The foreign subsidiary share sale exemption under Turkey’s Corporate Tax Law allows Turkish resident joint-stock companies to exclude from taxation the capital gains arising from the sale of shares in their foreign subsidiaries, provided that specific legal requirements are met.
The main objective of this exemption is to reduce the tax burden on Turkish companies when divesting foreign participations, thereby promoting international capital mobility and encouraging the repatriation of investment proceeds to Turkey.
Conditions for the Exemption in Turkey
Pursuant to Article 5/1-c of the Turkish Corporate Tax Law (Law No. 5520), the following conditions must all be met simultaneously for the exemption to apply:
- Seller Company:
The seller must be a Turkish resident joint-stock company (anonim şirket).
Limited liability companies and non-resident entities are not eligible for this exemption. - Type of Subsidiary:
The shares being sold must belong to a foreign company organized as a joint-stock or limited liability company that is not a Turkish tax resident. - Asset Composition:
At least 75 percent of the seller’s non-cash total assets must consist of such foreign subsidiary shares for a minimum period of one year before the sale.
This condition demonstrates that the company’s principal activity is the management of participation investments. - Minimum Holding Period:
The shares must have been held in the company’s assets for at least two full years (730 days) prior to disposal. - Ownership Threshold:
The Turkish company must own at least 10 percent of the paid-in capital of each foreign subsidiary whose shares are sold.
If any of these criteria are not met—such as the ownership ratio being below 10 percent, or the holding period being shorter than two years—the exemption does not apply.
Application and Interpretation
This exemption significantly reduces the Turkish corporate tax burden on capital gains realized from the sale of foreign subsidiaries.
It is available only to Turkish joint-stock companies; limited liability or non-resident entities cannot benefit.
The rule that at least 75 percent of total non-cash assets must consist of foreign shareholdings ensures that the company’s core activity is participation management.
If this ratio falls below 75 percent, the exemption is forfeited.
This mechanism reflects Turkey’s policy of encouraging cross-border investment and facilitating capital restructuring.
By eliminating additional taxation at the point of exit, it aligns Turkish law with international standards supporting outbound investment and global competitiveness.
Example
A Turkish joint-stock company holds three subsidiaries in Europe, which together make up 80 percent of its non-cash assets.
One of these subsidiaries has been held for more than two years, and its sale results in a capital gain of TRY 10 million.
Since all statutory conditions are satisfied—ownership above 10 percent, holding period over two years, and asset ratio above 75 percent—the entire gain is exempt from corporate tax in Turkey.
If, however, the ownership share were below 10 percent or the non-cash asset ratio dropped under 75 percent, the exemption would not be available.
Legal Basis
The Foreign Subsidiary Share Sale Exemption is regulated under Article 5/1-c of the Turkish Corporate Tax Law (No. 5520).
This provision was introduced to facilitate the disposal of international shareholdings by Turkish corporations, to reduce the domestic tax cost of such transactions, and to reinforce Turkey’s role as a regional investment and holding center.
It complements other participation-related exemptions, such as those for foreign subsidiary dividends and foreign branch income, providing a cohesive framework for international operations of Turkish-resident companies.
For professional assistance with capital-gain exemptions, cross-border structuring, or tax-efficient exit strategies in Turkey, reach out to ÖzbekCPA.
