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Exception application regarding sponsorship expenditures, donations and aids in Turkish Corporate Tax

24.06.2021

Sponsorship expenditures, donations and aids made by corporations will be taken into account as a deduction in the determination of the corporate tax base within the framework of the explanations below.

In the event that donations and aids are not made in cash, the cost value or registered value of the donated goods or rights, and if this value is not available, the value to be determined by the valuation commissions according to the provisions of the Tax Procedure Law shall be taken as basis.

Since the sponsorship expenditures, donations and aids made by the corporations are considered as expenses in the records on the date of the expenditure or donation and aid, it must be deducted from the corporate tax base, provided that it is shown separately on the declaration, within the framework of the explanations in this section, in case the said expenditures, donations and aids are taken into account as non-deductible expenses in the determination of the corporate income and the corporate income is sufficient.

– Sponsorship expenditures

All for amateur sports branches and 50% for professional sports branches can be deducted from the declared corporate income in the determination of the corporate tax base determined in accordance with the aforementioned laws of the sponsorship expenditures within the scope of the Law No. 3289 on the Organization and Duties of the General Directorate of Youth and Sports and the Law No. 3813 on the Establishment and Duties of the Turkish Football Federation.

Sponsorship expenditures are expenses that are not directly related to the commercial gain or cannot be measured, and their social purpose is prominent and differs from the advertising expenditures that are directly related to the commercial gain.

Provided that the name of the sponsoring institution is mentioned; the following expenses will be considered as sponsorship expenses:

  • Field, hall or facility rental fees for official sports organizations,
  • Subsistence, travel and accommodation expenses of the athletes,
  • The cost of sports equipment,
  • Expenditures in kind and in cash for sports facilities to be deemed appropriate by the General Directorate of Youth and Sports,
  • Reference fees that will enable the transfer of athletes,
  • Premium payments in cash and in kind to athletes or sportsmen according to the results of sports competitions

With the help of written or electronic signals on the sportswear or sports equipment of the athletes or other interested persons in the sports fields, expenditures that provide direct commercial benefit and aim to promote the corporation, such as placing emblems, brands, names and similar signs that will enable the promotion of the corporation virtually, will be considered as advertising expenditures.

In addition, it is possible to separate the expenditures made due to the transactions that include the purpose of advertising and promotion in addition to the sponsorship activities as advertising and sponsorship expenditures, provided that they are specified in the contract and are in accordance with the precedent. For example, expenditures related to advertising activities can be separated from the reference fee, provided that they are specified in the contract and are in line with their precedents, and will be considered as advertising expenses, if an institution transfers an athlete to a club by paying a reference fee, and also uses it in advertisements for the promotion of the company or its products.

The procedures and principles regarding the sponsorship application are regulated in the General Directorate of Youth and Sports Sponsorship Regulation published in the Official Gazette dated 16/6/2004 and numbered 25494. Accordingly, real and legal persons can be sponsor to federations, youth and sports clubs or athletes within the scope of the procedures and principles specified in the aforementioned Regulation regarding sports facilities and activities.

According to the Article 8 of the regulation, a written contract must be made between the parties – one of them is sponsor and the other one is receiving sponsorship services- which includes the rights and obligations of both parties. The person, institution or organization receiving the sponsorship service is authorized to make a contract with the sponsors. The information to be included in the contract to be made is specified in the mentioned article.

As can be seen from the examination of articles 4 and 13 of the regulation, there is no special regulation that the supports given in kind or in cash to the persons, institutions and organizations receiving the sponsorship service must be bound to the documents prepared in accordance with the Tax Procedure Law.

In Article 4 of the aforementioned Regulation, “document” is the document regarding sponsorship and advertising services and transactions. “Cash support” is the monetary payment made by the sponsor to the person receiving sponsorship service. “In-kind support” is defined as expenditure related to the purchase of goods and services made by the sponsor in connection with the sponsorship business.

In the 12th article of the regulation, it is stated that the sponsorship fee incurred in connection with the service and work subject to the sponsorship can be spent by the sponsor himself or it can be deposited into the account of the person receiving sponsorship service, and that the provisions of the legislation to which the person receiving sponsorship service is subject will be applied for the expenditures related to this amount, which is recorded as income by the person receiving sponsorship service.

If a cash support is provided by the sponsors to the persons, institutions and organizations receiving the sponsorship service and this support is deposited into a bank account opened on behalf of the service recipients, the document or receipt to be given by the banks for the amounts deposited to the sponsors must be accepted as the proof of the donation. However, a statement stating that the money has been deposited “for sponsorship purposes” must be included in the bank statement or receipt.

In case the aforementioned cash support is delivered in cash to the sponsor service recipients, the receipt to be issued by the persons, institutions and organizations receiving the service can be accepted as a supporting document regarding the donation.

On the other hand, if the support is made in kind, not in cash;

  • In case the support in kind from the assets of the enterprise is delivered to the persons, institutions and organizations receiving the sponsorship service, it is obligatory to issue an invoice for the delivered values. In the invoice, it is obligatory to include information that cannot be left in doubt regarding the fact that the delivery is for sponsorship purposes and the type, nature and amount of the delivered values. The invoice must be issued on behalf of the service recipients and the back of the invoice must be signed by the service recipients or their legal representatives.
  • In case the in-kind values are donated by the taxpayers to those who receive sponsorship services from outside, it is obligatory that the receipt is issued for these values to be received by the service recipients and that the values, type, quantities, number, etc. of the donated assets must be included in the receipt.

In addition, the back side of the invoices issued on behalf of the taxpayers regarding the donated values must be signed by the person or legal representatives who receive the service within the above-mentioned explanations.

However, it is not possible for taxpayers to consider donations or aids made without a receipt as a discount.

Expenditures made in cash or in kind within the scope of the Sponsorship Regulation can be considered as a deduction by corporate taxpayers in the year in which the expenditure is made.

There is no obligation to submit any documents attached to the aforementioned declarations for the reduction of sponsorship expenditures, the scope of which is stated above. Not only real and legal persons cannot be sponsors indefinitely but also they should not have any tax liabilities. Therefore, corporations must apply to the tax office to which they are affiliated, receive a letter stating that they do not have tax debt, and submit a copy of the sponsorship agreement to the relevant tax office in order to become a sponsor.

If sponsors fail to pay their tax liabilities accrued during the sponsored periods, the relevant tax office will immediately notify the Provincial Directorate of Youth and Sports with a letter.


Source: Revenue Administration of Republic of Turkey – Translated by Karen Audit – The rights of this translation belong to KarenAudit and unauthorized use is prohibited.
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.


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R&D Deduction in Corporate Tax in Turkey

24.06.2021

R&D Deduction

Subparagraph (a) of the first paragraph of Article 10 of the Law No. 5520 regarding the R&D deduction application was repealed as of 9/8/2016 in accordance with the provision of Article 57 of the Law No. 6728.

With the 60th article of the Law No. 6728, Article 3/A was added to the Law No. 5746. In Article 3/A of the Law No. 5746, R&D discount is regulated for the R&D and innovation activities carried out by income and corporate taxpayers within their businesses. Accordingly, 100% of the amount of research and development expenditures made by income and corporate taxpayers, exclusively for the search for new technology and information, within their businesses, will be deducted in the determination of earnings, in accordance with Article 10 of Law No. 5520 and Article 89 of Law No. 193, provided that the projects within this scope are evaluated as R&D and innovation projects by the Ministry of Science, Industry and Technology of Republic of Turkey.

As of 9/8/2016, in the application of discounts regarding research and development projects for the search for new technology and information, which are the subject of applications made within the scope of Article 3/A of the Law No. 5746, the R&D discount will be utilized by taking into account the Law No. 5746 and related regulations. On the other hand, regarding the projects that are the subject of applications made within the framework of the regulations of this Communiqué before 9/8/2016, R&D discount will be used According to the provisions of subparagraph (a) of the first paragraph of Article 10 of the Corporate Tax Law before it was amended by Law No. 6728.


Source: Revenue Administration of Republic of Turkey – Translated by Karen Audit – The rights of this translation belong to KarenAudit and unauthorized use is prohibited.
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.


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Controlled Foreign Corporation Earnings in Turkey

21.06.2021

1- Controlled Foreign Corporation Earnings

According to Article 7 of the Corporate Tax Law, it is accepted that taxpayers who invest in foreign subsidiaries under certain conditions are paid dividends in terms of tax applications, even if no actual dividends are distributed from these subsidiaries, and in this way, it is ensured that the earnings of these subsidiaries are subject to corporate tax in Turkey.

The concept of controlled foreign corporation refers to foreign subsidiaries that fully taxpayer real persons and corporations directly or indirectly control separately or together by owning at least 50% of their capital, dividends or voting rights.

With the expressions “directly or indirectly” and “separately or together” mentioned in the article, it is prevented that the partnership shares of the foreign subsidiary are shared between group companies or real persons, and going out of the scope is below the control rate specified in the article.

Example 1: Corporation (A), which is a full taxpayer in Turkey, participates 100% in the capital of Corporation (B) established in Country (S). 50% shares of Corporation (C) established in country (T) belong to Corporation (B). In this case, since Corporation (A) participates in Corporation (C) indirectly (100% x 50%=) 50%, Corporation (C) will be considered as a controlled foreign corporation if other conditions are also met.

 

Example 2: Corporation (A), which is a full taxpayer in Turkey, participates at the rate of 60% in the capital of Corporation (B) established in country (S). Corporation (C) established in the country (T) owns 50% of the shares of Corporation (B). Corporation (C)’s 20% share belongs to the real person (D), who is also a full taxpayer in Turkey. In this case, Corporation (A) participates in Corporation (C) indirectly (60% x 50%) by 30%. On the other hand, considering that the natural person (D) also directly participates in the Corporation (C) at the rate of 20%, since the total participation rate of the Corporation (A) and the real person (D) in the Corporation (C) is 50%, so Corporation (C) will be considered as a controlled foreign institution if other conditions are also met.

On the other hand, whether a real person (D) is related to the Corporation (A), which is a full taxpayer in Turkey, has no importance in the practice of the controlled foreign corporation.

When determining the controlled foreign corporation, if the indirect subsidiary relationship has several stages, partnership relations will be taken into account until the last indirect subsidiary.

1.1. Controlled foreign corporation

In order for a corporation abroad to be considered a controlled foreign corporation, at least 50% of the capital, dividend or voting right of this institution must belong directly or indirectly, separately or jointly, to fully taxpayer real persons and corporations.

In determining whether the foreign subsidiary is a controlled foreign institution, the highest control ratio held at any time during the relevant accounting period will be taken into account.

If the entire share (capital, dividend or voting right) of the foreign subsidiary is disposed of without collusion at any date before the end of the accounting period of the foreign subsidiary, the provisions of this article shall not apply to the relevant foreign subsidiary.

1.2. Conditions regarding the corporate income of a foreign subsidiary to be subject to corporate tax in Turkey

The following conditions must be met together in order for the foreign subsidiaries that the aforementioned control ratio is achieved to be accepted as a “controlled foreign corporation” in the Corporate Tax Law application and therefore the corporate earnings of the controlled foreign subsidiaries to be subject to corporate tax in Turkey whether they are distributed or not.

1.2.1. 25% or more of the total gross revenue of the foreign subsidiary in the relevant year consists of passive income

25% or more of the total gross revenue of the foreign subsidiary in the relevant year must consist of passive income.

Passive incomes consist of income such as interest, profit share, rent, license fee, security sales income, excluding income from commercial, agricultural or self-employment activities carried out by capital, organization and employee employment proportional to the activity of the foreign subsidiary.

Income obtained from commercial, agricultural or self-employment activities, which are not proportional to the activities of the foreign subsidiary, through capital, organization and employment of personnel will also be considered passive income.

For example, let the composition of the gross revenue of the foreign subsidiary, which is a total of 100 units, be as follows;

– Commercial income obtained through capital, organization and employee employment proportional to its activity……………………………… ……….. 30 units
– Dividend ……………………………………….. …………………………. 10 units
– Interest ………………………………………….. ……………………………………… 50 units
– Securities’ trading income ………………………………….. 10 units

Accordingly, in order that the ratio of passive incomes (Dividend + interest + securities trading income) to total gross income (70/100=) is 70%, the condition specified for the controlled foreign corporation will be met.

In determining the nature of the passive income of the controlled foreign corporation, since the passive income characteristic of the dividends to be obtained by the said corporation from its subsidiaries will not change, it is of no importance that the subsidiaries of the controlled foreign corporation deal with active commercial activities.

1.2.2. Tax burden of foreign subsidiary

The corporate income of the subsidiary established abroad must be less than 10% of the total tax burden similar to income and corporate tax.

The tax burden will be determined according to the definition in subparagraph (b) of the first paragraph of Article 5 of the Corporate Tax Law. Therefore, the explanations made in the section (5.2.1.5) of the Communiqué regarding the tax burden will be considered.

1.2.3. Minimum gross revenue amount of foreign subsidiary

In order for the subsidiary abroad to be considered as a “controlled foreign corporation” in the application of the Corporate Tax Law, the gross revenue amount in the relevant year must be above 100,000.- TL equivalent in foreign currency. Subsidiaries of which total gross revenue in the relevant year is below this amount will not be considered as a controlled foreign corporation, even if all other conditions are met.

The foreign exchange buying rate announced by the Central Bank of the Republic of Turkey, which is valid on the last day of the accounting period of the relevant subsidiary, shall be taken as the basis for determining the TL equivalent of the revenue of the foreign subsidiary.

1.3. Controlled foreign corporation income to be included in the corporate tax base of full taxpayer corporations

The taxable income of controlled foreign corporations within the scope of this article will be corporate earnings before tax, after deducting expenses including loss deduction, before deductions.

In case the controlled foreign corporation does not have a distributable profit due to previous year losses, it will not be possible to mention taxable income in Turkey.

In the calculation of the income deemed to have been obtained from the foreign subsidiary, the shareholding rate of the foreign subsidiary at the end of the relevant accounting period (capital, dividend or voting right rate) will be taken into account.

In case the profit of the controlled foreign corporation is added to the capital, the said profit will be taxed in accordance with the provisions of the mentioned article.

In the event that full taxpayer corporations and real persons with full liability are also shareholders of the foreign corporation, the shares and participation shares held by the real persons will be taken into account in determining whether the foreign corporation is a controlled foreign corporation or not. In addition, the earnings to be obtained by the said real persons over the controlled foreign corporation will not be evaluated within the scope of this article, only the income obtained by the resident corporation will be subject to corporate tax within the scope of this article.

If the conditions of the controlled foreign corporation are fulfilled, the profit obtained by the subsidiary established abroad will be included in the corporate tax bases of the full taxpayer companies (and temporary tax bases as of the provisional tax periods) in proportion to their shares as of the accounting period of the said subsidiary’s accounting period. If there is an accounting period exceeding twelve months in the country where the controlled foreign corporation is located, the accounting period of the foreign company will be considered as the calendar year in determining the date of earning the profit.

On the other hand, it is not possible for the losses of the controlled foreign corporation to be taken into account in the determination of the earnings of the full taxpayer corporations participating in the said corporation.

Example 1:

The shareholding structure of the Company (CFC) abroad as of 20/5/2007 is as follows:

                Shareholder                                    Shareholder share

Full taxpayer real person (A) ……………………………… 40%

Full taxpayer corporation (B) ……………………………… 25%

Limited taxpayer real person (C) …………………………. 35%

The aforementioned company uses the accounting period of July 1 – June 30 in the country in which it is located. As of the end of the accounting period, the company’s corporate income is $200,000 and the corporate tax paid in the country it is based on is $10,000. The entire gross income of the company consists of passive income.

As of June 30, 2007, the full taxpayer corporation (B) has 5% of the shares of the aforementioned (CFC) Company in its assets.

Accordingly, 40% shareholder share held by full taxpayer real person (A) and 25% shareholder share of full taxpayer corporation (B) will be evaluated together as to whether the (CFC) Company is a controlled foreign corporation, and since the total participation rate of the fully taxpayer real person (A) and the full taxpayer corporation (B) to (CFC) company is 65% as of 20/5/2007, the (CFC) Company must be considered as a controlled foreign corporation for the 1/7/2006-30/6/2007 accounting period.

As of 30/6/2007, when the accounting period to which (CFC) Company is subject is closed, since the full taxpayer corporation (B) has 5% of its shares in its assets, as of this date, 5% of the company’s earnings will be deemed to have been earned by the full taxpayer corporation (B), whether it is distributed or not.

10,000 USD (200,000 x 5% =) calculated within this ratio will be considered as the profit share obtained by the full taxpayer corporation (B) as of 30/6/2007, and it will be included in the tax base of the second provisional taxation period. The tax [$500 (10,000 x 5% =) paid in the country where the foreign subsidiary operates] corresponding to the said income can be deducted from the corporate tax calculated in Turkey within the framework of the provisions in Article 33 of the Corporate Tax Law.

The earnings of the controlled foreign corporations, in which the full taxpayer corporations participate indirectly, will also be determined as the earnings of the foreign corporations in which they directly participate. According to the example, both companies, in which (A) A.Ş. participates, will be deemed to be controlled foreign corporations and the profits of both companies will be subject to tax in Turkey if the other conditions are met. After the profits of both companies are taxed in Turkey, in case of a profit distribution between the companies (For example, if CFC 2 distributes profits to CFC 1), the previously taxed CFC 2 profits will be taxed again in Turkey as CFC 1 profit will not be the matter.

1.4. Offsetting of taxes paid by the subsidiary abroad

According to Article 33 of the Corporate Tax Law, taxes such as income and corporate tax paid in the country where the foreign subsidiary is located can be deducted from the corporate tax calculated over the profit of the controlled foreign corporation to be taxed in Turkey.

However, it is not possible to deduct taxes, such as income and corporate tax that the controlled foreign corporation has paid in countries other than the country in which it is located, from the corporate tax calculated over the income of the said corporation to be taxed in Turkey.

For instance, the earnings of (CFC) Company established in Country (A) are taxed as profits of foreign corporations controlled in Turkey and the aforementioned company does not have any income other than dividend income. A tax deduction of 10% was made on the profit share of $100,000 obtained from Company (Y) in Malta, which is a subsidiary of the said (CFC) Company, and $90,000 was transferred to the (CFC) Company. (CFC) Company has paid 5% corporate tax in (A) country on this income.

Accordingly, the income of the (CFC) Company to be included in the corporate income and taxed in Turkey must be considered as $90.000, and the tax paid abroad to be deducted from the corporate tax calculated on this income must be considered as $4.500.

1.5. Taxation if the subsidiary distributes dividends

If the profits of the foreign subsidiary taxed in Turkey within the scope of the controlled foreign corporate income, are subsequently distributed by the foreign corporation, the part of the profit shares previously taxed in Turkey will not be taxed separately.

However, in the following years, if more dividends are distributed than the taxable earnings of the controlled foreign corporation in Turkey, the excess amount will be subject to corporate tax.

1.6. Controlled foreign corporation’s position against double taxation treaties

Double taxation avoidance agreements in force do not limit their right to tax their own residents according to the provisions of “Controlled foreign corporate income” in Article 7 of Turkey’s Corporate Tax Law. In other words, whether or not a dividend is distributed to a resident corporation in Turkey by another state resident corporation, the provisions of the Corporate Tax Law “Controlled foreign corporate income” will be applied.

However, in cases where the income taxed in Turkey as the profit of a foreign corporation controlled by a corporation residing in another state is distributed to a corporation residing in Turkey as a dividend, the provisions regarding the taxation of “dividends” and “avoidance of double taxation” in the Agreements will be applied normally.

In case a tax is made on the dividends distributed by the source country and these dividends are not exempted from corporate tax in Turkey, the profit share must be added to the corporate income in the year it is earned, and the corporate tax must be calculated over it, and the taxes paid in the other country related to this profit share must be deducted in accordance with the provisions of the agreement and the Corporate Tax Law on the deduction of the taxes paid abroad. If there is a residual amount after this deduction, the part of the corporate tax that is calculated and paid over the profits that was previously taxed as foreign corporate income, which is attributed to the said profit share, must also be deducted from the remaining amount. Provided that the dividend has been brought to Turkey, the part that cannot be deducted, can be returned.

In case the provisions of the relevant agreement stipulate that the said dividend distributed be exempted in Turkey, in the period when the dividend is distributed and brought to Turkey, the portion corresponding to the distributed profit share amount can be refunded from the corporate tax calculated and paid on the income taxed within the framework of the provisions on foreign corporate income that was previously controlled.

1.7. Enforcement in the controlled foreign corporation income

Article 7 of the Corporate Tax Law regarding the controlled foreign corporate income has entered into force on the date of its publication, to be applied to the earnings obtained as of 1/1/2006 and to be effective from this date. Therefore, the corporate earnings of the controlled foreign corporations for the accounting periods ending as of 1/1/2006 must be included in the earnings of the corporate taxpayers who directly or indirectly participate in the aforementioned corporations in proportion to their shares.

On the other hand, if the previous year’s profits for the accounting periods before 1/1/2006 of the corporations in which the controlled foreign corporation participates are distributed to the controlled foreign corporation after this date, since the profit will be earned as of the date of the profit distribution, the said profits must be taken into account in the calculation of the controlled foreign corporate income.


Source: Revenue Administration of Republic of Turkey – Translated by Karen Audit – The rights of this translation belong to KarenAudit and unauthorized use is prohibited.
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.


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Loss Offsetting of Turkish Companies

17.06.2021

 1.Loss Offsetting of Turkish Companies

The losses arising from the commercial activities of the Corporations can be deducted from the profits arising in the following periods according to the explanations below.

1.1. Losses of previous periods

Losses in the returns of previous years can be deducted from the corporate income, provided that the amounts for each year are shown separately in the corporate tax return and are not transferred for more than 5 years.

If the loss incurred by the taxpayers within an accounting period cannot be offset with the profits to be generated in the following 5 accounting periods, offsetting will not be possible.

1.2. Loss offsetting in case of transfer and spin-off

In cases of transfer or full spin-off, the Corporations that have taken over the assets have the opportunity to set off the losses of the Corporations that have been taken over or split up within the limits specified below.

Accordingly, the transferee Corporations will be able to deduct the following from their earnings, in addition to the losses incurred within their own structure:

  • Losses not exceeding the equity amount of the Corporations taken over in case of transfer as of the transfer date
  • Losses not exceeding the equity capital of the Corporation split up as a result of the full spin-off transaction

In case of transfer and spin-off, the transferred loss amounts are limited to the equity capital of the acquired or Corporation split up. In a full spin-off transaction, the portion of the loss not exceeding the transferred amount of the equity capital of the said Corporation and proportional to the acquired value can be deducted from the losses of the division.

1.2.1. Equity amount

Equity is the capital of the Corporation determined as of the date of transfer or spin-off in accordance with the Tax Procedure Law. Pursuant to Article 192 of the Tax Procedure Law, the difference between total assets and debts constitutes equity. The explanations made in the section (12.1.5) of this Communiqué will be taken into account in the equity calculation.

In case the equity capital of the transferred or Corporation split up is zero or negative, it is not possible to deduct the losses of these Corporations.

1.2.2. Conditions for loss offsetting in case of transfer and spin-off

In order for loss offsetting to be made in case of transfer and spin-off, the following are required:

  • The corporate tax returns for the last 5 years of the acquired or Corporations split up must be submitted within the legal time limit.
  • The Corporation that will make a loss offsetting as a result of the transfer or spin-off must continue the same activity for at least 5 years from the accounting period in which the transfer or spin-off occurred.

With the article 9 of the Corporate Tax Law, the condition of “continuation of the same activity” has been introduced in order to be able to deduct losses in transfer and spin-off transactions. This condition is narrower than the condition of “operating in the same sector” in the repeating article 14 of the abolished Law No. 5422 and the transferee Corporations are obliged to continue their activities for at least 5 years from the date of the transfer or spin-off occurred.

With the acquisition of corporations that cannot be brought into the economy for tax avoidance purposes by transfer, division or loss offsetting is not possible if the transfer and spin-off transaction is made due to non-economic reasons such as partial suspension or termination of the activities of the Corporations transferred or split up within a period of 5 years by making incidental.

Since the possibility of loss offsetting will be eliminated in case of violation of the conditions, the necessary correction will be made and tax loss will be deemed to have arisen for the taxes that are not accrued on time due to the undue loss offsetting.

1.2.3. In case of transfer and spin-off, the order of loss offsetting and the amount of loss that cannot be offset

Transferred losses can be offset within a period of five years from the time they occurred in the Corporation transferred or split up.

The losses that can be offset in case of transfer and spin-off can be determined freely by the taxpayers, provided that the accounting period they belong to is separately stated in the annex of the declarations of the transferee Corporations. Loss amounts exceeding the equity limit will be canceled.

1.3. Offsetting of Foreign Loss

In the event that a loss arises from the foreign activities of the Corporations, it is possible to deduct the foreign losses from the corporate income within the conditions specified in the article. However, there is no deduction facility for foreign losses related to activities whose earnings are exempt from corporate tax in Turkey.

Accordingly, since the earnings from overseas construction and repair works are exempted from corporate tax in Turkey, according to subparagraph (h) of the first paragraph of Article 5 of the Law, in case of loss from these activities, these losses cannot be deducted from the gains from other activities.

1.3.1. Authentication of Foreign Loss

In order for Corporations to deduct their losses arising from their activities abroad from the profits they declare in Turkey, they must have the tax bases (including damages) declared in accordance with the tax laws of the country in which they operate, examined and included in the report every year by the Corporations that have audit authority in accordance with the legislation of that country, and submit a translated copy of this report together with the original to the relevant tax office in Turkey. In addition, the tax declarations, balance sheet and income statement to be included in the annex of the report prepared by the said audit Corporations must be approved by the competent authorities in the foreign country.

If there is no auditing authority in the foreign country where the activity is carried out, a copy of each year’s tax return, its annexed balance sheet and income statement, to be obtained or approved by the competent authorities of the foreign country, must be approved by the Turkish embassies or consulates in the locality, if there is no such representative of the country protecting Turkish interests, and the original and a translated copy must be submitted to the relevant tax office.

1.3.2. Obligation to have an audit

Corporations that want to deduct their foreign losses from their declared earnings in Turkey are required to certify the results of their activities abroad in accordance with the above principles.

In order for taxpayers to deduct their foreign losses, they must have submitted their reports for the last five years, prepared according to the principles specified in the article, to the relevant tax office.

For example, if a taxpayer Corporation that made a profit in the 2002, 2003, 2004 and 2005 accounting periods and made a loss in the 2006 accounting period, submitted the reports of the last five years to the tax office to which it is affiliated in the relevant years, it is possible to deduct foreign losses for the 2006 accounting period, excluding those related to earnings exempted from corporate tax in Turkey.

However, if the taxpayers have not submitted the said reports to the relevant tax office, it will be sufficient to submit the reports regarding these periods in the relevant period in which the loss will be deducted.

1.3.3. Loss offsetting abroad

If the foreign loss subject to deduction in Turkey is deducted or written off in the relevant country, the foreign income to be included in the declaration in Turkey is the amount before deduction or expense.

For example: The results of the (A) Corporation’s domestic and international activities in 2005 and 2006 are as follows:

In the declaration submitted in the foreign country regarding the year 2006, an equivalent of 10.000.000.- TL has been declared by deducting 25.000.000.- TL loss from the 35.000.000.-TL profit. The tax base to be declared by the Corporation in its annual declaration in Turkey regarding the years 2005 and 2006 will be calculated as follows.

1.3.4. Result of Previous Year’s Activity

Since the provision regarding the deduction of foreign losses in subparagraph (b) of the first paragraph of Article 9 of the Corporate Tax Law No. 5520 is also included in the abolished Corporate Tax Law No. 5422, it is obligatory for corporations to certify their foreign activity losses for previous years within the framework of the explanations given above.

1.3.5. The time of transferring the results of the activity to the general result accounts

The explanations made in the section (5.9) of the Communiqué on the timing of the transfer of the results of operations abroad to the general results accounts in Turkey will be valid.

Profits arising from foreign operations must be transferred to the general results accounts in Turkey in the same currency as the losses.


Source: Revenue Administration of Republic of Turkey – Translated by Karen Audit – The rights of this translation belong to KarenAudit and unauthorized use is prohibited.
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.


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Is VAT exemption applied for leases to be made within the scope of investment incentive certificate from a leasing company abroad?

16.06.2021

Subject: The status of the machines purchased from a foreign company through financial leasing against tax laws.

By stating that you will lease the goods listed in the 84.57 and 84.58 Customs Tariff Statistics Position (CTSP) numbers of the Turkish Customs Tariff Table (TCTT) subject to the financial leasing contract from a financial leasing company located abroad and take over the ownership at the end of the contract period, to be used by your company in the investments you will make within the scope of investment incentive certificate, pursuant to the Financial Leasing, Factoring and Financing Companies Law No. 6361, and you will import the said goods with partial exemption within the scope of temporary importation regime within the scope of Articles 128 and 134 of the Customs Law No. 4458; our Presidency’s opinion is requested on the value-added tax (VAT) rate to which the said goods will be subject, and whether VAT withholding will be applied from the monthly rental payments to be made to a German company regarding financial leasing, and the VAT rate to be applied or not.

IN TERMS OF THE TURKISH CORPORATE TAX LAW:

In the second paragraph of the Article 3 of the Corporate Tax Law No. 5520, it is stipulated that the corporations written in Article 1, whose legal and business centers are not located in Turkey, will be taxed only on their earnings in Turkey, and in subparagraph (ç) of the third paragraph, it is stipulated that the income obtained from the rental of movable and immovable properties and rights in Turkey will be taxed as corporate income, which is included in limited liability.

The revenues obtained from the leasing of movable and immovable properties and rights in Turkey are the earnings of limited taxpayer companies in the form of real property capital income. According to Article 7 of the Income Tax Law No. 193, immovable properties must be located in Turkey and such goods and rights must be used in Turkey or evaluated in Turkey for such gains to be deemed to have been earned. Evaluation in Turkey means making the payment in Turkey or if the payment is made in a foreign country, it is transferred to the accounts of the payer in Turkey or on whose behalf the payment is made, or it is separated from the profit.

On the other hand, in Article 30 of the Corporate Tax Law, it is stipulated that corporate tax deductions will be made by those who pay or accrue these earnings and revenues, including advances, in cash or on account, on the earnings and revenues of limited taxpayer companies. In subparagraph (c) of the first paragraph of the article, it is stipulated that corporate tax deduction will be made from real estate capital gains. In accordance with the Council of Ministers Decision No. 2009/14593, the rate of corporate tax withholding on real estate capital gains, it has been determined as 1% from the real estate capital gains to be obtained from the activities within the scope of the Financial Leasing, Factoring and Financing Companies Law No. 6361, and 20% for the others.

WITH RESPECT TO THE AGREEMENT BETWEEN TURKEY AND GERMANY AVOIDING DOUBLE TAXATION:

The Agreement between the Republic of Turkey and the Federal Republic of Germany for the Prevention of Double Taxation and Tax Evasion in Taxes on Income entered into force on 01.08.2012 to be implemented as of 01.01.2011. In Article 12 of the Agreement, titled “Intangible Rights Fees”;

  1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State can be taxed in that other State.
  2. However, such royalties can also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax charged shall not exceed 10% of the gross amount of the royalties.
  3. The term “royalties” used in this article means the use or right of use of any literary, artistic or scientific copyright, any patent, trademark, design or model, plan, secret formula or production method, including motion pictures and radio and television recordings, or industrial, commercial or scientific know-how or industrial, commercial or scientific any payment for the use or right to use the equipment. The term “royalties” also includes any payments made in return for the use or right of use of a person’s name, image or any other similar personal right. …” clause are included.

Accordingly, the payments to be made to the financial leasing company will be considered within the scope of royalties, within the scope of paragraph 3. The right to tax these payments belongs to Germany in accordance with paragraph 1. However, Turkey, as the source state, has the right to collect taxes on these payments. This taxation to be made according to the domestic legislation of Turkey shall not exceed 10% of the gross amount of the royalties in accordance with paragraph 2 if the beneficial owner of the payment is a resident of Germany.

However, if a lower rate is applied to the said payments in our internal legislation, this lower rate determined in our internal legislation will be applied.

Pursuant to the clause (b), paragraph 2 of Article 22 of the Agreement titled “Prevention of Double Taxation”, the tax paid in this way in Turkey for the said payments shall be deducted from the tax on this income to be paid in Germany and double taxation on the same income will be avoided.

In cases where the provisions of the Agreement bring about changes according to the internal legislation, the resident of Germany who wants to benefit from the provisions of the Agreement must prove with a document to be obtained from the German authorities that s/he is a full taxpayer in Germany and is taxed in this country on all world earnings, the original of this document and a copy of its Turkish translation certified by the notary public or by the Turkish Consulates in Germany must be submitted to the tax authorities or the relevant tax office. In case the residence document is not submitted, it is natural that our internal legislation provisions will be applied instead of the provisions of the relevant Agreement.

IN TERMS OF TURKISH VALUE-ADDED TAX LAW:

In the following articles of the VAT Law No. 3065, the following are provided;

– In article 1/1, deliveries and services made within the framework of commercial, industrial, agricultural and self-employment activities in Turkey, and in article 1/2, imports of all kinds of goods and services are subject to VAT,

– In article 4/1, service can be realized in the form of making something, processing, creating, manufacturing, repairing, cleaning, preserving, preparing, evaluating, renting, undertaking not to do something,

– In article 6/b, making the transactions in Turkey means that the service is done in Turkey or that the service is used in Turkey,

– In Article 9/1, in cases where the taxpayer does not have a residence, workplace, legal center and business center in Turkey and in other cases deemed necessary, the parties to the taxable transactions may be held responsible for the payment of tax in order to secure the tax receivables of the Ministry of Treasury and Finance,

– In article 13/d, deliveries of machinery and equipment within the scope of the certificate to taxpayers holding investment incentive certificates are exempt from tax.

– In article 16/1-a, import of goods and services of which deliveries are exempt from tax according to this Law, and in article 16/1-b, exempt from customs duty within the scope of provisions regarding temporary importation and outward processing regimes and returned goods – article 167 of the Customs Law No. 4458 [Except for subparagraph (a) and clause (7) of paragraph (5)] – or import of exceptional goods is exempt from VAT

On the other hand, VAT rates applied to goods and services are based on the authority given by Article 28 of the VAT Law, within the limits of the article, it is determined by the Council of Ministers before the amendment with the Decree Law No. 700, and by the President after the amendment.

In this context, VAT rates have been determined as 1% for the deliveries and services in the list (I) of the Council of Ministers Decision (CMD) numbered 2007/13033, and 8% for the deliveries and services in the list (II), 18% for taxable transactions not included in the aforementioned lists.

In financial leasing transactions, it is stated that the VAT rate applicable to the goods related to the transaction will be applied, except for the transactions listed in the 16th and 17th rows of the list (I), in the second paragraph of the article 1 of the said Decision.

With the annex of the decision, it has been decided to be subject to VAT at the following rates;

– In the 16th row of the list (I), in accordance with subparagraph (d) of the first paragraph of the article 13 of the VAT Law No. 3065, renting of machinery and equipment within the scope of the certificate by financial leasing companies in accordance with the Financial Leasing Law No. 3226 to taxpayers holding Investment Incentive Certificate,

In the 17th row of the list numbered (I), machinery and equipment (excluding used ones and parts, accessories and fixtures) that are depreciable economic assets defined in tariff numbers 84.57 and 84.58 of the Turkish Customs Tariff Table (TCTT) are subject to financial leasing; considering the delivery of these goods to financial leasing companies in accordance with the Financial Leasing Law No. 3226 and the leasing and delivery of these goods by financial leasing companies to income and corporate taxpayers who do not have VAT liability because of their transactions with VAT taxpayers are exempt from VAT, but whose earnings are determined on the basis of balance sheet, it has been decided that these transactions will be subject to VAT at the rate of 1%.

– Considering the goods classified in the 84.58 tariff position of the Turkish Customs Tariff Schedule, in the B/29th row of the list (II), it has been decided that the import and delivery of this product will be subject to 8% VAT.

“Machining centers for metalworking, single station benches and multi-station transfer benches” in tariff position no. 84.57 of the Turkish Customs Tariff Schedule (TCTT), “Machining centers” in sub-tariff position no. 8457.10, 8457.10.10.00.00 and 8457.10.90.00.00 GTIP numbers are classified as “Horizontal” and “Others”, respectively. In the position no. 84.58, “Metalworking lathes (including turning centers)” is defined, and single-spindle automatic lathes from horizontal lathes with numerical control are classified under HS Code 8458.11.41.00.00.

According to these provisions, since it is not possible to evaluate the leasing transactions to be made by companies established abroad within the scope of the 16th or 17th row of the list (I) of the CMD annex numbered 2007/13033, which are not included in the scope of the Financial Leasing, Factoring and Financing Companies Law No. 6361, which came into force by repealing the Law No. 3226 , the rent payments to be made to the company abroad as a result of the rental of the aforementioned goods must be declared and paid as responsible by subjecting them to VAT at a general rate (18%).

On the other hand, pursuant to Article 133 of the Customs Law No. 4458, it must be calculated 3% of the amount of taxes to be charged in relation to the free circulation of the goods to be subject to the temporary importation regime with partial exemption; the VAT to be collected within the import duties for each month must be calculated as 8% for the 8458.11.41.00.00 GTIP numbered goods within the scope of the B/29 row of the list annexed to the Decision (II), and for goods with GTIP numbers 8457.10.10.00.00 and 8457.10.90.00.00 that are not included in the lists attached to the decision, it must be calculated over the general rate (18%).

On the other hand, provided that the goods in question have met the necessary conditions by your Company, imports within the scope of investment incentive certificate are exempt from VAT in accordance with Articles 13/d and 16/1-a of VAT Law No. 3065. However, it is explicit that these exemption provisions will not be applied in the rental of the aforementioned goods from abroad.


Source: Revenue Administration of Republic of Turkey – Translated by Karen Audit – The rights of this translation belong to KarenAudit and unauthorized use is prohibited.
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.


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Taxation of liaison offices opened by limited taxpayers in Turkey

02.06.2021

Liaison offices are established and operated in accordance with the regulations contained in the Foreign Capital Framework Decision and the Communiqués on the Foreign Capital Framework Decision based on this Decision. According to the current legal regulations, liaison offices cannot carry out commercial activities in Turkey, cannot transfer profits and have to cover all their expenses with the foreign currency they will bring from abroad.

Since it is legally forbidden for liaison offices to do business in Turkey, within the framework of the above definitions, it is not possible to accept the workplace of the liaison office and the persons assigned to carry out the business of this office as permanent representatives.

Within the framework of these explanations, if the liaison office operates within the framework of the relevant legislation, in other words, if it does not engage in commercial or other income generating activities, the following are not required:

– Corporate tax liability establishment,

– Notification of starting work,

– Submitting corporate tax returns,

– Keeping a book in accordance with the provisions of the Tax Procedure Law

It is explicit that all these obligations will be fulfilled if commercial activities are carried out.

On the other hand, since the liaison offices are responsible for withholding on the wages of workers and workplace rent payments, these offices are liable in terms of withholding.


Source: Revenue Administration of Republic of Turkey – Translated by Karen Audit – The rights of this translation belong to KarenAudit and unauthorized use is prohibited.
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.


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Are the interests paid to companies abroad and the amounts paid to the group company in return for loan guarantees subject to tax deduction?

02.06.2021 

Interest payments made to companies abroad and expenses such as commissions paid in return for guarantor service are considered as receivable interest within the framework of financing services, in accordance with the subparagraph (ç) of the first paragraph of Article 30 of the Corporate Tax Law No. 5520, a 10% tax deduction is made pursuant to the Council of Ministers Decision No. 2009/14593.

In addition, the financial services between group companies can be criticized in terms of hidden income or they can be the subject of concealed capital.

Pursuant to the Council of Ministers Decision No. 2009/14593, 0% tax is deducted from the interest paid in return for the loans used from foreign banks and financial institutions.


Source: Revenue Administration of Republic of Turkey – Translated by Karen Audit – The rights of this translation belong to KarenAudit and unauthorized use is prohibited.
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.


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What is the status of the payments made in return for the purchase of services such as finding customers and marketing from limited taxpayer institutions regarding the goods and services exported abroad?

02.06.2021

If the activity of the company abroad, which provides services in relation to the goods and services exported abroad, consists of finding customers and receiving a commission on the price of the goods sold, this business will be evaluated within the framework of commercial activity and no tax deduction will be made pursuant to Article 30 of the Corporate Tax Law No. 5520.

However, if the activity in question is foreign market research, advertising the products, services such as marketing and management services and exceeds the mere brokerage service, they will be considered as self-employment services and in accordance with Article 30/1-b of the Corporate Tax Law, a 20% corporate tax deduction will be required in accordance with the Council of Ministers Decision No. 2009/14593.

On the other hand, the provisions of the double taxation agreements regarding self-employment activities will be primarily considered.


Source: Revenue Administration of Republic of Turkey – Translated by Karen Audit – The rights of this translation belong to KarenAudit and unauthorized use is prohibited.
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.


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Are the earnings of limited taxpayer institutions obtained from the congresses that they organize in Turkey, subject to taxation?

02.06.2021 

For limited taxpayer institutions that do not have a workplace or permanent representative in Turkey and do not earn their income through this workplace or permanent representative, the earnings to be obtained due to the international congress held in Turkey is evaluated not as commercial income, but as incidental commercial income in Turkey and must be taxed.

Accordingly, if the taxable income of foreign institutions subject to limited liability is found to consist of incidental commercial income, these institutions must declare these earnings with a special declaration within fifteen days from the date of acquisition.


Source: Revenue Administration of Republic of Turkey – Translated by Karen Audit – The rights of this translation belong to KarenAudit and unauthorized use is prohibited.
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.


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Will there be a tax deduction for payments made to purchase a “domain name” from a company abroad?

02.06.2021 

“Domain name” purchased online from companies abroad is considered as an intangible right, and a 20% corporate tax deduction is required from the payments made, pursuant to the second paragraph of Article 30 of the Corporate Tax Law No. 5520, in accordance with the Council of Ministers Decisions No. 2009/14593.

However, if there is a double taxation agreement between the country of residence of the company and Turkey and a lower rate is foreseen in these agreements, this rate will be taken into account.


Source: Revenue Administration of Republic of Turkey – Translated by Karen Audit – The rights of this translation belong to KarenAudit and unauthorized use is prohibited.
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.


Read more