, it is important for companies planning to transfer their immovable properties into their assets through a partial spin-off to take this amendment into consideration. Considering the waiting periods regarding the announcements to shareholders and creditors, it would be beneficial to evaluate and implement the process as soon as possible. It may be possible to finalize the process faster by using mechanisms that enable the elimination of waiting periods.
- According to the Regulation on Small and Medium-sized Enterprises, enterprises that employ fewer than 250 employees, whose annual net sales revenue or any of their financial balance sheet does not exceed 500 million Turkish liras, are defined as SMEs.
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