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Profits Generated from Shares Acquired without Cost

October 2014 - Corporate & Commercial. Legal Developments by Baspinar & Partners Law Firm.

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Introduction General Communiqué on Corporate Tax Law Nr. 1 - Section 5.6.2.4.3 Status of the Profits Generated from Shares Acquired without Cost ("General Communiqué") regulates Corporates who acquired shares without cost by Capital Increase transactions carried out through using profit reserves.

As per the section 5.6.2.4.3 paragraph 2; actual profit distribution have no difference with participation shares issued without cost by capital increase carried out through using profit reserves. In the event participation shares without cost are acquired as explained; these participation shares shall be exempted from the corporate tax. On the other hand, paragraph 1 of section 5.6.2.4.3 stipulates that shares acquired without cost by capital increase carried out through using capital reserves are not subject to tax at all since this kind of increase does not make any changes in the assets or liabilities. In this case, only the number of the share should change and there should not be any changes in the total amount the shareholder corporate holds. According to the General Communiqué, there is a difference between capital reserves and profit reserves in terms of increasing the capital. While capital increase through capital reserves does not make any change on the assets/liabilities of the shareholders; capital increase through profit reserves are deemed as profit distribution and shareholders are deemed to received dividends. However, as it is explained below Council of State has issued an injunction decision dated 16.09.2013 and numbered 2013/2951 concerning the implementation of Section 5.6.2.4.3 paragraph 2. Council of State Decision First of all, it should be noted that Council of State have not given a final judgment however given an interim decision regarding the capital increase through using profit reserves. Principally, corporates who are shareholders in another corporate and acquired participation shares without cost are exempted from corporate tax by virtue of article 5/1-a of Corporate Tax Law. However, this article of the law does not include participation shares acquired from investment partnership and therefore shares acquired without cost from the investment partnerships are subject to corporate tax law. A taxpayer, who had to pay corporate tax for the shares they acquired without cost from an investment partnership, filed a lawsuit and requested stay order and cancellation of Section 5.6.2.4.3 paragraph 2. Council of State have not given their final judgment however issued a stay order concerning Section 5.6.2.4.3 paragraph 2 on the below explained grounds. Council of State stated that there is no difference between capital reserves and profit reserves in terms of increasing company capital. As both capital reserves and profit reserves are company's equity capitals, there are no actual assets obtained by the shareholders. Shareholders' share percentages and rights continue and do not change. Council of State do not agree with the provision stated at Section 5.6.2.4.3 paragraph 2, which states that actual profit distribution have no difference with participation shares issued without cost by capital increase carried out through using profit reserves. Therefore same procedures should be followed for the shares acquired without cost through capital or profit reserves. Conclusion
Council of State issued an injunction decision dated 16.09.2013 and numbered 2013/2951 for Section 5.6.2.4.3 paragraph 2 on the above-explained grounds. In the event the final judgment is given in accordance with the injunction decision; a corporate that obtains shares without cost from an investment partnership is no longer required to pay corporate tax. However, judicial process is still continuing and it is required to wait for Council of State's final decision whether or not the concerned provision will be cancelled.