THE EXEMPTION RATE UNDER ARTICLE 5/1-E OF THE CORPORATE INCOME TAX LAW HAS BEEN REDUCED
Introduction
Article 5 of the Corporate Income Tax Law No. 5520 (“the Law”), a cornerstone of the Turkish tax regime, provides tax exemptions for specific corporate gains. Subparagraph (e) of paragraph 1 of Article 5 (“Article 5/1-e”) governs the partial exemption of capital gains derived from the sale of participation shares, founders shares, redeemed shares, pre-emptive rights, and participation shares of the investment funds. Presidential Decree No. 9160, published in the Official Gazette on November 27, 2024, under issue number 32735 (the “Presidential Decree”), has significantly amended the exemption rate stipulated under Article 5/1-e. This memorandum will examine the pre-amendment and post-amendment legal frameworks, their scope, and the implications of the recent changes.
Pre-Amendment Legal Framework
Prior to the amendment, Article 5/1-e of the Law provided that 75% of the capital gains arising from the sale of participation shares held for a minimum period of two full years, as well as founder’s shares, redeemed shares, pre-emptive rights, and participation shares of the investment funds contributing to tax-exempt earnings under subparagraph (a) of the same article, were exempt from corporate taxation.
This 75% exemption served as a significant fiscal incentive, mitigating tax liabilities for entities sale of qualifying assets which promotes liquidity and long-term investments.
Post-Amendment Legal Framework
Pursuant to Article 1 of Presidential Decree No. 9160, effective as of November 27, 2024:
- The exemption rate under Article 5/1-e of the Law has been reduced from 75% to 50%.
- The provisions entered into force on the date of publication in the Official Gazette which was November 27, 2024 under Article 2 of the Presidential Decree.
- Article 3 designates the Ministry of Treasury and Finance as the competent authority responsible for executing the provisions of the Presidential Decree.
The amendment does not differentiate between assets acquired prior to or after the effective date. As such, the revised exemption rate of 50% applies uniformly to all qualifying asset sales, irrespective of their acquisition date.
Other than the aforementioned amendment, no alteration has been introduced to Article 5 of the Law.
Revised Statutory Text of Article 5/1-e
"50% of the capital gains derived from the sale of participation shares as well as founder’s shares, redeemed shares, pre-emptive rights, and participation shares of the investment funds, that have been held as part of the corporation’s assets for a minimum of two full years, which contributes to tax-exempt earnings as outlined in subparagraph (a) of this paragraph, shall be exempt from corporate taxation."
Conclusion
Article 5/1-e of the Corporate Income Tax Law remains an essential instrument for facilitating corporate financing through favorable tax treatment of capital gains. However, the Presidential Decree has reduced the exemption rate from 75% to 50%, effectively increasing the tax burden on gains occurred from the sale of qualifying assets. This amendment came into force on November 27, 2024, and applies irrespective of the acquisition date of the assets.
Accordingly, tax obligors subject to the Law are strongly recommended to reassess their tax planning strategies in light of this regulatory change to ensure compliance and optimize their fiscal outcomes.