Real Estate Cannot Be Subject to Partial Division Without Taxation as of January 1, 2024
Many important tax regulations were made with Law No. 7456, titled “Law on the Imposition of Additional Motor Vehicle Tax for Compensating the Economic Losses Caused by the Earthquakes Occurring on February 6, 2023, and Making Amendments to Certain Laws and Decree Laws No. 375,” published in the Official Gazette on July 15, 2023.
One of the regulations made was the exclusion of real estate from the scope of partial division as of January 1, 2024, with the amendment to Article 19 of the Corporate Tax Law No. 5520.
This article provides details of the regulation and highlights the tax advantages that the transfer of real estate through partial division until January 1, 2024 will offer.
Partial Division Process under the Corporate Tax Law
Under the third paragraph of Article 19(b) of the Corporate Tax Law No. 5520, real estate, equity shares, and production or service enterprises may be subject to partial division under certain conditions.
For a fully liable capital company or a foreign institution with the status of a capital company:
• Real estate listed in the balance sheet of their place of business or permanent representative in Turkey,
• Equity shares held for a minimum of two full years as listed in their balance sheets,
• One or more of their production or service enterprises,
the process of including them as in-kind capital based on their registered values into a fully liable capital company that is already existing or newly established is considered a partial division according to the Corporate Tax Law.
For equity shares to be included as in-kind capital under the scope of partial division, these assets in the balance sheet must be held for a minimum of two full years.
In the partial division process, in order to maintain the integrity of the operation, the related assets or liabilities of the relevant activities must be transferred as a whole.
Furthermore, Article 20 of the aforementioned Law states that the resulting profits from the partial division under Article 19 of the Law will not be calculated and taxed. The same article also specifies that the companies taking over the assets of the divided company will be jointly and severally liable for the accrued and future tax debts of the divided company up until the date of division, limited to the fair market value of the assets they acquired.
What are the Tax Advantages of Transferring Real Estate through Partial Division until January 1, 2024?
As mentioned above, real estate within this scope is transferred to an existing or newly established company based on their registered values, and the tax burden on the property is transferred to the acquiring company.
However, if the acquiring company sells the property in the future, the difference between the sale value and the registered value will be included in the corporate income as taxable gain.
Therefore, the removal of real estate from businesses through partial division is used as a tax deferral tool. Additionally, this method allows companies to be restructured, enabling multiple services or production activities within the same company to be separated and carried out by different entities.
Moreover, in partial divisions carried out in accordance with the Corporate Tax Law:
• VAT exemption under Article 17/4-c of the VAT Law,
• Stamp duty exemption for documents issued due to mergers, acquisitions, and divisions as stated in item (17) of section “IV-Papers related to commercial and civil matters” in the table appended to the Stamp Duty Law,
• Property transfer tax exemption under Article 123 of the Fees Law,
are also applicable.
In addition, the portion of VAT amounts related to the transferred assets and incurred by the divided company, which cannot be deducted, can be subject to deduction without causing double deduction by the taxpayers acquiring the assets from the companies commencing activities or being transferred or divided after the transfer or division.
Applicable until January 1, 2024
After the amendment made with Law No. 7456, real estate cannot be subject to partial division without taxation under the regulations of the Corporate Tax Law as of January 1, 2024.
Considering the publication date of the Law (July 15, 2023) and the effective date of the regulation (January 1, 2024), there is a short period of five and a half months to benefit from the current practice.
Therefore, companies that transfer their real estate to an existing or newly established company through partial division until January 1, 2024, will gain significant tax advantages.