Corporate Tax Communiqué on Taxation of Capital Decrease has been published
Summary: Within the equity capital items of companies, certain account items, such as revaluation funds and positive capital adjustment differences, are subject to corporate tax and tax withholding related to dividend distribution when withdrawn from the business. On the other hand, certain account items like previous year profits are subject to tax withholding only upon dividend distribution when withdrawn from the business. However, cash and in-kind capital introduced into the business is not subject to taxation if transferred to another account or withdrawn from the business.
Taxpayers may add amounts from such accounts in the equity capital items to the capital. In this context, when a capital reduction is made, it is important to consider which items were deducted from the capital for taxation purposes.
For this reason, the 7420 Law added Article 32/B to the Corporate Tax Law, which regulates taxation in the case of capital reduction. The explanation regarding this article was published in the Official Gazette on 01.03.2023 with the 21st Series of the Corporate Tax General Communiqué.
Below is a summary of the regulation in the mentioned Law and the explanations in the Communiqué:
Capital elements subject to reduction can be grouped into three categories as follows:
I. Equity capital items that are subject to corporate tax and tax withholding related to dividend distribution when transferred to another account, withdrawn from the business, or transferred to accounts other than the capital account,
II. Equity capital items subject only to tax withholding related to dividend distribution when transferred to another account or withdrawn from the business,
III. In-kind and cash capital that will not be subject to taxation when transferred to another account or withdrawn from the business.
In the case of capital reduction, the determination of which element will be reduced will depend on whether five years have passed since the capital increase of the equity capital items.
1. Capital Reduction by Corporations After Five Full Years from the Date the Equity Capital Items Were Added to the Capital
After five full years have passed since the addition of the equity capital items to the capital, in the case of capital reduction by corporations, the capital elements subject to reduction will be identified by comparing the amount of cash or in-kind capital introduced into the business to the total capital.
In this calculation, the ratios of the total capital items in the three categories mentioned above will be taken into account, and no further classification will be made beyond these categories.
2. Capital Reduction by Corporations Before Five Full Years from the Date the Equity Capital Items Were Added to the Capital
If corporations reduce their capital before five full years from the date when the equity capital items were added to the capital, the capital elements subject to reduction will be assumed to follow the order of reduction, as classified in the three categories mentioned above.
Thus, taxation will start with the element subject to the highest taxation.
3. Priority in Capital Reduction Based on the Date Equity Capital Items Were Added to the Capital
In capital reductions by corporations, some equity capital items may have surpassed the five full years while others have not. In such cases, the items added to the capital that have not passed the five full-year period will be assumed to be the first to be reduced from the capital.
4. Capital Reduction by Offsetting Past Year Losses
In cases of capital reduction through the offsetting of past year losses, the capital items subject to reduction will be determined according to the explanations above. However, in the process of offsetting past year losses to the capital, since no payment is made to shareholders in cash or through account transfers as stipulated in Article 32/B of the Law, this offsetting will not be considered a dividend distribution or transfer to the parent company, and no tax withholding will be applied to the capital items subject to reduction.
5. Capital Reduction After Transfer Transactions
If the company that acquires capital elements in a transfer transaction reduces its capital, taxation will be carried out according to the nature of the reduced capital items, following the explanations in previous sections.
In this case, when determining the five full years stipulated in Article 32/B of the Law, the duration during which the capital elements remained in the transferred company’s capital will also be considered by the acquiring companies.
6. Capital Reduction After Full Split Transactions
In the case of a full split transaction, if the company acquiring the capital elements reduces its capital, taxation will be carried out according to the nature of the reduced capital items, following the explanations in previous sections.
In this case, when determining the five full years stipulated in Article 32/B of the Law, the duration during which the capital elements remained in the transferred company’s capital will also be considered by the acquiring companies.
7. Capital Reduction Due to Partial Split Transactions
In the case of a partial split transaction, if the company acquiring the capital elements reduces its capital, taxation will be carried out according to the nature of the reduced capital items, following the explanations in previous sections.
In this case, when determining the five full years stipulated in Article 32/B of the Law, the duration during which the capital elements remained in the transferred company’s capital will also be considered by the acquiring companies.
You can access the relevant Communiqué here.
Best regards,
BİLGENER
