New developments
Law No. 7440 on Restructuring of Certain Receivables and Amendments to Certain Laws ("Law No. 7440"), published in the Official Gazette dated 12 March 2023, allows financing costs incurred for the share purchase to be deducted from the corporate income tax base at the acquired company if the loan is transferred to that company through a merger.
What is transferring loans for the share purchase to the acquired company (debt pushdown)?
Acquisitions can take place through the purchase of the target company's shares by a special purpose vehicle (SPV) instead of acquiring the target company's shares directly. It is common for such acquisitions to be financed through loans. Transferring the loans obtained for the share purchase to the acquired company, also called debt pushdown, refers to recognizing the financing costs related to the share purchase as an expense in the acquired company after the merger with the SPV.
Before the amendment, Article 5/3 of the Corporate Income Tax Law allowed the financing costs incurred regarding the share purchase at the SPV level to be deducted. However, deducting these financing costs from the new company's business profit was not allowed in the case of a merger of the SPV and the acquired company.
What does Law No. 7440 mean?
Article 20 of Law No. 7440 amended Article 5/3 of the Corporate Income Tax Law. Accordingly, financing costs related to the share purchase can be deducted from the business profit at the new company after the merger with the acquired company under Article 19 of the Corporate Income Tax Law. Therefore, the costs related to the loans used for acquiring shares can be recognized as expenses in determining the new company's business income after the tax-free merger of the acquired company and the SPV.
This amendment applies to the income and profits generated as of 1 January 2023.
Conclusion
Allowing the debt pushdown, by which financing costs are recognized as an expense in the acquired subsidiary through the transfer of loans by a merger, provides a significant tax advantage for financing acquisitions through loans. We expect this advantage to increase the use of loans in acquisitions.
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