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New law on bank mergersHerguner Bilgen & Ozeke Istanbul

Accelerating the pace of bank reform in Turkey has become crucial, after fears fuelled by a criminal investigation into 10 failed banks under government administration. The investigation led foreign investors in December to sell both Turkish treasury bills and shares, igniting a liquidity crisis that was ultimately stayed by the announcement of $10 billion in new International Monetary Fund (IMF) loans. As part of Turkey's commitments to the IMF under its stand-by arrangement, Turkey has recently passed legislation to encourage bank mergers and acquisitions. A law amending the Corporation Tax Code was adopted at the end of November to encourage merger or acquisition transactions, with the hope of strengthening Turkish banks and making them more competitive internationally.

This law, which will be effective until December 31 2003, introduced an exemption from the corporation and income tax liabilities that may arise from the merger or acquisition of a bank actively carrying out operations in Turkey. The law included a further exemption from liability for stamp tax, insurance and banking taxes that arose from eligible transactions before the corporation tax code was amended.

Any bank that is to merge or be acquired by another bank or a group of banks must obtain the official permission of the Banking Regulation and Supervisory Agency, and the transaction must be initiated within three months of this approval. Should the bank fail to complete the approved transaction within 18 months, it will be liable retroactively for all relevant tax obligations.

Another exemption in the Corporation Tax Code is for a bank that merges with, or acquires the assets of, an insolvent bank under the control of the Savings Insurance Deposit Fund. The acquiring or merging bank can deduct as a loss from its income for up to five years the amount shown in the most recent balance sheet of the insolvent bank issued before the merger or the acquisition.

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