Share Transfer and Taxation

Tying the shareholding to an instrument

Shares in a Turkish joint stock company can be transferred without being embodied in a negotiable instrument. For tax purposes, however, what matters is whether the shares have been tied to a share certificate or an interim certificate. Where no share certificate has been printed, the gain on a transfer may be taxed as a capital gain regardless of how long the shares were held.

Printing share certificates requires a board resolution and costs very little. It cannot be done retrospectively after a transfer. The decision therefore belongs on the agenda before sale negotiations begin, not during them.

The two-year holding period

Turkish income tax legislation excludes from capital gains the disposal of share certificates in a fully liable resident company that have been held for more than two years. In practice: a shareholding embodied in a share certificate and held for more than two years is, as a rule, not subject to income tax when sold by an individual shareholder.

The period runs from the acquisition of the certificate, not of the shareholding. Under the tax administration’s settled practice, transferring interim certificates counts as transferring share certificates, and where an interim certificate is later exchanged for a share certificate the original acquisition date is preserved. That makes the interim certificate a practical way to start the clock before share certificates are printed.

• The period runs from acquisition of the certificate, not of the shares
• Interim certificates are issued in registered form and exchanging them does not restart the clock
• Shares acquired through a bonus capital increase need a separate acquisition-date analysis
• Corporate shareholders are subject to a different exemption with its own conditions

Limited companies: notarisation alone is not enough

The transfer of a limited company share is one of the most frequently left-unfinished transactions in practice. The transfer agreement must be in writing and the signatures notarised — but that does not complete the transfer.

Unless the articles provide otherwise, the transfer takes effect against the company only with the approval of the general assembly. It must then be entered in the share ledger and registered and announced with the trade registry. A transfer agreement signed before a notary but never approved by the general assembly creates obligations between the parties without making the transferee a shareholder. The gap usually surfaces years later, over a dividend distribution or a vote at a general assembly.

Taxation of limited company shares

Limited company shares cannot be embodied in negotiable instruments, so no share or interim certificate can be issued for them. The two-year exemption available to joint stock companies therefore does not apply, and a gain on transfer is treated as a capital gain irrespective of the holding period.

Where a shareholding is expected to be sold in the longer term, choosing a joint stock company at the outset — or converting well before any sale — removes a difference that cannot be repaired afterwards.