Application of Exemption upon Sale of Repurchased Shares

Overview of the General Provisions on Share Buyback

The share buyback by a joint stock company is regulated under Articles 379 to 389 of the TCC. According to these provisions:

• Article 379/1 of the TCC stipulates that a company may not acquire or pledge its own shares in return for consideration if such acquisition exceeds, or would result in exceeding, one-tenth of its issued or paid-in share capital.
• Article 379/3 provides that, in order to conduct a share buyback for consideration, after deducting the value of such shares, the company’s remaining net assets must be at least equal to the aggregate of its share capital and any legal reserves not available for distribution under the law or the company’s articles of association.
• Article 382 sets out certain exceptional cases where share buyback or pledging is permitted notwithstanding the limitations of Article 379.

Under these provisions, non-public joint stock companies that conduct share buybacks are required to dispose of the repurchased shares — either by offering them to existing shareholders or by selling them to third parties. Alternatively, the repurchased shares can be cancelled through a capital reduction.

Application of Exemption upon Sale of Repurchased Shares

In its ruling dated August 5, 2024, numbered 15937, the Istanbul Tax Office of the Revenue Administration addressed whether the participation exemption under Article 5/1-e of the CITL applies when a company sells its own repurchased shares. The ruling states as follows:

“In the ruling request forms submitted, it is stated that, in accordance with capital market regulations, a certain percentage of your company's shares — traded on Borsa Istanbul (BIST) — were repurchased by your company in [year], and that a portion of these shares were subsequently sold on BIST in [year] at a price exceeding the buyback price, generating a profit. You have inquired whether such profit would be eligible for the exemption under Article 5/1-e of the CITL (…)

In view of the relevant provisions and explanations, the participation exemption applies only to income derived from the sale of shares or participations in other companies. Therefore, the profit arising from the sale of your own repurchased shares is not eligible for the exemption under Article 5/1-e of the CITL.”

The rationale behind this view, as reflected in the ruling, may be summarized as follows:

• A company cannot participate in itself.
• Article 5/1-e of the CITL refers to income derived from “shares in other fully liable companies,” which condition is not met in a share buyback scenario.
• The primary purpose of a share buyback is not participation.

Thus, based on a literal interpretation of the law and the underlying rationale for the exemption, profits arising from the sale of repurchased shares should not benefit from the participation exemption under Article 5/1-e of the CITL.

Accordingly, in line with this ruling, it is understood that: (i) the company’s repurchased shares will not be considered “participation shares” for purposes of the CITL; and

(ii) the participation exemption under Article 5/1-e of the CITL will not apply to gains derived from such sales.

Conclusion

In practice, it is quite common for certain concepts to be defined or interpreted differently under “commercial law” and “tax law.” While such differences may enrich legal interpretation, they can at times lead to divergent approaches on fundamental concepts between these two fields of law — potentially disrupting the harmony between fiscal and legal perspectives.

In the present case, the ruling reflects an understanding based on the principle that a company cannot “participate” in itself under the CITL framework. On the other hand, the TCC No. 6102 — unlike the repealed TCC No. 6762 — provides detailed and comprehensive provisions on share buybacks.

Thus, reaching the conclusion that tax exemption cannot apply merely by reference to the term “participation in another entity” in the CITL would be considered a narrow interpretation. Even though the final outcome may ultimately be the same, considering the relevant provisions and rationale of the TCC — especially in areas where the TCC and CITL overlap — would contribute to more robust and well-reasoned tax rulings, while also providing both tax and corporate lawyers with a broader perspective for structuring commercial transactions.

That said, as it currently stands, the position of the Revenue Administration is that:

(i) a company’s repurchased shares will not be treated as “participation shares” under the CITL; and (ii) the participation exemption under Article 5/1-e of the CITL will not apply to gains from the sale of such shares.