Restructuring Through a Foreign Holding Company (Flip-Up)

The Flip-Up Process

1. 01

   Choosing the Country and the Structure

   • The investors’ expectations
   • The company and tax legislation of the country where the holding company will be set up
   • Whether there is a double taxation avoidance agreement between Türkiye and that country
   • The tax consequences of the transaction for the shareholders and for the company in Türkiye
2. 02

   Setting up the Holding Company Abroad

   The holding company is set up under the legislation of the relevant country through local advisers authorised in that country. For details, see our Company Formation Abroad page.

3. 03

   Transfer of the Shares to the Holding Company

   • Limited liability company (Limited Şirket): The transfer of a capital share is made in writing, and the signatures of the parties are notarised. Unless the articles of association provide otherwise, the transfer requires the approval of the shareholders’ general meeting. (Turkish Commercial Code No. 6102, Art. 595)
   • Joint stock company (Anonim Şirket): For registered share certificates, the transfer is made by endorsing the share certificate and passing possession of it to the transferee. (Turkish Commercial Code, Art. 490) Where shares are not represented by certificates, where there are bearer share certificates, or where the articles of association restrict transfer, the transfer procedure is checked separately according to the nature of the shares.
   • Authorisations and notifications: If the company operates in a sector subject to authorisation, the authorisation of the relevant authority is assessed separately; if the transaction results in a change of control and exceeds the thresholds, the authorisation of the Turkish Competition Authority (Rekabet Kurumu) is also assessed separately.
4. 04

   Taxation of the Shareholders

   • Individual shareholders: Contributing shares to a commercial company as capital (contribution in kind, aynî sermaye) and exchanging them (trampa) are treated as a disposal. (Income Tax Law No. 193, Additional Art. 80) The exemption in the law is for shares of companies that are full taxpayers and that have been held for more than two years; it does not apply to shares in a limited liability company. The tax outcome is determined by the legal nature of the shares, how they were acquired, the acquisition date and the transaction model.
   • Corporate shareholders: Under Presidential Decree No. 9160, the rate of the exemption on gains from the sale of participation shares held as assets for at least two full years is 50 per cent. (Corporate Tax Law, Art. 5/1-e) The two-year period is not the only condition: the exempt amount is kept in a special reserve account (özel fon hesabı) for five years, and the sale price must be collected by the end of the second calendar year following the year of sale. The tax consequences of a cash sale, a contribution in kind and a transfer in exchange for shares in the holding company are each assessed separately; there is no automatic exemption or tax deferral for a flip-up.
   • Share exchange: For a tax-free share exchange (hisse değişimi), the company acquiring the shares must be a capital company that is a full taxpayer in Türkiye, must acquire the management and the majority of the shares of the company it takes over, and must give its own shares in return. (Corporate Tax Law, Art. 19/3-c, Art. 20) If the acquiring holding company is not a full taxpayer in Türkiye, this regime does not apply.
   • Residence: The fact that the holding company is incorporated in a foreign country does not by itself determine its tax residence. A company whose legal seat or place of business is in Türkiye is a full taxpayer (Corporate Tax Law, Art. 3); for this reason, where the holding company is actually managed from is assessed separately.
5. 05

   Capital Export and E-TUYS Notifications

   Capital export notification: Shareholders resident in Türkiye send the information form to the Ministry of Treasury and Finance and the Ministry of Trade within three months following their first export of capital in cash or in kind to set up a company abroad or to become a shareholder in an existing company. The form is available on the Ministry of Trade’s Overseas Investment Notification page. (Communiqué No. 2008-32/34 on Decree No. 32, Art. 10)

   E-TUYS: If a company with entirely domestic capital falls within the scope of the Law because the holding company becomes its shareholder, it completes the Investor, Shareholder List and, if any, Affiliated Subsidiaries fields in E-TUYS within one month at the latest following completion of the share transfer. If the company already has foreign capital, the Shareholders List is updated within one month at the latest following completion of the share transfer; if a payment has been made in connection with the share transfer, the Annex 2 Capital Information Form (EK-2 Sermaye Bilgi Formu) is completed within one month following the payment. (Implementing Regulation of the Foreign Direct Investment Law, Art. 5)

6. 06

   Accounting and Tax Arrangements After the Flip-Up

   • Transactions between the Turkish company and the holding company are carried out in line with the arm’s length principle. (Corporate Tax Law, Art. 13)
   • Distributions from the Turkish company to the holding company: Withholding tax is applied under Turkish legislation; the reduced treaty rate applies only if the holding company is resident in the treaty partner country, is the beneficial owner and meets the other conditions of the treaty.
   • Distributions from the holding company to the ultimate shareholders: These are assessed separately according to the legislation of the country where the holding company is located and the tax position of the shareholders in Türkiye.
   • Controlled foreign company (CFC): If individuals and corporations that are full taxpayers hold, directly or indirectly, control of at least 50 per cent over the holding company and the passive income, tax burden and revenue conditions in Corporate Tax Law Art. 7 are all met, the holding company’s profits, even if they are not distributed, are included in the corporate tax base of the fully liable corporations in Türkiye that are shareholders of the holding company, in proportion to their shareholding. If the shareholders of the holding company are individuals only, the effect of this provision is assessed separately. (Corporate Tax Law, Art. 7)

   For details, see our International Tax and Transfer Pricing pages.