Termination of Co-ownership

Does VAT Apply When Shareholders Are Buyers in Partition Sales (Liquidation of Co-ownership)?

Partition sales, also known as "izale-i şüyu" in Turkish, refer to a type of lawsuit that terminates the existing ownership relationship among co-owners of immovable or movable property, allowing for individual ownership. If the division of jointly owned or co-owned assets is not possible, a decision may be made to liquidate the co-ownership through a sale.

According to Article 1/3-d of the Value Added Tax Law No. 3065, all types of sales, including auctions, negotiations, and other forms of sales conducted in auction venues, due to partition sales (izale-i şüyu), are subject to VAT. The provisions of the law regarding exemptions and tax rates are also applicable to these sales.

According to Article 6.1 of the General Application Communiqué on Value Added Tax, if one of the buyers in a partition sale is a shareholder, there will be no transfer of ownership for that share, and this portion will be deducted from the tax base and not subject to taxation.

To illustrate with an example, if you own a 2/10 share of a real estate property and you purchase a 5/10 share through a partition sale, taxation will only be applied to the 3/10 share, and the 2/10 share will be deducted from the tax base.

Transfer of Shares Among Shareholders and VAT

If the shareholders of the property subject to partition sales transfer their shares to each other by purchasing the property, this will not be considered a separate sale. Instead, taxation will be based on the total increase in the shares held by the shareholders resulting from the partition sale.

For example, in a partition sale of a property where the shareholders are K1 with a 7/10 share, K2 with a 1/10 share, and K3 with a 2/10 share, if K1 and K2 purchase equal 5/10 shares each, only the 2/10 share transferred from K3 will be subject to VAT. The transfer of K1's 2/10 shares to the other shareholder will not be subject to taxation in this context.

In a similar vein, the 4th Chamber of the Council of State (Danıştay) ruled in its decision dated April 14, 2016, with reference numbers E. 2015/6931 and K. 2016/1625, that in an auction for the liquidation of co-ownership of a property, where four out of five shareholders purchased the property by paying an equal amount, considering the delivery of a single property as a taxable transaction and determining the VAT base as the final sale price of that property, the individual proportions of the purchase amount paid by the buyers would not affect the calculation of the VAT base for that transaction.

In conclusion, if shareholders purchase the property through partition sales, no VAT will be paid for their respective share proportions. However, if the shares of a non-buying shareholder are acquired, VAT will only apply to that specific share.