English Translation
TAX FREE EXCHANGE OF SHARES APPLICATION
Market conditions sometimes push companies to leave certain fields of activities and intensify their resources in some
other fields. It may be necessary to transfer or dismiss an activity entirely or partially. It may also become necessary to
acquire other enterprises, enter into partnerships with them or to merge one or more companies to enter into new field.
Behind the applications of restructuring lie miscellaneous internal or external reasons such as the increase of
efficiency and competitive capacity, changes in dividend policies, organization and management requirements, public
offering and foreign partnerships, dissolution of the partnerships or tax optimization. Such applications have very
significant tax implications. Sales of assets and obligations, transfer or exchange of partnership shares, capital
increases or decreases, new company establishment and similar operations result in various tax costs, mainly
corporate tax; sometimes these costs may prevent performing the operation.
Throughout the time, it has become possible to decrease these costs by means of certain tax free structuring models
included in our corporate tax system in parallel to the needs. Models such as acquisition, entire or partial spin-off and
exchange of shares are preserved in the new Corporate Tax Code. The present article covers the application of
“exchange of shares” which is not as attractive as merger and spin-off; but provides flexibility to the structuring
operations when used together with other models particularly such as transfer and spin-off.
Profit is not Calculated Due to Exchange of Shares
The arrangement relating to the exchange of shares is introduced in paragraph 3/c of Article 19 of the Corporate Tax
Code. It is brief and clear:
“Under the scope of the present Code, exchange of shares occurs when a resident company takes over the shares of
another company in such a way to have control over the management of the company and to acquire the majority of
shares and in return gives the participation shares constituting the capital of the its own company to the shareholders
transferring over the shares of the company. The transaction shall still be considered an exchange of shares even if up
to 10% of the nominal value of the participation shares that will be given to the shareholders of the transferred
company is paid to them in cash.”
Pursuant to paragraph 3 of Article 20 of the same Code, the profits emerging from the exchange of shares are not
calculated and taxed. The exchange of shares is the alienation of the shares in terms of transferor parties. If the
transferor of the shares is a corporation, the income derived is subject to corporate tax. On the other hand, in line with
the regulation, since income will not be calculated due to the exchange of shares, there will not be any corporate tax
burden.
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Conditions for Tax Free Exchange of Shares
Tax free exchange of shares can be determined in the following way:
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Both companies to perform exchange of shares must be capital stock companies. Capital stock company
refers to joint stock companies, limited companies and companies limited by share; foreign companies which
of the same nature in terms of corporate tax application are considered capital stock company.
The company to take over the shares of the company must be a resident company. It is not a condition that
the company to be taken over be a resident company. In this respect, it is understood that a resident
company can subject the shares of a foreign affiliate of a company in Turkey to exchange of share.
The exchange of share must be realized in such a way to have control over the management of the company
and to acquire the majority of shares. Both conditions will be required as noted in the rationale of the
arrangement.
In return for the shares taken over, the shares of the transferee company will be given to the shareholders of
the company taken over.
It is possible to pay in cash up to 10% of the participation shares to be given in return for shares taken over;
this will not violate the conditions of exchange of shares.
If the exchange of shares operation is evaluated in terms of the transferee company, it must be resident capital stock
company. It is not important whether or not its shareholders are resident or non-resident taxpayer or real person.
In exchange of shares, the transferee company is required to grant its own shares in return for the shares of the
company whose management and majority of shares will be transferred. The company may transfer its shares to the
shareholders of the company to be transferred in two ways. The company purchases from its shareholders and gives
or performs capital increase and gives the new shares issued.
Pursuant to Article 329 of the Turkish Commercial Code, a company cannot own its shares other than some
exceptional cases. In this respect, it can be suggested that a company cannot purchase its shares from the
shareholders of the company in order to make exchange of share. However, considering that the company owns the
shares of the company for a short time and this is a temporary and obligatory operation, it may be argued this situation
will not breach the current legislation.
Exchange of Share Through Capital Increase by the Transferee Corporation
In the second method through which the transferee company can give its own shares in the exchange of shares, the
company makes capital increase in return for the shares taken over and gives the share certificates issued in return for
the capital increased to the shareholders of the company taken over. This operation will not create any tax burden for
both the transferee company and its current shareholders.
If the first method is accepted to be contrary to the Turkish Commercial Code, it seems that there is not any applicable
method other than the second method in terms of exchange of shares. On the other hand, since there are not any
conditions required other than the insertion of the transferred shares as capital in kind after the application of this
method, there are not any serious difficulties in the application.
Corporate Tax Code does not cover any provisions concerning how the number of the share certificates to be given in
return for the shares taken over will be determined, in other words how the rate of exchange of share will be
determined. Therefore, it must be accepted that there are not limitations concerning the issue. Any contrary
application, in other words an approach to interfere in the free will of the parties concerning the issue may render the
application of exchange of share impossible.
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In such case, the transferee company can give its shares in return for the shares taken over on condition that the value
of these shares corresponds to the real value of the transferred shares. It is not a condition that the exchange of
shares be performed with the shares amounting to the face value or acquisition value of the shares of the company
taken over.
Operations Relating to the Company Whose Shares are Taken Over
The exchange of shares operation is not different from the sale of share in terms of management and the corporate
shareholders of the company whose majority of shares is taken over. If there is not any special arrangement, income
is calculated and it will be subjected to corporate tax due to this operation. Nevertheless, as the application of
exchange of share is formed as a tax-free structure under the conditions specified in the Corporate Tax Code, it does
not result in any income subject to corporate tax.
It is in dispute how the shareholders of the company whose shares are taken over shall enter into records the shares
which have been taken over in return for these shares and acquired due to the capital increase. In our opinion, the
value of the shares acquired in return for the shares transferred is the acquisition value of the previous shares. We are
in the opinion that this understanding is more appropriate to the approach foreseen in the law that income is not
calculated.