02.07.2021
- Offseting opportunity
The taxes previously paid for the profits obtained abroad and to be taxed in Turkey will be deducted from the corporate tax to be calculated due to these gains in Turkey.
The exchange rate at the time of transfer to the general result accounts of the related earnings will be applied to the taxes paid in foreign currency abroad.
- Offsetting duration
If it is not possible to partially or completely deduct the taxes paid on the foreign earnings included in the declarations in Turkey, this right of offsetting can be used until the end of the third accounting period, provided that the limitations below are essential, due to the absence of taxable corporate income in Turkey in the relevant year as a result of loss offsetting or exceptions.
- Limit of foreign taxes that can be setoff
Corporate tax and similar taxes paid abroad that can be deducted from taxes to be levied in Turkey and paid on foreign earnings cannot be more than the amount to be found by applying 20% corporate tax rate to earnings obtained abroad, under no circumstances.
When it is requested to setoff the taxes paid abroad from the corporate tax to be calculated in Turkey, the amount of foreign earnings included in the tax base in Turkey must be grossed up to include these taxes.
For example; Corporation (A) has earned a corporate income equivalent to 100,000.- TL at its workplace in country (B). In accordance with the tax legislation in the foreign country, 25% corporate tax and similar taxes were paid on this income. In this case, Corporation (A) will include 100,000.- TL in corporate income in Turkey, but cannot setoff the portion – ie [25,000 – (100,000 x 20%)=] 5,000.- TL-of the tax paid abroad regarding this income from the tax calculated in Turkey, which exceeds the tax calculated in relation to this income in Turkey. It is not possible to setoff this tax in the following years as in the current year.
On the other hand, if the earnings obtained abroad are exempted from corporate tax, it is not possible to setoff the taxes paid abroad on these earnings from the corporate tax calculated in Turkey.
- Taxes paid by the controlled foreign corporation
In cases where Article 7 of the Corporate Tax Law is applied, taxes similar to income and corporate tax paid by the controlled foreign corporation, can be setoff from the corporate tax calculated on the income of the said corporation to be taxed in Turkey.
- Offsetting of taxes paid on dividends from foreign subsidiaries
From the corporate tax payable in Turkey, the portion corresponding to the dividend amount of the income and corporate tax-like taxes paid on the earnings that form the source of the dividend distribution in the countries where the subsidiaries are can be deducted, over the dividends obtained directly or indirectly from foreign subsidiaries in which resident companies hold at least 25% of the capital or voting rights. The profit share added to the earnings will be taken into account by including taxes such as income and corporate tax paid abroad over these earnings.
Example: The information regarding the participation income obtained from the Corporation (C) abroad, in which the Corporation (A) participates by 30% in its capital, is as follows.
(Dividends in foreign currency and taxes paid abroad are calculated in TL.)
Participation rate …………………………………………. …………………………………….. 30%
Corporate tax rate in foreign country ……………………………………………………… 10%
Tax withholding rate applied to dividends distributed abroad ……………………. 20%
Total corporate income of the corporation (C)………………………….. 1.000.000.- TL
Corporate tax paid by the corporation (C) in a foreign country (10%) ……………. 100.000.- TL
Participation income (gross) of the corporation (A)………………………. 300.000.- TL
The amount corresponding to the participation earnings of the corporation (A) from the corporate tax paid in the foreign country (300.000 x 10%) ………….. 30.000.- TL
The distributable earnings of the Corporation (C)…………………… ……. 900.000.- TL
After-tax profit share of the Corporation (A) ………………………. 270.000.- TL
The tax deducted abroad from the profit share obtained by the Corporation (A) at the stage of distribution (270,000 x 20%)…………………………….. ………… 54.000.- TL
The net profit share of the Corporation (A) ……………………….. ….. 216,000.-TL
In this case, Corporation (A) will add the net 216,000.- TL obtained from Corporation (C), which has not been exempted from corporate tax in Turkey, to its corporate income with its gross amount (300.000.- TL), and the part up to 60,000.- TL of the [(100,000 x 30%) + 54.000=] 84,000.- TL (300.000 x 20%=) paid abroad over this income is setoff from the corporate tax calculated in Turkey over this income. There is no offsetting opportunity for the tax amount of 24.000.- TL paid abroad, which is over 60.000.- TL.
- Provisional tax offsetting of taxes paid abroad
Taxes paid abroad can be setoff from provisional tax. In case of income obtained from abroad within the provisional taxation period, taxes paid with deductions or other forms in the countries where these incomes are obtained can also be setoff from the provisional tax amount calculated for that period. However, the amount to be deducted cannot be more than the amount to be found by applying the 20% temporary tax rate to the earnings obtained abroad.
- Authentication of taxes paid abroad
Unless it is documented that taxes are paid in foreign countries, obtained from the competent authorities and certified by the local Turkish embassies or consulates, or if not by the same qualified representatives of the country protecting Turkish interests, taxes paid in a foreign country cannot be deducted from the tax levied in Turkey.
If the documents showing that the taxes deducted from the corporate tax have been paid in foreign countries, cannot be submitted by the taxpayer at the time of assessment, the tax paid or to be paid in the foreign country will be calculated over the rate known to be current in that country, provided that it does not exceed the 20% corporate tax rate. If the part of the assessment that corresponds to the amount calculated in this way is postponed, the documents to be submitted are submitted to the relevant tax office within 1 year at the latest from the date of assessment, the assessment must be corrected according to the exact amount written in these documents.
If the documents are not submitted within the specified period without force majeure, or if it is understood that there is a lower right of deduction from the deferred tax amount after the presentation of these documents, for the deferred taxes, the default interest will be calculated in accordance with the provisions of the Law No. 6183.
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.
