| Meryem UZUN Tax Consultant | Ahmet Hakan MİRZA Attorney |
ABSTRACT Commercial companies may increase or decrease their capital amounts allocated to the enterprise or stated in their articles of association and registered with the Trade Registry, to the extent permitted by statutory provisions for various reasons. The manner in which taxation should be conducted in cases where capital is withdrawn from the enterprise has been explained in the Corporate Tax Law General Communiqué, and explanations regarding how taxation will be carried out in capital reduction have been included through Law No. 7420 on Amending the Income Tax Law and Certain Laws and Decrees Having Force of Law, published in the Official Gazette dated 09/11/2022, with a 5-year limitation introduced in tax practice. While capital reduction in publicly traded and non-public companies is carried out within the framework of provisions stipulated in the Turkish Commercial Law No. 6102 (“TCL”), capital reduction for publicly traded companies is specifically regulated in the Capital Markets Board’s (“CMB”) Communiqué on Shares No. VII-128.1 (“Share Communiqué”). Within this scope, the subject matter of this article encompasses the differences existing in capital reduction between publicly traded and non-public companies, the matters that must be considered in simultaneous capital reduction and increase, and certain specific issues regarding capital increase and reduction.
Keywords: Capital Increase, Capital Reduction, Simultaneous Capital Reduction and Increase, Taxation, Repurchased Shares.
INTRODUCTION
Although there are various reasons for capital reduction transactions, we wish to state that capital reduction in joint-stock companies is voluntary. However, according to Article 376 of the Turkish Commercial Code, technical bankruptcy may result from the loss of the company’s equity or the company becoming insolvent when the sum of capital and legal reserve funds becomes uncovered due to losses according to the last annual balance sheet of a capital company. The same article also regulates the measures to be taken and procedures to be implemented when companies’ financial structures deteriorate. In capital increase or reduction transactions, a change in principal capital will occur regardless of the source from which it is funded. However, when capital increase and capital reduction are carried out simultaneously and the reduced amount equals the increased amount, no change will occur in the principal company’s capital. In this article, matters that must be considered in capital reduction transactions pursuant to the provisions of the TCL and the Corporate Tax Law General Application Communiqué will be addressed, and evaluations regarding how taxation should be calculated within the scope of Article 32/B of the Corporate Tax Law No. 5520 (“CTL”) will be included.
1. COMPANY’S ACQUISITION OF ITS OWN SHARES AND CAPITAL REDUCTION
Article 379 of the TCL stipulates that a company cannot acquire its own shares against consideration in amounts exceeding or that will exceed one-tenth of its principal or issued capital. Accordingly, it is possible for the company to acquire its own shares against consideration, provided that it does not exceed 10% of the principal/issued capital. Article 384 of the same Law states that acquired shares shall be disposed of as soon as their transfer becomes possible without causing any loss to the company, and in any event within three years from their acquisition.
- With respect to companies subject to capital markets legislation, pursuant to Article 19 of the CMB’s Communiqué on Repurchased Shares No. II-22.1 (“Repurchased Shares Communiqué”), repurchased shares;
- May be held indefinitely, provided that the conditions specified in Articles 9/1 through 9/3 of the Repurchased Shares Communiqué are complied with,
- If they have been repurchased in violation of the aforementioned Communiqué provisions, they shall be disposed of within one year at the latest from the repurchase date. Shares that cannot be sold during this period shall be extinguished through capital reduction,
- The portion exceeding ten percent of the partnership’s paid-in or issued capital shall be disposed of as soon as their transfer becomes possible without causing any loss, and in any event within three years from their acquisition. Shares not disposed of during this period shall be immediately extinguished through capital reduction.
According to Article 18 of the Repurchased Shares Communiqué, repurchased shares are not taken into consideration in calculating the quorum for meetings of partnerships’ general assemblies. Repurchased shares held by partnerships, including shares acquired without consideration, shall not confer any share ownership rights except for dividend and preemptive rights. Furthermore, again with respect to companies subject to capital markets legislation, pursuant to Article 19/6 of the Repurchased Shares Communiqué, capital reductions made through extinguishment of repurchased shares shall be carried out in accordance with the provisions of capital reduction “Not Requiring Fund Outflow.” The provisions of capital reduction “Not Requiring Fund Outflow” have also been regulated under Article 19 of the Share Communiqué. Paragraph 10 of the aforementioned Article stipulates that Articles 473/2, 474, and 475 of the TCL shall not be applied in such reduction. Within this scope, the “institution of securing creditors’ rights” regulated in the TCL shall not be applicable, and the two-month waiting period shall also not arise. In cases where capital increase is conducted simultaneously with capital reduction, pursuant to Article 19/12 of the Share Communiqué, “partners holding management control are obligated to exercise all of their preemptive rights to new shares; and they shall not sell the shares thus acquired on the stock exchange for a period of one year from the commencement of trading of the issued shares on the stock exchange.”
With the paragraph added following the third paragraph of Article 94 of the Income Tax Law No. 193 pursuant to Law No. 7256 published in the Official Gazette dated 17/11/2020, it has been stipulated that in cases where fully liable capital companies do not extinguish or dispose of their own share certificates or partnership shares they have acquired through capital reduction within two full years from the date of acquisition, the difference between the acquisition cost and the nominal value of the share certificates or partnership shares shall be deemed as distributed dividends as of the last day of the two-full-year period from the acquisition date, and withholding tax at a rate of 15% must be levied on these amounts. The withholding tax rate had been determined as 0% through Presidential Decision No. 6791 dated 14/02/2023. Subsequently, pursuant to the amendment made through Presidential Decision No. 7343, amounts deemed as distributed dividends regarding own shares acquired by fully liable capital companies whose shares are traded on Borsa Istanbul from 7 July 2023 onwards shall be subject to withholding at a rate of 0%, while amounts deemed as distributed dividends regarding own shares acquired by fully liable capital companies other than these from 7 July 2023 onwards shall be subject to withholding at a rate of 15%.
Article 32/B of the CTL, entitled “Taxation in Capital Reduction,” establishes the principles regarding taxation to be applied in capital reduction. Detailed explanations regarding how taxation should be conducted have been included within the section entitled “32.4. Taxation in Capital Reduction” of the CTL General Application Communiqué (“Communiqué”).
2. PRACTICE IN CAPITAL REDUCTION
The section entitled “32.4.8. Capital reduction made as a result of capital companies acquiring their own shares” of the Corporate Tax Law General Application Communiqué includes the following explanations: “…in cases where fully liable capital companies extinguish their own share certificates or partnership shares they have acquired through capital reduction, the negative difference between the acquisition cost and the nominal value of the share certificates or partnership shares must be subject to tax withholding at a rate of 15% at the capital companies as of the date the capital reduction decision is registered with the trade registry.” On the other hand, through Presidential Decision No. 9286, the withholding tax rate on dividends distributed by fully liable institutions to fully liable natural persons, those who are not income and corporate tax taxpayers, and those exempt from income tax has been increased from 10% to 15%, effective from 22 December 2024. Sample calculations pursuant to the Communiqué provisions are as follows.
Capital Reduction by Institutions After Five Full Years Have Passed Since the Date Equity Items Were Added to Capital
Example: Enterprise X Inc. purchased 100,000 of its own share certificates on 10.02.2019 for a consideration of 1,000,000.00 TL. X Inc. made a capital reduction decision for its own share certificates acquired for 1,000,000.00 TL and had the reduction decision registered in the trade registry on 12.01.2025. The nominal value of the shares as of 12.1.2025 is 17 TL. The capital account in X Inc.’s balance sheet prior to the reduction decision contains 12,000,000.00 TL, and this amount consists of;
- 2,000,000 TL from capital in kind and cash capital,
- 5,000,000 TL from positive inflation adjustment difference added to capital in 2013,
- 5,000,000 TL from prior year profits added to capital in 2015.
In this case, since it is understood that five full years have passed from the date the capital items were added to capital for the share amount of 1,000,000.00 TL planned to be reduced, the capital elements within the amount subject to reduction must be determined by apportioning the capital elements to the total capital pursuant to the Communiqué provisions.
1 “In cases where capital reduction is made by institutions after equity items have been added to capital, the primary matter to be considered in the taxation procedure to be carried out on this reduced amount is which element of capital will be reduced and in what amount.
The capital elements that may be subject to reduction can essentially be grouped into three classes as follows:
I. Equity items that, if transferred to another account other than addition to capital, withdrawn from the enterprise, or transferred from the capital account to other accounts, will be subject to corporate tax and tax withholding depending on profit distribution/transfer to headquarters,
II. Equity items that will be subject only to tax withholding depending on profit distribution/transfer to headquarters,
III. Capital in kind and cash capital that will not be taxed if transferred to another account or withdrawn from the enterprise.
Pursuant to Article 32/B of the Corporate Tax Law, in cases where capital reduction is made before the completion of five full years from the date these elements were added to capital, the reduction shall be deemed to have been made sequentially from the capital elements falling within classes (I), (II), and (III) in the above classification.
On the other hand, in cases where these elements are made subject to capital reduction in any manner after five full years have passed from the date they were added to capital, the capital elements within the amount subject to reduction shall be determined by apportioning the capital elements in question to the total capital.
In this context, the capital elements subject to capital reduction shall be taxed in accordance with the relevant regulations contained in tax laws and special laws.”
| Description | Amount | Percentage of Total Capital | Amount Subject to Reduction | Calculated Corporate Income Tax (25%) | Income Tax Withholding (15%) |
| Cash | 2.000.000,00 | 16,67% | 166.666,67 | – | – |
| Inflation Differential | 5.000.000,00 | 41,67% | 416.666,67 | 104.166,67 | 31.250,00 |
| Previous Year Profits | 5.000.000,00 | 41,67% | 416.666,67 | – | 41.666,67 |
| TOTAL | 12.000.000,00 | 100,00% | 1.000.000,00 | 104.166,67 | 72.916,67 |
TOTAL(*) The taxes in question may vary depending on the taxpayers’ legal status.
ȇ Capital Reduction by Corporations Before Five Full Years Have Elapsed Since the Date Equity Items Were Added to Capital
Example: Y Inc. has a capital of 7,500,000.00 TL. The company’s authorized body decided to reduce capital by 3,000,000 TL, and this decision was registered on February 11, 2025. Y Inc.’s balance sheet prior to the reduction decision shows 7,500,000.00 TL in the capital account, and the breakdown of its capital is as follows:
| Public. Date | Type of Entry | Cash | Revaluation Fund | Inflation Adjustment Differences | Retained Earnings | Total |
| 05.05.2000 | Founding | 10.000,00 | 10.000,00 | |||
| 01.11.2001 | Capital Increase | 100.000,00 | 100.000,00 | |||
| 10.09.2003 | Capital Increase | 350.000,00 | 350.000,00 | |||
| 18.12.2007 | Capital Increase | 800.000,00 | 800.000,00 | |||
| 19.08.2010 | Capital Increase | 1.000.000,00 | 1.000.000,00 | 1.500.000,00 | 3.500.000,00 | |
| 12.04.2022 | Capital Increase | 2.740.000,00 | 2.740.000,00 | |||
| 1.260.000,00 | 1.000.000,00 | 1.000.000,00 | 4.240.000,00 | 7.500.000,00 |
Based on the information provided, in accordance with the provisions of the Circular, the share premium of 3,000,000.00 TL planned for reduction must first be covered by items for which the date of capitalization has not exceeded five full years. In this context, it will be assumed that the reduction is first made from prior year profits
(2,740,000). The remaining 260,000.00 TL (3,000,000 – 2,740,000) must be
allocated to the remaining total capital to determine the capital components within the amount subject to the reduction.
| Description | Amount | Total Capital Percentage | Amount Subject to Reduction Amount |
| Cash | 1.260.000,00 | 26,47% | 68.823,53 |
| Revaluation Fund | 1.000.000,00 | 21,01% | 54.621,85 |
| Inflation Differential | 1.000.000,00 | 21,01% | 54.621,85 |
| Retained Earnings | 1.500.000,00 | 31,51% | 81.932,77 |
| TOTAL | 4.760.000,00 | 100% | 260.000,00 |
The calculation table for the corporate income tax and withholding tax calculated under this framework is as follows:
| Description | Amount | Calculated Corporate Tax (25%) | Income Tax Withholding (15%) |
| Cash | 68.823,53 | – | – |
| Revaluation Fund | 54.621,85 | 13.655,46 | 4.096,64 |
| Inflation Differential | 54.621,85 | 13.655,46 | 4.096,64 |
| Retained Earnings | 2.821.932,77 | – | 282.193,28 |
| TOTAL | 3.000.000,00 | 27.310,92 | 290.386,55 |
(*) The taxes in question may vary depending on the legal status of the taxpayers.
3. IMPLEMENTATION IN SIMULTANEOUS CAPITAL INCREASE AND DECREASE
Upon examination of the legislative provisions concerning the execution of simultaneous capital decrease and increase, it is observed that there exists no provision stipulating that the capital increase transaction shall be taken into consideration as a priority. Nevertheless, the Revenue Administration has indicated, on the basis of the private rulings issued, that in cases of simultaneous capital increase and decrease, priority shall be accorded to the capital decrease transaction.
Furthermore, in the private ruling issued by the Presidency of the Large Taxpayers Tax Office, dated 26.09.2013 and numbered 64597866-125[6-2013]-158, the following explanations were set forth: “In your private ruling request form referenced herein, it was stated that your capital account consists of cash increases and the addition to capital of revaluation value increase fund, affiliates value increase fund, share premium reserves, and extraordinary reserves; that losses from previous years shall be offset through capital reduction; and that the capital shall simultaneously be increased by the amount corresponding to the reduced capital; and inquiry was made regarding which items shall be accepted as the source of the capital reduction. Accordingly, it is required that: primarily, the revaluation value increase fund and the affiliates revaluation value increase fund, which have been added to capital, shall be deemed as withdrawn from the enterprise due to the company’s capital reduction, and the amounts withdrawn from the enterprise shall be subject to corporate tax; subsequently, given that there exists no payment in cash or by account in the offsetting of the revaluation value increase fund and the affiliates revaluation value increase fund, which had previously been added to capital, against losses from prior years, the revaluation increase fund and the affiliates value increase fund, over which corporate tax has been calculated and paid, shall not be evaluated as dividend distribution, and no tax withholding pertaining to dividend distribution shall be executed; furthermore, given that there exists no payment in cash or by account in the offsetting of share premium reserves and extraordinary reserves, which had been added to the company’s capital in previous years, against losses from prior years, these shall not be evaluated as dividend distribution, and no tax withholding pertaining to dividend distribution shall be executed; finally, the capital contributed by the company partners in cash or in kind shall be deemed as withdrawn from the enterprise, yet no corporate tax shall be calculated over this amount, and no tax withholding pertaining to profit distribution shall be executed.”
As can be discerned from the private ruling cited above, the Revenue Administration has indicated, on the basis of the private rulings issued, that in cases of simultaneous capital increase and decrease, priority shall be accorded to the capital decrease transaction.
Example: X Joint Stock Company, as of 12.01.2025, with a capital of TL 12,000,000.00, plans to simultaneously decrease its capital by TL 1,000,000.00 and add the amount of TL 5,000,000.00, representing inflation adjustment differences pursuant to Communiqué No. 555 on the Tax Procedure Law, to its capital.
The breakdown of the capital account in the balance sheet of X Joint Stock Company prior to the decision on simultaneous capital decrease and increase is as follows:
- TL 2,000,000 consists of capital contributed in kind and in cash;
- TL 5,000,000 consists of the favourable inflation adjustment difference added to capital in 2013;
- TL 5,000,000 consists of profits from previous years added to capital in 2015.
Within this scope, priority shall be accorded to the capital decrease transaction in terms of taxation. Given that, in the example cited, it is understood that five full years have elapsed since the date on which the capital items were added to capital, it is required, pursuant to the provisions of the Communiqué, to determine the capital elements contained within the amount subject to reduction by apportioning the capital elements to the total capital.
| Description | Amount | Percentage of Total Capital | Amount Subject to Reduction | Calculated Corporate Income Tax (25%) | Income Tax Withholding (15%) |
| Cash | 2.000.000,00 | 16,67% | 166.666,67 | – | – |
| Inflation Differential | 5.000.000,00 | 41,67% | 416.666,67 | 104.166,67 | 31.250,00 |
| Retained Earnings | 5.000.000,00 | 41,67% | 416.666,67 | – | 41.666,67 |
| TOTAL | 12.000.000,00 | 100,00% | 1.000.000,00 | 104.166,67 | 72.916,67 |
(*) The aforementioned taxes may vary contingent upon the legal status of the taxpayers.
As a consequence of the transaction, X Inc.’s share capital shall amount to 16,000,000.00 TL (12,000,000 – 1,000,000+5,000,000), and a tax liability of 177,083.33 TL shall arise.
CONCLUSION
In this article, the matters concerning the cancellation of reacquired shares through capital reduction via simultaneous realization of capital reduction and increase have been examined in terms of legislative provisions. Subsequently, tax applications of capital reduction, increase, and simultaneous increase-reduction have been elucidated with examples.
With the 2024 corporate tax declaration period approaching, companies are intensifying their endeavours pertaining to inflation adjustment transactions, and the matter that inflation differences attributable to equity items shall be added to share capital within the ambit of VUK General Communiqué No. 555 is emerging on the agenda.
Upon examination of the legislative provisions governing the realization of simultaneous capital reduction and increase, albeit there exists no provision stipulating that the capital increase transaction shall be accorded primacy, the Revenue Administration, predicated upon the special rulings it has issued, has articulated that precedence shall be accorded to the capital reduction transaction in cases of simultaneous capital increase and reduction.