New Tax Law Provisions on Debt Push-Down for Merger Transactions

Through the Article 20 of Law No. 7440 on Restructuring of Some Receivables and Amending Some Laws (Law No. 7440), published in the Official Gazette dated 12 March 2023 and No. 32130, significant tax regulations regarding Debt Push-Down financing structure for merger transactions are introduced.

What is the meaning of Debt Push-Down?

The term “debt push down” may be defined as follows: (i) participation to the target company through the buyer company or the acquiring company specially set up for this purpose by using credit, (ii) and then tax neutral merger of the target company and the buyer company as per Article 19 of Corporate Tax Code 5520 (CTC) and transfer of the financing expenses related to the acquisition to the transferee company.

What was the opinion of Turkish Tax Administration before the promulgation of the Law no. 7740?

The main controversy issue was: Is it possible for the transferee company to deduct financing expenses related to the borrowing utilized for the acquisition of the participation shares from its own corporate income following the merger?

The Revenue Administration’s approach was against the taxpayers and in the direction to reject this deduction mechanism. In general, tax courts have also ruled against the taxpayers during the cases initiated regarding the above summarized tax deduction mechanism.

What are the new tax rules introduced by the Law No. 7740?

Through the amendment introduced to Article 5/3 of CTC, it is regulated that financing expenses related to the acquisition of the participation shares may be deducted following tax neutral merger transactions to be conducted in line with Article 19 of the CTC.

We believe that this new regulation should be considered during any potential company restructuring projects and new investment plans.