E&Y Tax Marathon 2016 Case Study Tax advice on fiscal transactions of Istanbul Inc.

Plan 1. Tax liability of Istanbul Inc 2. Dividend yields 3. Share sales transaction 4. Capital increase 5. Provisions 6. Real estate transfer

1. Tax Liability of Istanbul Inc 1.1 Law applicable: Articles 1 and 2 of the Corporate Tax Law Conclusion: Istanbul Inc. is a full liability tax payer. => Taxation to be made for its world-wide income by Turkey 1.2 Law applicable: Article 172 and 177 of the Tax Procedure Law Conclusion: Istanbul Inc. is subject to balance-sheet basis.

2. Dividend yields Dividend income from Amsterdam BV Dividends from Rome Srl Profit made by Mann Limited

Taxation of dividends from Amsterdam BV Application of Dutch withholding dividends tax rate (15%) to the period dividend of EUR 12.000.000 - Articles 10, 23 and the annexed protocols of the Double Taxation Treaty between Turkey and the Netherlands Limits to the Dutch taxation: 15% or 5% ? Exemption method preferred for the elimination of double taxation (Art. 23 of the DTT) Articles 5-1-b; 7 and 33 of the Turkish Corporate Tax Law “Can the exemption under Article 5-1-b apply?” and “Is Article 7 (CFC regime) applicable?” Non-Application of Article 33

Taxation of dividends from Rome Srl. Actual amount of the period dividend to be discovered after application of the Italian corporate tax rate (27,5%) to the whole profit of EUR 4.000.000 Italian withholding dividends tax rate applied (25% or less?) Articles 10, 23, 28 and the additional protocols of the Double Taxation Treaty between Italy and Turkey Limits to the Italian taxation: 15% Right to claim credit from the Italian taxation authority if more than 15% applied Credit method preferred for the elimination of double taxation Reference to Article 33 of the Turkish Corporate Tax Law - impossibility for the deduction Turkish Council of State rejects the deduction as per Article 33 for taxes paid in Italy if conditions not met => risk of unavoidable double taxation for Istanbul Inc. Exemptions under Article 5-1-b and CFC regime can’t be applied either

Taxation of the profit earned through Mann Limited Non-Applicability of the general provisions of the Turkish Corporate Tax Law Application of the CFC regime by virtue of Article 7 of the Corporate Tax Law 50% of Mann Limited shares held by Istanbul Inc. Is “passive income criterion” fulfilled? Is “effective tax rate” on the Isle of Mann less than 10%? Gross revenue exceeds TRY 100.000

3. Share sales transaction Article 13 of Italy-Turkey Double Taxation Treaty Can exemption under Article 5-1-c of the CTC apply? Yes if; Istanbul Inc. is an international holding company Istanbul Inc. holds at least 10% of the shares of the foreign companies (other than Rome Srl.) for 1 continuous year. Other conditions are already met Application of the exemption of 75% under Article 5-1-e of the CTC Possible: All conditions are met Istanbul Inc. can choose not to use it; given that it is in need of cash flow

A new legislation: Incentive for capital increases in cash Possible for TRY 12.500.000 of the capital increase Slight chance of application of Article 12 for the remaining part (TRY 7.500.000) Exemption under Article 5-1-ç may apply

5. Provisions Receivable from Ankara Inc “Postponement of bankruptcy is sufficient ground for the receivable to be spared provision” Receivable from Izmir Inc “A debt secured is not available for being made provision” “Security may be partial; or its foreclosure by virtue of Execution and Insolvency Law may be unsuccessful.” => Provision possible

6. Real estate transfer Taxation of the income derived will be made under general provisions (%20 CTR applies) Reference to ‘real estate transfer’ in the AoA of Istanbul Inc Istanbul Inc in the business of real estate trade? Or a ‘safety valve’ from ‘ultra vires’ for the old Turkish Commercial Code? Exemption under Article 5-1-e of the Corporate Tax Law is possible. Taxation of the ‘transaction’ under VAT Law and exemption of Article 17-4-r apply Exemption from taxation recognised within the Stamp Tax Law A statutory fee applies for the transaction at the Land Registry by virtue of the Statutory Fees Law

Thank you Burak Keskin