Tax Implications of the Holding Organisation
1. Introduction
A holding company refers to a company that holds shares in multiple companies and is the majority shareholder of those companies. In this study, the special tax circumstances of holding companies, the tax implications of transferring company shares owned by individuals as in-kind capital to a holding company, and the comparison of the management of company shares held by individuals versus those transferred to a holding company from a tax perspective are discussed.
2. Taxation in Holding Companies
2.1 Dividend Distribution in Holding Companies and the Participation Income Exemption
Holding companies are subject to corporate tax as they are capital companies in the form of joint-stock companies.
The main business activity of holding companies is their participation in other companies. Therefore, their most significant income arises from the dividends they receive from these participations.
Article 5/1-a of the Corporate Tax Law No. 5520 regulates the participation income exemption. According to this article, income derived from a corporation’s participation in the capital of another corporation subject to full taxation is exempt from corporate tax.
The participation income exemption is intended to prevent double taxation. Since the distributing company pays corporate tax, the receiving corporation should not be taxed again on the dividend income it receives from this company. Therefore, dividends distributed by the company in which the holding is involved will not be taxed.
If these amounts are later distributed to the real person shareholders by the holding company, a 10% withholding tax will be applied. In addition, a personal income tax return will be filed by the individual shareholders for the income related to securities income.
In this structure, since real individuals receive dividends from the holding company, rather than directly from the company, dividend distribution and taxation will be deferred to the year following the year in which the holding company earned the income (except for advance dividend distributions).
2.2 Dividend Payments Invested by the Holding in the Capital of Companies Inside or Outside the Holding
Holding companies can invest the dividends they receive into companies inside or outside the holding as capital. In such investments, holding companies can play a significant role.
As mentioned above, since dividends received by holding companies are subject to the participation income exemption, no taxation will be applied on the distributed dividends. The amounts not taxed at the holding level can later be invested as capital in companies within or outside the holding.
In cases where there is no holding structure, the process will be different. When an individual shareholder invests dividends received from one of their companies as capital into another company, the dividend will first be subject to withholding tax, and then the individual will have to file a personal income tax return. The remaining amount after tax can then be invested as capital into another company by the individual shareholder.
In this sense, holding companies provide a significant advantage as no taxation is applied on the dividends distributed to them, making them advantageous in investment transactions.
2.2.1 Taxation Difference in Case of Loaning Instead of Capital Contribution
Companies can be financed by their partners in two ways: either through capital contribution/increase or through loans.
When one company lends money to another company, this is considered a financing service, and the transaction is subject to VAT under the first article of the Value Added Tax Law.
If the transaction is carried out free of charge, it is considered as a disguised profit distribution under transfer pricing provisions according to Article 13 of the Corporate Tax Law, and arm’s length interest must be calculated. Considering that companies with continuous financing needs may often be in a loss position, the possibility of treasury loss increases if arm’s length interest is not calculated. Therefore, to avoid tax loss in terms of corporate tax, interest should be calculated, and an invoice should be issued by the lending company to the borrowing company.
However, when companies are financed by their partners, the loan transaction is not considered part of commercial activity, so VAT is not applicable. Moreover, there is no obligation to pay interest unless the partner requests it.
From this perspective, the act of lending dividends received from one company to another by an individual shareholder does not by itself create taxable events. However, in a holding structure, if profits are distributed to the holding and then loans are made to other companies, VAT and corporate tax will apply.
2.3 Sale of Shares Held by Holding Companies
Holding companies can sell the shares they hold in affiliated companies. The gains from this sale are subject to corporate tax. However, under Article 5/1-e of the Corporate Tax Law, gains from the sale of participation shares held for at least two full years are 75% exempt from taxation.
The purpose of this exemption is to strengthen the capital structure of corporations, address financing difficulties, and allow for the more effective use of their assets in economic activities, thereby strengthening the financial structure of businesses.
For the exemption to apply:
- The exempted portion of the gain must be kept in a special reserve account on the liability side until the end of the fifth year following the year in which the sale occurred,
- The sale price must be collected by the end of the second calendar year following the year of sale.
Any portion of the exempted gain that is transferred to another account or withdrawn from the business, or transferred to the parent company by a limited tax liability institution within five years, will result in the taxes not being paid on time and will be considered as tax loss.
When the shareholding is sold by the holding company, the 75% exemption will apply if the shares have been held for more than two years and the conditions are met. The remaining portion will be subject to tax. However, if the conditions are not met, the entire gain will be subject to corporate tax within the holding company.
Furthermore, as explained in Section (3) of this study, if the shares of the holding are held for more than two years and are sold by a real person, the gains from the sale of those shares will be exempt from tax.
2.4 Services Provided by Holding Companies
Holding companies may provide various services to the companies in which they hold stakes, including marketing and distribution, investment project preparation, goal setting, planning, organizing decisions, legal services, consultancy, security, accounting, and R&D. These services can provide cost advantages when obtained from a single source, and they represent a distribution of expenses within the holding structure.
The Corporate Tax Law Regulation also addresses this issue. According to this regulation, it is mandatory for the holding company to issue invoices for services provided to affiliated companies, and the amount charged for the service must be determined in accordance with the arm’s length principle, as stipulated in Article 13 of the Corporate Tax Law.
For these services to be deducted by the affiliated companies:
- The service must have been provided,
- The type of service must be specified in detail on the invoice,
- If a single invoice contains the fees for multiple services, each service fee must be shown separately
If these conditions are met, the affiliated companies can record the invoice amounts as expenses in their accounts.
3. Contribution of Existing Company Shares as In-kind Capital for Establishing a Holding
It is possible to contribute various assets as capital to commercial companies, including receivables, securities, shares of capital companies, intellectual property rights, movable and immovable assets, transferable and sellable electronic spaces, domains, and other valuable rights.
For the assets and shares to be transferred as in-kind capital during the establishment process, they will be valued by experts appointed by the civil court of the district where the company is located.
In this context, it is possible for an individual shareholder to contribute shares held in another company as in-kind capital to establish a holding company.
Article 80 of the Income Tax Law provides that gains arising from the disposal of assets and rights mentioned in this article are subject to tax as capital gains.
The term “disposal” in this article refers to the sale, transfer, assignment, exchange, expropriation, nationalization, or contribution of assets as capital to a commercial company.
Therefore, shares of a company contributed as capital for establishing a holding will be subject to capital gains tax.
On the other hand, the disposal of shares held by fully taxable institutions for more than two years is not subject to capital gains tax. Therefore, the contribution of shares that have been held for more than two years to establish a holding company will not be subject to capital gains tax. Other share transfers will, however, be subject to capital gains tax.
Furthermore, as this transfer is not considered part of commercial activity, it will not be subject to VAT.
Best regards,
BİLGENER
