Company Divisions in Türkiye: Current Legislation, Trends and Strategies

Prevailing conditions in Türkiye are prompting companies to reassess their structures. One of the most powerful tools in this transformation is the “company division” (demerger). In recent years, small, medium and large enterprises alike have increasingly resorted to this route. So, what exactly is a company division, why have companies preferred this strategic move in recent years, and what legal points should they consider when doing so?

Reasons for the Rise in Company Divisions

A company division is a restructuring whereby an existing commercial company transfers its assets, rights and liabilities to one or more companies. The process is regulated in detail under Articles 159 to 179 of the Turkish Commercial Code No. 6102 (“TCC”) and plays a critical role in enabling companies to meet strategic objectives and adapt to changing market conditions.

The main drivers behind the increase in division transactions are:

Adapting to Economic Conditions: Economic uncertainties such as high inflation and exchange-rate volatility force companies to control costs and manage risks. Accordingly, companies can allocate operating risks and liabilities by separating risky and/or differently regulated lines of business from the parent through division. When properly used, together with other tools within a comprehensive legal and tax structuring and strategic planning, it can even help prevent the risk of capital loss, over-indebtedness or technical insolvency.
Efficiency and Specialization: Very large and/or multi-line businesses may experience efficiency losses over time. A division allows a company to focus on its core business, enables each line to operate more efficiently within its area of expertise, and helps generate added value. Thus, in today’s fiercely competitive environment, companies that have grown substantially and drifted from their core activities are frequently observed to choose this path.
Easing Management: In very large, complex and multinational groups, coordination and management challenges may arise among different lines of business. A division can separate these lines, simplify management and allow each to focus better on its own strategy.
Attracting Investment: In certain cases, a business line and/or asset group separated through a division can obtain financing more easily or establish strategic partnerships as a standalone company. We also see cases where the goal is to enhance the growth potential of the separated unit on its own.
Resolving Shareholder Disputes: Especially in family-owned and widely held companies, differences of opinion, inheritance issues or divergent strategic visions can be resolved through division, often at an early stage of the dispute, without resorting to litigation.
Regulatory Incentives: Where the conditions set out in Articles 19 and 20 of the Corporate Tax Law No. 5520 (“CTL”) and the relevant communiqués are met, company divisions are exempt from corporate income tax, VAT, stamp tax and fees. These tax advantages make division an economically attractive restructuring method. Although, pursuant to amendments introduced by Law No. 7456, “immovables” have been excluded from tax-free partial divisions as of 1 January 2024, prompting companies to reassess their division strategies, “equity participation” and “manufacturing and service businesses” can still be structured tax-free. For this reason, companies continue to use partial division as a strategic tool.

Permissible Divisions and Types of Company Division

Under the TCC, capital companies (joint-stock and limited liability companies) and cooperatives may divide into other capital companies and cooperatives. Partnerships (non-corporate companies) cannot divide among themselves, nor can capital companies divide into partnerships or vice versa.

The TCC recognizes two main types of company division:

a) Full Division

All assets of a company are split into parts and transferred to at least two companies.
The dividing company dissolves without liquidation.
The shareholders of the dividing company acquire the shares and rights of the transferee company(ies).
Since the dividing company ceases to exist, there is no capital decrease.

b) Partial Division

One or more parts of a company’s assets are transferred to another company.
The dividing company continues to exist and operates with the remaining assets.
A partial division may be implemented either by issuing the transferee company’s shares to the shareholders of the dividing company, or by having those shares remain with the dividing company itself (formation of a subsidiary).
Where shares are allotted to shareholders, a capital decrease may be required (not required where a subsidiary is formed).

In both full and partial divisions, the relevant asset parts may be transferred to an existing company (“company division by acquisition”) or to a newly formed company (“company division by formation of a new company”). It is also possible to transfer part of the assets to an existing company and the remainder to a new company.

In a company division by acquisition, to allocate shares of the transferee company(ies) to the shareholders of the dividing company, the transferee company(ies) may need to increase capital to a level that protects shareholders’ rights. Such increase is carried out by capital subscription and applies to both symmetric and asymmetric divisions.

Divisions are also classified by how shares are allotted to shareholders; symmetric (shareholding ratios are preserved) and asymmetric (ratios are not preserved). As a rule, both types are subject to the same provisions; however, an asymmetric division must be approved by at least 90% of the votes of shareholders with voting rights in the transferring company. This distinction exists because asymmetric divisions may create risks for minority shareholders.

Points to Consider in Company Divisions

Division transactions are regulated in a highly comprehensive manner to ensure legal certainty and enhance transparency. Therefore, a division requires a detailed legal and tax pre-assessment.

Protection of Creditors and Employees: Since a division transfers part of the assets that serve as security for creditors, it entails the risk of changes to the debtor and to collateral. The TCC contains rules designed to balance this risk, including public calls/notices to creditors, securing the claims of creditors who so request, and joint and several liability among companies participating in the division. Similarly, in respect of employees, there are rules under which the former employer and the transferee employer are jointly and severally liable for employee claims.
Legal Process Management: A decision to divide a company requires careful process management under the TCC. The process begins with the management bodies preparing the division plan or agreement. This is followed by the division report, (in certain cases) an interim balance sheet and the relevant financial statements; shareholders are granted a right of inspection to ensure transparency. Creditors are called by way of public notice and, where necessary, security is provided. After obtaining general assembly approval, the process becomes legally effective upon registration with the trade registry.
Need for Tax Assessment: In a full division, losses of the dividing entity that do not exceed its equity may be deducted from the profits of the transferee entities. However, for such loss carry-overs to be allowed, conditions such as the dividing entity having filed its corporate tax returns for the last five years within the statutory deadlines and the activities of the transferred or dividing entity continuing for at least five years as of the fiscal period in which the division takes place, must be satisfied. Strict compliance with all statutory conditions is essential to benefit from these advantages. In a partial division, unlike a full division, carry-over of prior-year losses from the dividing entity to the transferee is not permitted. This shows that partial divisions are more restrictive in terms of loss deductions and is an important distinction companies must consider in planning. Moreover, in partial divisions, capital decreases may be subject to taxation in certain circumstances. Consequently, to benefit from the tax advantages of the process, the transaction must also be structured following a thorough tax analysis.

Conclusion and Recommendations

In conclusion, supported by the legal framework and certain incentives provided by the legislation, company divisions are a restructuring tool frequently used by companies to adapt to changing economic conditions and strategic objectives. However, given the complexity of these processes, their legal risks and operational challenges, it is crucial that companies conduct a detailed assessment before deciding to divide and carefully examine current legislation and legal precedent.

Although partial division is often preferred in practice due to its flexibility, different division options address different needs. Therefore, in each case the most appropriate path should be determined in line with the company’s long-term strategic interests. With such a comprehensive assessment, companies can mitigate potential risks and derive maximum benefit from division processes.