TAX NEWS NO: 2018/8
August 14, 2018
Subject: Share certificates acquired gratuitously through addition of profit to share capital by the subsidiaries shall be deemed as profit distribution.
With the decision of The Council of State, Plenary Session of the Tax Law Chamber (PSTLC) (E. 2017/626, K. 2018/51) share certificates acquired gratuitously through addition of profit to share capital by the subsidiaries shall be deemed as profit distribution.
As per the decision of the 4th Chamber of the Council of State (E:2013/2951 K:2017/5260), the second paragraph of "Section 18.104.22.168.3. Status of the profits derived from sale of shares which have been acquired gratutiously" of General Communiqué on Corporate Tax Law No. 1 had been cancelled.
The Ministry of Finance had appealed against the aforementioned cancellation decision. Afterwards, PSTLC has decided that the paragraph of the decision of the 4th Chamber of the Council of State regarding the cancellation shall be reversed.
In the current situation, there is a difference between capital reserves and profit reserves in terms of their usage in capital increases.
If the subsidiary executes the capital increase through capital reserves and the shares issued in the process are provided to the parent company gratuitously, no accounting entries shall be required on the level of the parent company.
If the subsidiary executes the capital increase through profit reserves and the shares issued in the process are provided to the parent company gratuitously, the transaction shall be deemed as a de-facto dividend distribution and such shares shall be added to the purchase value of subsidiaries account over their nominal values in the books of the parent company. The same amount will be treated as income but no corporate tax will be applicable to such amount due to participation exemption.
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