In this week’s article series, where we address the most common issues or concerns faced by entrepreneurs and startups, we will mention tax liabilities, potential tax advantages and exemptions and the tax implications of buying or selling in the process of company formations and acquisitions.
Determining on the type of company to establish during the transition from the idea phase to incorporation, plays a significant role in laying the foundations of the Startups. Making the right decision regarding the company type, capital amount, articles of association, partnership structure, and partnership responsibilities at the company establishment stage will elevate the value of the Startups to its optimal level, securing a competitive position.
Even though it is possible for entrepreneurs to start by establishing individual tax liability based on their current economic strength, today, almost all forms of commercial organization structured around traditional company types such as joint-stock companies (“JJCs”) and limited liability companies (“LLCs”). Therefore, it would not be incorrect for startups to focus on operating within these two types of companies.
Regardless of the company type to be established, the real person owning the company may benefit from various tax advantages, depending on the company’s activity field and location, provided certain conditions are met. For instance, under the “young entrepreneur income exemption” added to the Income Tax Law in 2016, real person who establishes their first income tax liability under the age of 29 can be exempt from income tax up to the amount listed in the second bracket of the tariff specified in Article 103 of the Income Tax Law for three taxation periods starting from the calendar year they begin their activities, under certain conditions. Furthermore, under the Law No. 5746 on Supporting Research, Development and Design Activities, all R&D, innovation, or design expenses carried out in R&D/Design Centers until December 31, 2028, can be deducted from corporate income. Furthermore, income derived from software design or R&D activities in a Technology Development Zone, as per the Law No. 4691 on Technology Development Zones, is exempt from income and corporate taxes until December 31, 2028. Apart from these exemptions provided by special laws, some income derived from services provided abroad (such as architecture, engineering, design, software, data storage, data analysis, data processing, etc.) is subject to an 80% reduction in corporate tax, according to the Corporate Tax Law.
Another matter of concern for startups is the taxation of profits from the sale of shares or partnership interests upon establishment a business or acquiring shares in an existing company. The answer to this question varies depending on the type of company.
As a general rule, under subparagraph 4 of the bis Article 80 of the Income Tax Law, the gains from the transfer of shares or partnership interests in a company are taxed as capital gains. However, some differences arise based on the type of company.
According to the Turkish Commercial Code, limited liability companies cannot issue shares or certificates. Since shares in LLCs are represented as partnership interests and cannot be converted into shares, any gains arising from the sale of such partnership interests, regardless of the time of sale, are taxed as capital gains.
On the other hand, under subparagraph 1 of the bis Article 80 of the Income Tax Law, the gains derived by real persons from the transfer of shares held for more than two years in JJC are not subject to taxation.
Furthermore, if the transfer transaction conducted by real persons is not for commercial purposes, it will not be subject to VAT in any way.
In addition, share transfer agreements for JJC and LLC are exempt from
- stamp tax under the regulation in the 16th row of the of the “IV – Commercial and Civil Papers” section of the table attached to the Stamp Tax Law No. 488,
- from fees under the Article 123 of the Fees Law No. 492.
Finally, we would like to emphasize that the liability for public debts also differs depending on the company type. Under Article 35 of Law No. 6183, in case of a shareholder of a LLC transfers their capital share in the company, both the transferor and the transferee are liable for public debts incurred before the transfer, in proportion to their partnership shares. However, shareholders of JJC are not liable for public debts, the liability for public debts rests with the members of the board of directors.