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To encourage mergers and acquisitions and thereby the restructuring of companies in Turkey, certain tax advantages to merging companies have been regulated under the relevant tax regulations. The banking crisis in 2001 has prompted the Banking Regulation and Supervision Agency (BRSA) to encourage restructuring of the banking system and strengthen the financial structure of banks by setting out certain benefits in its regulations for merging banks under the Regulation on the Merger and Acquisition of Banks (the Regulation).

The Regulation grants that, if the merging banks both have licence/authority to accept deposits, (a) upon a decision of the BRSA board, the Turkish Central Bank, during the merger and/or acquisition process, may make refunds from the deposit reserves that had been deposited by the merging banks with the Central Bank or may postpone their obligations to make such deposits with the Central Bank; and (b) the BRSA may reduce the savings deposit insurance premium payment obligation of the new merged bank by half, for two years after the announcement of the approval to the merger in the Official Gazette.

In addition to this, pursuant to the Corporate Tax Law, profits arising from merger transactions are exempted from corporate tax, provided that the relevant procedures under the Corporate Tax Law are complied with. Also, the profits arising from spin-off and share exchange transactions do not give rise to taxation of capital gains provided that the stipulated conditions are fulfilled.

Transactions regarding spin-off are fully exempt from stamp taxes. Additionally, several stamp tax exceptions are identified with regard to transactions deriving from acquisitions; such as the stamp exception regarding capital increases. Mergers, acquisitions, and spin-off of joint stock corporations are free from any charges. Banks can also benefit from these general exemptions available under the relevant tax legislation.

In the Corporate Tax Law there are provisional articles stating that: (i) the previous year's deductible losses of the dissolved entity in a merger transaction, as reflected in the last balance sheet, can be deducted from the new merged entity's corporate income to the extent no deferral is made for more than five years; and (ii) certain agreements/documents signed in relation to a merger transaction would be exempt from stamp tax obligation. This exemption was available until the end of 2004; however, the government previously extended the term of this exemption.

Being subject to strict regulatory requirements recently, Turkish banks started to restructure their assets and to seek strong partners who will assist them to grow in a more competitive and regulated environment. Coupled with the effect of recent promising economic and political developments in Turkey and the growth potential of the Turkish banking sector, it seems that Turkish banks and their shareholders will be able to pull off large transactions in 2005. According to a report prepared by the BRSA dated October 2003, the total asset value of merging banks was about $26.5 billion. It is expected that this number will increase considerably taking into account the recent positive trend. Therefore, tax and benefits in merger transactions will be of special interest to parties while negotiating and discussing restructuring and merger models.

Piraye Kuranel

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