English Translation
TAX APPLICATIONS AND MERGERS AND ACQUISITION OF COMPANIES
What is Merger ?
Mergers and acquisition means the transfer of one or more company’s full assets and liabilities to another or to a new established company. Thus; as provision of merged and transferred assets, dissolved company’s shareholders acquire shares in the new company according to the ratio to be determined among the merger process.
In accordance with the current Turkish Commercial Code provisions, it is important to note that merger is possible only between same type of companies, thus the type of entities to be merged should be determined at first instance.
In the Turkish set of legislation, several code provide provisions regarding the mergers. Two main codes of these, are the Turkish Commercial Code and the Corporate Tax Law.
Different Types of Merger
Company mergers are able to be realized by (2) different types; “new establishment” and “merger by acquisition”.
a)New establishment: In this type of merger; two or more companies merge and establish a new company. These merged companies dissolve without liquidation and the assets/liabilities thereof pass to the new established company.(Fusion)
b)Merger by acquisition: In this type of merger; one or more company dissolves without liquidation by transferring all of its assets/liabilities to another existing company. In other words; one of the two companies joins to other’s constitution. The “acquirer” is the company which the companies merge therein and the “acquired” is the dissolving entity free of liquidation.(Absorption)
Taxation of The Profit Obtained From Merger
In general terms from a Turkish Commercial Code (mainly adopted from the German Commercial Code) point of view, acquisition is a type of merger. According to the Turkish Commercial Code (Article 146) merger consists of the creation of a new commercial partnership through the amalgamation of two or more commercial partnerships (fusion); or through the absorption of one or more commercial partnerships by another existing commercial partnership (acquisition).
In the Turkish Commercial Code, merger has been defined as dissolution without liquidation.In Articles 451 – 454 of the Turkish Commercial Code, provided under the general caption of “Dissolution without Liquidation”, it has been stipulated that a merger operation may take place only through the establishment of a new company, or through acquisition. In other words, an acquisition or the establishment of a new company are the types of merger. Whereas, in the Corporate Tax Code, merger and acquisition processes have been regulated under separate articles. According to the Corporate Tax Code, acquisition is a special type of merger, in the occurrence of the special circumstances enumerated within the Code.
In Article 18 of the Corporate Tax Code, the merger (subject to tax) of one or several corporations with another corporation is equivalent to a winding-up with regards to the corporations which are dissolved due to amalgamation. In case of merger, however, the winding-up profit shall be replaced by the amalgamation profit for the assessment of the tax. The provisions regarding the establishment of the winding-up profit shall be enforced for the determination of the amalgamation profit, with the following difference that the assets given directly or indirectly by the amalgamating corporation to be associates or owners of the dissolved corporation or corporations shall replace the assets distributed to the shareholders in the event of the winding-up of the corporation. Assets received from the amalgamating corporation shall be valued in accordance with the rules set forth in the Tax Procedure Law.
This provision is followed by the pre-conditions, where the mergers will be regarded as acquisition (tax free mergers). In accordance with Article 19 of the Code, these pre-conditions of an acquisition (tax free merger) are as follows;
Both of the acquiring and the acquired (dissolved) companies should be resident in
Turkey (full taxpayer),
All the assets and the liabilities of the acquired (dissolved) company should be
transferred to the acquiring company, at their book-values.
Besides the pre-conditions referred in Article 19 of the Corporate Tax Code, there is also a set of conditions in Article 20 of the Corporate Tax Code, which are as follows:
The acquiring company and the acquired (dissolved) company shall submit a
corporate tax declaration for the dissolved company as of the date of acquisition (the
date of registration of the decision of the merging entities competitive organ to the
Trade Registry is the date of acquisition), that they will jointly sign, to the tax office
where the dissolved company is registered, within 30 days from the date of the
announcement of the acquisition in the Trade Registry Gazette,
The acquiring company shall undertake through a declaration provided in the
abovely stated declaration of the dissolved company, that it will pay all the tax
related debts of the dissolved company that has accrued and that will accrue, and
that it will fulfill the other obligations that befall on the dissolved company. The
highest civic authority of the region may demand a separate guarantee from the
merged company regarding this subject matter.
In case where these conditions, as well as the pre-conditions, are present, only the profits derived until the date of acquisition shall become subject to tax, and the profits generated directly from the merger shall not be calculated and shall not be subject to corporate tax.
In the acquisition operations effected pursuant to the Corporate Tax Code, in which the assets and liabilities should be transferred to the acquiring company, the depreciation over the depreciable economic assets of the acquired (dissolved) company will continue to be applied for their remaining economical lifetime in the acquiring company.
In order to close the acquisition process beforehand, the relevant tax declarations of the acquired company may be submitted and paid to the Tax Office prior to their due dates.
In determination of corporate tax base; the costs which take place in the previous tax returns can be utilised by the acquirer company on condition that to show separately the amounts of each year and not to carry more than 5 years. Besides this for the carry-forward losses of the acquired company to be utilised by the acquiring entity. The following conditions should be met;
- Allowing of corporate tax declaration forms related to last 5 years in their legal period.
- Progressing of dissolved company’s activities at least 5 years from the accounting period in which the acquisition transaction realized.
Procedure of the Merger Transaction
The Turkish Commercial Code does not regulate the procedures of the merger transactions in details and simply specifies the principles thereof.
The procedure can be summarized as follows;
- Negotiation between the parties
- Preparation of the merger balance sheets and commercial books of the parties
- Application to the commercial court for the provision of an expert report regarding the applicability of the merger transaction as well as the determination of the book values of the parties.
- Vesting power to the administrative boards for the preparation of the merger agreement
- Approval of the merger contract by the general assembly and capital increase in the acquirer company (if it is necessary)
- Registration and announcement of the merger decision (or establishment of new company)
- Deregistration of the dissolving company
With regards to the meeting and decision quorum; Turkish Commercial Code article 148 stipulates that “ procedures and circumstances about the statute amendments are applicable on merger decisions”. Thus Article 388/3 will be applicable fort the merger transactions as well.
According to The Ministry of Industry and Trade’s communiqué numbered 2004/2 “if capital increase of joint-stock company is realized by transfer of capital in kind or firm transfer, expert report and/or court’s expert assignment decisions should be attached to the registration form.”
Merger decisions are effective within 3 months starting from the announcement day. Insofar; merger decision may be effective from the announcement day if companies which are merged pay or deposit their liabilities among the merger procedure and receive a sworn Fiscal Auditor report as a proof document to be submitted to the Trade Registry.
Each of the creditors of the merged companies are entitled to apply to the competant court within (3) months from announcement for the rejection of the merger transaction.
Other Turkish Acts Which Concern Merger Transactions
Besides the Turkish Commercial Code and Corporate Tax Code there are different codes providing additional clauses with regards to the merger transaction which should also be taken into account among the procedures. These are mainly as follows.
Charges Code numbered 492
Stamp Tax Code numbered 488
Income Tax Law numbered 193
Value Added Tax (VAT) numbered 3065
Banking and Insurance Transactions Tax numbered 6802
Competition Code numbered 4054
Conclusion
Merger is an important instrument for achieving the goals of an enterprise such as the economical scale, management rationalisation, productivity and enforcement of financial structure. To the extent of the added values of these restructring transactions, there are plenty of tax incentives in favor of taxpayers. However for the sake of the application, the most important issue is that the merger & acquisition transactions are structured in details from a tax & legal point of view.
AMENDMENTS PROJECTED TO BE INTRODUCED IN THE TAXATION REGIME OF THE WAGES
I. Introduction
As known, it is stipulated in Article 86 of Income Tax Code concerning the taxation of the wages which is one of the taxable income factors enumerated in Article 2 of Income Tax Code that annual income tax return shall not be filed for those wages received from one employer and taxed through withholding under the scope of Article 94, with no regard to the amount.
It is stated in Repeated Article 121 of the Code concerning the taxation of real wages that a portion of the total annual amount of education, health, food, clothing and rent expenses of the domicile of both the taxpayer and his spouse and children shall be refunded through withholding.
This article covers the amendments and arrangements planned to be made on the provisions concerning the taxation of income with a Draft Code which was being negotiated in the Grand National Assembly when this article was prepared (probably will have been passed as law at the date by the time this article is published).
II. Amendments planned to be introduced in the taxation regime of the wages
1- Tax Allowance application for the wage earners is terminated
The application of “tax allowance for wage earners” defined in Repeated Article 121 of Income Tax Code and based on the refund of the amount calculated by applying certain rates over a portion of certain expenses of the wage earners which does not exceed the tax bases, from the income tax to be paid by the taxpayer through withholding in the following year is terminated with the Draft as of 01.01.2007.
It is stated in the rationale of the arrangement that the application has lost its effectiveness in time and negative effects have been observed in the documentation order due to common misuses. It is emphasized that the “minimum living allowance” system which is claimed to be consistent with the European Union Acquis Communautaire and will contribute in a fairer income distribution by decreasing the tax burden over the low-paid employees yet partially, is introduced instead of this application.
With this arrangement, the tax levy over the well-paid employees will change significantly since the advantages that the well-paid employees group gets through tax allowance application is more than the advantages to be derived from minimum living allowance application. For example, while a single wage earner whose annual tax base is TRY 27.200 derives an advantage of TRY 1.304 in 2006 through the tax allowance application; this advantage will decrease to TRY 540 (supposing that minimum wage is TRY 600 in 2008 and income tax tariff does not change) through the minimum living allowance.
2- Minimum living allowance application commences
Annulled Article 32 of Income Tax Code is rearranged with Article 2 of the Draft; accordingly “minimum living allowance” application shall be effective as from the beginning of 2008 in the determination of the income tax amount to be paid by the wage earners taxed on the basis of actual income method. It is stipulated in the Draft that minimum living allowance shall be applied as 50% of the minimum wage applied for the taxpayer employed in the industrial sectors and above the age of 16; 10% for the spouse who is unemployed and does not earn income and 7,5% for the first two children and 5% for each of the other children. Marital status and family status will be taken as basis in the determination of the minimum living allowance amount at the date when the taxpayer obtains income.
The minimum living allowance application will be performed by deducting the income tax calculated over the gross tax to be calculated by implementing the rate (15%) over the first income bracket of income tax tariff specified in Article 103 of Income Tax Code, from the total allowance amount to be calculated in such way.
As it can be understood from the formula above, any employee with the same marital status without regarding their wages shall derive the same advantage through this new application. For example, supposing that the monthly gross minimum wage is TRY 600 at the beginning of 2008, a single employee will derive a tax advantage of TRY 45 through this application within a month. This advantage will be TRY 54 for a married employee whose spouse does not work and TRY 67,5 for an employer married with two children.
Since wage bargaining is generally performed over the net wage amount in our country, this new application will yield results mostly in favor of employers.
From the minimum wage earners’ point of view, since the maximum income to be generated from the tax allowance application is TRY 34,69 monthly for the wage earners who don’t work and whose spouse does not derive any income and fulfills the requirements (children staying with the taxpayer or is below the age of 18 and taken care by the taxpayer or below 25 and still receiving education) without regarding the number of the children, minimum living allowance is more advantageous anyhow. When the wage increases, the amount that the individual can deduct from the income tax is rather below the refundable amount in the tax allowance application for the wage earners and an unfavorable condition arises for the well-paid employees.
From the standpoint of well-paid employees, this application which is planned to be introduced to ensure justice among the wage earners may be claimed to result in a more unjust condition, by diverting from its rationale.
3- Requirements for Filing Return for Those Deriving Wage from More than One Employer
With the new arrangement, an amendment is planned to be introduced in Article 86 of Income Tax Code; it is stated that the employees deriving wage income taxed through withholding from more than one employer in 2007 and whose total wage income received from the employer following the first does not exceed the third bracket of the income tax tariff (TRY 43.000 for 2007) (which was second bracket of income tax tariff for 2006 income amounting to TRY 18.000,00) are not required to file annual Income Tax Return.
Wage earners receiving wage from more than one employer within a calendar year can accept any of these employers as his first employer. As it is stated in the Article, the wage income which does not exceed the limits specified shall not be included in the return in the event that return is filed for other income. If the wage income does exceed the limits, wage earners shall declare all of their wages within the year through annual income tax return; however, they shall deduct total income tax paid through withholding within the year from the income tax calculated on the return.
This arrangement will yield favorable results for wage earners since it allows higher wages to be excluded from the progressive tax tariff. In more explicit words, those whose total wage income received from more than one employer up to now exceeds TRY 18.000, will be taxed in accordance with the progressive tax tariff through the submission of annual return; while those deriving income exceeding TRY 43.000 shall file return as from 2007. This situation will adversely affect the tax burden of wage earners.