Withholding tax on share buybacks increased to 15% for unlisted companies

In detail

Article 94 of the Income Tax Law was amended in 2020 to introduce an anti-avoidance measure, intended to prevent arrangements where a company could transfer funds to its shareholders without payment of a dividend withholding tax.

As per the concerned amendment, in accordance with article 94/4 of the Income Tax Law, the following events that may occur after share buybacks by Turkish resident companies are deemed to be dividend distributions subject to a 15% withholding tax:

1. Capital reduction:
   
   If a company buying its shares from its shareholder makes a capital reduction, the difference between the repurchase price and the nominal value of the shares is accepted to be a dividend distributed on the date the capital reduction is registered in the Trade Registry.
   
2. Sale of shares below the repurchase price:
   
   If the repurchased shares are sold at a price lower than the repurchase price, the difference between the repurchase price and the sale price is accepted to be a dividend distributed on the date of sale.
   
3. If the repurchased shares are not sold or cancelled by capital reduction within two years of the date of repurchase, the difference between the repurchase price and the nominal value of the shares is treated as a dividend distributed on the last day of the two-year period beginning on the date of repurchase.

With Presidential Decree no.6791 published on 14 February 2023, the withholding tax rate on these deemed distributions was reduced to 0% from 15%. 

With Presidential Decree no.7343 published on 7 July 2023, the application of the 0% withholding tax has been limited to companies listed on the Istanbul Stock Exchange. Accordingly, the withholding tax rate has been reset at 15% for unlisted companies. The amendment is applicable to deemed distributions in relation to shares acquired after 7 July 2023.