The Law on the Amendment to the Income Tax Law and Certain Laws (the "Omnibus Bill") entered into force upon its publication on the Official Gazette No. 30836 dated July 19, 2019. The Omnibus Bill includes provisions for financial restructuring and tax related matters.
We discussed the Draft Law on the Restructuring of Debts Owed to the Financial Sector prepared by the Banking Regulatory and Supervisory Authority in our Client Alert dated May 13, 2019. The legislative preference, however, has been to include provisions related to financial restructuring (the "Restructuring Provisions") in the Banking Law No. 5411 with the Omnibus Bill rather than having a standalone restructuring law.
The Restructuring Provisions will be applicable for two years from the enactment date. The President will be entitled to extend the term for an additional two years.
- Creditors' undertaking of financial restructuring (previously regulated under the Regulation on Restructuring of Debts Owed to the Financial Sector (the “Regulation”)) is now regulated by law by virtue of the Restructuring Provisions. The Restructuring Provisions refer to the Regulation and the framework agreements for the procedure and principles of financial restructuring.
- The Restructuring Provisions' definition of "creditors " include Turkish banks; financial leasing, factoring and finance companies; non-resident banks; other financial institutions which have directly lent to a Turkish resident borrower and multinational banks; institutions which have directly invested in Turkey and SPVs established by these institutions to collect receivables; and investment funds established for the same purpose.
- The Restructuring Provisions enable creditors to take various measures within the scope of financial restructuring, including but not limited to term extension, provision of new loans, write-down and conversion of debt into equity.
- In line with the Regulation, the Restructuring Provisions clarified that in order for debtors to benefit from financial restructuring, debtors are expected to be able to repay their debts within a reasonable period. The independent auditing firms or institutions referred to under the framework agreements, or if agreed by the debtor, the creditor institutions, will review the debtor's financial status.
- The Restructuring Provisions explicitly state that banks' reduction of collaterals, write-offs of the principal amount and other receivables and similar transactions to restructure loans will not constitute criminal actions, i.e., embezzlement.
- In accordance with the Restructuring Provisions, banks are required to adapt policies regarding sufficient reserves for loans; classification of the loans; acquisition of enough collateral and guarantees and their assessment of reliability; and write-off and repayment of loans, including their restructuring. Banks are also required to establish the necessary structures to apply these policies.
- The special reserves set aside for loans in accordance with the Restructuring Provisions will be considered expenses for calculation of corporate tax assessment.
- The Restructuring Provisions also provide a number of tax exemptions for the transactions and documents to be entered into within the scope of financial restructurings. These include but are not limited to the exemption from stamp tax; the resource utilization support fund; the banking and insurance transaction tax; and other levies and charges. However, if the debts of a debtor who has gone through financial restructuring become subject to financial restructuring again within two years, these tax exemptions will not apply.
- The tax exemptions will not apply to the disposition of assets and collaterals acquired within the scope of financial restructuring agreements, except for transfers between creditors and/or the debtor.
- The corporate income tax exemption provided under Article 5/1-f of the Corporate Income Tax Law will apply to those who transfer their related assets to creditor institutions within the scope of framework agreements and financial restructuring agreements, without the legal proceedings requirement; as well as to the income derived by credit instructions by the sale of these assets they acquired this way.
- The VAT exemption provided under Article 17/4-r will apply to the transfer of the related assets to creditor institutions within the scope of framework agreements and financial restructuring agreements; as well as to the transfer of these assets by credit instructions who acquired these assets this way.
- Tax exemptions will be applicable without being subject to the two-year time limit and they will not need to be returned even if the transactions foreseen cannot be realized.
- Loans written-down due to the inability to collect will be considered “bad debt” under the Tax Procedural Code No. 213, on the condition that a special reserve is set aside for such loans.
The Restructuring Provisions incentivize financial institutions to undertake financial restructurings