07.03.2023/38
Taxation in Capital Reduction: Corporate Tax Bulletin Published
Summary: Some account items in the equity components of corporations, such as revaluation reserves and positive capital adjustment differences, are subject to corporate tax and dividend distribution withholding tax when withdrawn from the business. On the other hand, some account items, like past year profits, are subject to dividend distribution withholding tax when withdrawn from the business, while in-kind and cash capital contributions are not taxed when transferred to another account or withdrawn from the business.
Amounts in these accounts within the equity components may be added to the capital by taxpayers. In this context, when capital reduction occurs, it is important for tax purposes to determine from which items in the equity components the capital reduction will be made.
Therefore, Article 32/B was added to the Corporate Tax Law with Law No. 7420 to regulate taxation in capital reduction. Explanations regarding this article were published in the Corporate Tax General Communiqué No. 21 on 01.03.2023 in the Official Gazette.
The regulations in the said Law and the explanations in the Communiqué are summarized below:
Capital items subject to reduction can be grouped into three categories as follows:
I. Equity components subject to corporate tax and dividend distribution/transfer to the parent company withholding tax when transferred to another account, withdrawn from the business, or transferred from the capital account to other accounts,
II. Equity components subject only to dividend distribution/transfer to the parent company withholding tax,
III. In-kind and cash capital that is not subject to taxation when transferred to another account or withdrawn from the business.
The reduction in capital will be determined based on whether five full years have passed since the equity items were added to the capital.
1. Capital Reduction by Corporations After Five Full Years from the Date Equity Items Were Added to Capital
When the equity items added to capital are reduced by the corporation after five full years from the date they were added to capital, the amount to be reduced will be determined by calculating the proportion of the capital components, including in-kind or cash capital and other elements added to capital, in relation to the total capital.
In this calculation, the ratios of the capital components, grouped in the three categories mentioned above, to the total capital will be considered, and no further grouping will be made beyond these categories.
2. Capital Reduction by Corporations Before Five Full Years from the Date Equity Items Were Added to Capital
When corporations reduce their capital before five full years have passed since the equity items were added to capital, the capital reduction will be considered based on the items grouped in the three categories above, with priority given to the items subject to the highest tax rate.
3. Priority in Capital Reduction According to the Date Equity Items Were Added to Capital
In capital reduction by corporations, some of the equity items added to capital may have passed five full years, while others may not have. In this case, it will be accepted that the items whose addition to capital has not yet exceeded five full years will be reduced from capital first.
4. Capital Reduction by Offsetting Past Year Losses
In cases where capital reduction occurs by offsetting past year losses, the equity items reduced in this way will be identified according to the explanations above. However, since no payment is made to the partners in cash or by credit when past year losses are offset against the capital, this offsetting process will not be considered as a dividend distribution/transfer to the parent company, and no withholding tax will be applied to the capital items reduced in this way.
5. Capital Reduction After Transfer Transactions
In cases where capital items are reduced in the company that has acquired them through a transfer transaction, the taxation will be carried out according to the explanations in the previous sections, depending on the nature of the capital items reduced.
In this case, when determining the five full years in the context of Article 32/B of the Law, the period during which the capital items remained in the transferred company’s capital will also be taken into account by the acquiring companies.
6. Capital Reduction After Complete Spin-Off Transactions
In cases where capital items are reduced in the company that has acquired them after a complete spin-off transaction, the taxation will be carried out according to the explanations in the previous sections, depending on the nature of the capital items reduced.
In this case, when determining the five full years in the context of Article 32/B of the Law, the period during which the capital items remained in the transferred company’s capital will also be taken into account by the acquiring companies.
7. Capital Reduction Due to Partial Spin-Off Transactions
In cases where capital items are reduced in the company that has acquired them after a partial spin-off transaction, the taxation will be carried out according to the explanations in the previous sections, depending on the nature of the capital items reduced.
In this case, when determining the five full years in the context of Article 32/B of the Law, the period during which the capital items remained in the transferred company’s capital will also be taken into account by the acquiring companies.
You can access the relevant Communiqué here.
Kind regards,
BİLGENER
