Transfer of Real Estate through Partial Spin-Off
Introduction
According to Article 19 of Corporate Tax Code No. 5520 (“CTC”), real estate, participation shares held for more than two years, and manufacturing or service business lines that are recorded in the balance sheet of a full liable equity company, or a non-resident equity company’s work place or permanent establishment in Turkey, may be transferred to an existing or a newly established full liable equity company through partial spin-off transaction over their net book values.
Partial spin-off transactions conducted in line with CTC provisions benefit from the corporate tax, value added tax, stamp tax and title deed fees exemptions envisaged in the relevant tax codes.
The referred provision of the CTC lists assets that may be subject to partial spin-off as real estate, participation shares held for more than two years, and manufacturing or service business lines in a restrictive manner.
Additionally, Corporate Tax Communiqué Serial No. 1 (“CT Communiqué No. 1”) refers to Article 704 of Turkish Civil Code No. 4721 (“Civil Code”) in order to define “real estate.” Accordingly, the subject of immovable property (real estate) is comprised of lands, independent and imprescriptible rights indicated on a separate page in the land register, and independent sections in the condominium regime.
Within this scope, it may be concluded that assets defined as “immovable property/real estate” as per to the provisions of the Civil Code may be subject to a partial spin-off in line with the CTC rules without any other restrictions.
However, it is observed that some other restrictions that are contrary to Article 19 of the CTC are introduced to the transfer of real estate through partial spin-off transactions via draft communiqués and rulings published by the Revenue Administration.
This newsletter article evaluates current tax rulings and draft communiqués of the Revenue Administration in relation to the transfer of real estate through partial spin-off transaction.
Recent Tax Rulings
In the tax ruling of the Large Taxpayers Office, dated 11.04.2018, No. 64597866-125[19]-8802[1], the taxpayer bank has asked the opinion of the Tax Administration as to whether or not the transfer of real estate that is used as a branch and administrative building may be subject to a partial spin-off transaction. The opinion of the tax office may be summarized as follows: The transfer of real estate that is used as a branch and administrative building, within the scope of the banking activities, to another full liable equity company cannot be evaluated as a partial spin-off transaction performed in line with Article 19 of the CTC.
In another tax ruling of Istanbul Tax Office, dated 16.03.2018, No. 62030549-125[19-2015/298]-268217[2], the taxpayer has asked the opinion of the Tax Administration as to whether or not the transfer of factory premises and two office buildings recorded on its balance sheet as real estate to a full liable equity company would be accepted as a partial spin-off transaction, performed in line with the CTC provisions. In its answer, the tax office states that real estate constituting physical or technical integrity with the manufacturing and service business lines of the company and not being able to be separated from the referred business lines cannot be subject to partial spin-off, independently.
Therefore, the factory building in question cannot be transferred through partial spin-off transaction independently from the relevant manufacturing business line.
However, the above-mentioned office buildings may be transferred through partial spin-off transactions, provided that they do not constitute a physical or technical integrity with the manufacturing and service business lines of the company, nor have the same nature as the sole manufacturing business line of the company.
Draft Communiqués
The Revenue Administration published a draft communiqué regarding partial spin-off transactions in its official website on 24.03.2017. Subsequently, the draft communiqué has been removed from the official website. However, the Revenue Administration continues to work on the draft communiqué.
As a result of the analysis of the draft communiqué, it is observed that some additional restrictions that are not stipulated under Article 19 of the CTC, have attempted to be imposed in relation to the transfer of real estate through partial spin-off transactions, and the referred restrictions are in line with the above-mentioned rulings of the Revenue Administration. The perspective acknowledged in the draft communiqué states that only real estate, which is not used in the essential manufacturing and service business lines of a company, may be subject to a partial spin-off transaction.
Also through the examples indicated in the draft communiqués, it is emphasized that that real estate which constitutes physical or technical integrity with the manufacturing and service business lines of a company and not being able to be separated from the referred business lines cannot be subject to partial spin-off independently.
Evaluations
As indicated in the former sections of this article, assets defined as “immovable property/real estate” as per the provisions of the Civil Code, may be transferred through partial spin-off in line with the CTC rules without any other restrictions. However, various other restrictions, contrary to the “legality of tax” principle, are introduced to the partial spin-off of the real estate through draft communiqués and rulings prepared by the Revenue Administration.
The referred restrictions state that factory premises or service buildings cannot be transferred through partial spin-off transactions independently from the relevant manufacturing or service business lines. This means that the referred real estate cannot be subject to a partial spin-off, separately and independently. However, we are of the opinion that there is no obligation for the referred to real estate to be within the property of the relevant business lines. The referred buildings may also be used in the relevant manufacturing or service business lines through a lease agreement.[3]
Therefore, it may be alleged that the perspective acknowledged by the recent rulings and draft communiqués are contrary to the main purpose envisaged by the partial spin-off transaction.
Conclusion
Taxpayers expect the Revenue Administration to clarify the application of partial spin-off transactions, and to stipulate clear rules in order to direct their implementation. However, the current tax rulings and draft communiqués clearly do not meet these expectations. To the contrary, it creates serious concerns regarding the implementation of potential partial spin-off transactions planned in line with the CTC rules, and it creates a tax criticism risk for the formerly concluded partial spin-offs. Additionally, creation of new restrictions that are not stipulated in the law through tax rulings and draft communiqués damages the legality of the tax principle. Within this scope, instead of imposing new restrictions, it is expected that the Revenue Administration will eliminate concerns regarding the transfer of real estate through partial spin-off transactions.
[1] http://www.gib.gov.tr/node/130814/pdf (Access date: 17.11.2018).
[2] http://www.gib.gov.tr/node/130829/pdf (Access date: 17.11.2018).
[3] Akif AKARCA / Dr. Mehmet ŞAFAK, İşletmeye dahil taşınmazlar başlı başına kısmi bölünmeye konu edilebilir mi?, 27 April 2017, https://www.dunya.com/kose-yazisi/isletmeye- dahil-tasinmazlar-basli-basina-kismi-bolunmeye-konu- edilebilir-mi/360033 (Access date: 16.11.2018).
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