Turkey introduces new tax law

Yusuf Gökhan Penezoğlu
Penezoğlu Law Firm, Istanbul
yusuf.penezoglu@penezoglu.com

Ayşe Uzun Nurili
Penezoğlu Law Firm, Istanbul
ayse.uzun@penezoglu.com

Law No 7440 on the Restructuring of Certain Receivables and the Amendment of Certain Laws (‘the Law’), which entered into force after being published in the Official Gazette on 12 March 2023, provides for the restructuring of taxes, insurance premiums, and administrative fines; the settlement of existing and potential disputes; the correction of business records, such as cash, receivables from shareholders, and inventories; and the increase of the tax base for certain taxes.

The main highlights of the Law are as follows:

• an additional corporate income tax (‘Additional Corporate Income Tax’), which will be calculated over certain exemption and deduction amounts declared in the corporate tax return for the year 2022;

• the restructuring of finalised receivables related to the periods before 31 December 2022 (excluding advance taxes paid in 2022);

• partial write-offs of disputed receivables related to the periods before 31 December 2022 (excluding advance taxes paid in 2022);

• tax base increases for TY2018-2022;

• the correction of certain accounting records; and

• the amendment of the Corporate Income Tax (CIT) Code that allows for debt push-down through mergers.

The key provisions of the Law are outlined below:

Scope of the restructuring provisions

Among others, the following public receivables are within the scope of the Law:

• taxes and related tax penalties and default interest for tax returns that were due before 31 December 2022 (including this date) and had to be turned in by the said date, according to Tax Procedure Law No 213 (TPL);

• taxes accrued prior to 31 December 2022 (including this date) for the year 2022, including penalties, interest and late fees;

• standalone tax penalties pertaining to determinations made before 31 December 2022 (including this date);

• administrative fines issued before 31 December 2022 (including this date);

• commodities, machinery, equipment, fixtures, cash and receivables from shareholders that are present in the business but not recorded; or commodities, machinery, equipment, fixtures, cash and receivables from shareholders that are not present in the business but are recorded;

• customs duties, administrative fines and respective default interest arising from customs liabilities; and

• certain social security premiums.

Restructuring of accrued but unpaid receivables

For overdue amounts not yet paid, or for which the payment period has not expired, as of the date of publication of the Law, the following applies:

• if the unpaid portion of taxes, including taxes accrued upon declarations with reservations, and the amount calculated based on the Domestic Producer Price Index (D-PPI) are paid in full, all default interest and tax penalties shall be waived;

• if half of the standalone tax penalties (eg, special irregularity fines) and the amount calculated based on the D-PPI are paid in full, the remainder of the penalties and all default interest shall be waived;

• if the unpaid portion of the administrative fines and the amount calculated based on the D-PPI are paid in full, all default interest shall be waived;

• if the unpaid portion of the principal public receivables other than the ones listed above and the amount calculated based on the D-PPI are paid in full, all default interest shall be waived;

• if the unpaid portion of customs duties and the amount calculated based on the D-PPI are paid in full, all default interest and administrative fines related to the customs duties shall be waived;

• if half of the administrative fines imposed regardless of the original customs duty and the administrative fines imposed due to participation are paid, the remaining penalties shall be waived; and

• if 30 per cent of the administrative fines imposed depending on the customs value of the goods and the amount calculated based on the D-PPI are paid in full, the default interest shall be waived.

The receivables that have been finalised by a judicial decision, but for which the taxpayer has not been notified for payment will be deemed to be due as of the date of publication of the Law without further notification. These receivables will also be structured within the scope of the above principles.

Taxpayers who would like to benefit from the abovementioned opportunity must not initiate any litigation, or must waive any litigation already initiated.

Restructuring of receivables that have not yet accrued or are currently subject to litigation

As of the publication date of the Law:

1. For tax assessments that are (i) under litigation before the first instance courts or (ii) whose statute of limitations for filing a lawsuit has not expired as of the enactment of the Law:

   • if the taxpayer pays 50 per cent of the principal tax amount and the amount calculated based on the D-PPI is over 50 per cent of the tax principal, the remaining 50 per cent of the principal tax amount and the entire tax penalty and default interest shall be waived.

2. For tax assessments that are (i) subject to litigation before the Regional Administrative Court or the Council of State or (ii) whose deadline for filing an appeal has not expired,

where the latest decision rendered as of the date of enactment was a cancellation decision (in favour of the taxpayer):

• if the taxpayer pays ten per cent of the principal tax amount and the amount calculated over such amount based on the D-PPI, the remaining 90 per cent of the tax principal and the entire tax penalty and default interest shall be waived.

Where the latest decision rendered as of the date of the enactment was an approval decision (in favour of the Revenue Administration) or was an approval with adjustment:

• for the approved part, if the entire approved tax principal, ten per cent of the reversed tax principal, and the amount calculated over such amount based on the D-PPI is paid, the remaining 90 per cent of the tax principal and the entire tax penalty and default interest shall be waived; and

• for the reversed part, if the tax principal and the amount to be calculated, instead of default interest, over the tax principal based on monthly D-PPI rates applied until the promulgation date of the Law is paid, the entire tax penalty and default interest shall be waived.

Where the latest decision rendered as of the date of the enactment was a reversal of a court decision or a regional administrative court decision:

• if the taxpayer pays 50 per cent of the principal tax amount and the amount calculated based on the D-PPI is over 50 per cent of the tax principal, the remaining 50 per cent of the original tax amount and the entire tax penalty and default interest shall be waived.

Tax penalties and customs duty fines that are under litigation

• If the tax principle or the customs duty is paid before the enactment of the Law or they are paid under the restructuring provisions of the Law, the penalties and fines shall be waived.

Where (i) the case is subject to litigation before the first instance court or (ii) the statute of limitations for filing a lawsuit has not yet expired as of the adoption date of the Law:

• if 25 per cent of the non-tax-based tax penalties or non-customs duty-based administrative fines are paid, the remaining amount shall be waived.

Where the case is (i) subject to litigation before the regional administrative court or the Council of State, and the first instance court has decided on cancellation:

• if ten per cent of the non-tax-based tax penalties or non-customs duty-based administrative fines are paid, the remaining amount shall be waived.

Where the case is (i) subject to litigation before the regional administrative court or the Council of State, and the first instance court has decided on approval or approval with adjustment:

• for the approved part, if 50 per cent of the tax penalty/administrative fines and ten per cent of the cancelled tax penalty/administrative fine is paid, the remaining penalty/fine shall be waived.

Where, as of the date of publication of the law, for the taxes for which the taxpayer has applied for settlement and the settlement meeting invitation has not been issued; the settlement meeting has not yet occurred; or the case has not been settled, and the statute of limitations for initiating a case has not expired:

• if the taxpayer pays 50 per cent of the principal tax amount and the amount calculated based on the D-PPI, the remaining 50 per cent of the principal tax amount shall be waived.

Taxpayers, who would like to benefit from the abovementioned opportunity, must not initiate litigation and must waive the litigation already initiated, if any.

For taxpayers who have applied to benefit from the provisions of this Article, but have not met the payment requirements outlined in the Law, the receivables listed in the tax/penalty notice will become due without further action.

The restructuring of receivables that are subject to an ongoing tax inspection

Tax inspections and assessment procedures that have begun before the publication date of the Law and are ongoing as of the date of publication will continue.

After the tax inspection and tax assessment procedures have been completed:

• if 50 per cent of the taxes and the amount calculated based on the D-PPI over 50 per cent of the tax principal are paid in full, the remaining 50 per cent of the tax principle and the tax penalties shall be waived;

• if 25 per cent of the non-tax-based tax penalties (such as special irregularity fines) are paid, the remaining 75 per cent of the tax penalties shall be waived.

For tax/penalty notifications received after 31 May 2023, the condition for benefitting from this provision is to submit a written application to the administration within 30 days from the date of notification. Payment will be made in 12 equal installments in monthly periods from the beginning of the month, following the notification of the first installment.

For tax/penalty notifications received before 31 May 2023, the condition for benefitting from this provision is to submit a written application to the administration by 31 May 2023. The payment shall be made in 12 equal installments in monthly periods from the beginning of the month, following the notification of the first installment.

The tax base and tax increases

The Law also provides a tax/tax base increase mechanism for income tax, corporate income tax, value-added tax (VAT) and certain withholding taxes.

1. 1. In terms of corporate tax

In instances where a corporate income taxpayer increases their tax bases declared in their annual CIT returns (including those submitted with reservations) according to the rates listed below until 31 May 2023, no corporate income tax inspections will be undertaken, and no additional corporate income tax assessments will be made for such taxpayers for the relevant tax year.

The rates to be applied for the tax base increase are as follows:

The tax base cannot be less than the following amounts (in TRY) if a loss was declared or there was no tax base due to deductions and exemptions in the corporate tax returns submitted, or if no tax return was filed for the year for which the tax base increase is intended:

The increased tax bases will be taxed at a rate of 20 per cent, and no additional tax will be charged for those years.

For CIT taxpayers who have submitted their annual declarations for the year they want to increase in due time and paid the stamp tax accrued on the tax returns, the increased tax base will be taxed at a rate of 15 per cent, provided that they have not benefitted from the provisions regarding the restructuring of receivables. This lower rate is also applied if no tax is paid on these declarations due to losses, exemptions and deductions.

Moreover, 50 per cent of the losses generated in the tax years for which the income and corporate taxpayers have increased their tax base will not be deducted from their profits for 2022 and the following tax years.  

Tax base increase for 2022

The Law provides specific rules for the tax base increase for 2022. Accordingly, the annual income and corporate tax base increase for 2022 will be implemented according to the following conditions:

1. 1. 1. 1. the income tax and corporate tax bases for the calendar year 2022 shall be increased by at least 25 per cent;

         2. if there is no tax basis in the 2022 tax return or if no tax return has been submitted, the tax base amount to be increased shall be at least TRY 500,000 for corporate taxpayers; and

         3. the tax base increase should be the higher of:

(i) the tax base from the 2021 annual CIT return increased by 122 per cent, or

(ii) the tax base declared in the Third Advanced Corporate Tax Return which increased by 40 per cent;

(iii) if the Third Advanced Corporate Tax Return has not been filed, the tax base declared in the Second Advanced Corporate Tax Return, which increased by 100 per cent; or

(iv) if the Second Advanced Corporate Tax Return has not been filed, the tax base declared in the First Advanced Corporate Tax Return, which increased by 300 per cent.

According to the Law, in the case of a base increase for 2022, none of the losses generated in that year can be carried forward to subsequent years.

Additionally, the advanced corporate income taxes shall not be deducted from the tax calculated for the year in which the tax base was increased.

It should also be noted that the increase in the corporate tax base for 2022 will not prevent a tax inspection and a tax assessment regarding the additional corporate income tax, explained later.

In terms of the income/corporate withholding tax

Payments subject to withholding, which are within the scope of the tax base increase provisions, can be summarised as follows:

Payments subject to withholding under Income Tax Law No. 193:

• salaries and wages defined in Article 94/1;

• independent personal services fees defined in Article 94/2;

• progress payments for multi-year construction works defined in Article 94/3;

• rental payments defined in Article 94/5;

• dividend payments defined in Article 94/6;

• payments made to farmers defined in Article 94/11; and

• payments made to those who benefit from the tradesman exemption defined in Article 94/13.

Payments subject to withholding under Corporate Income Tax Code No. 5520:

• progress payments for multi-year construction works defined in Article 15/1(a);

• rental payments defined in Article 15/1(b) that are made to cooperatives;

• dividend payments defined in Article 15/2;

• progress payments made to non-residents for multi-year construction works defined in Article 30/1(a); and

• dividends payments made to non-residents defined in Article 30/3.

If the taxpayer pays an additional tax amount, to be calculated based on the respective rates listed below, over the annual total of the gross amounts of the relevant payments included in their withholding tax returns, no tax inspections will be conducted for those years and for those types of payments.

In the case of an increase in the tax base for the dividend payments, defined under the provisions of Article 94/6 of the Income Tax Law and Articles 15/2 and 30/2 of the CIT Code, the tax base for corporate income tax should also be increased for the relevant tax year.

In terms of VAT

If the taxpayer pays an additional tax amount, to be calculated based on the respective rates listed below, over the annual total of output VAT included in their VAT returns, no tax inspections and assessments will be conducted for those years in terms of VAT.

Once a taxpayer requests an increase in the tax base for a VAT period (month), an increase must be implemented for all tax periods (months) in the relevant year.

After a VAT base increase, the VAT from such period cannot be taken into account as an expense or cost element in the determination of income or corporate tax bases, nor can it be deducted from the output VAT.

Common aspects

According to the Law, the tax base and tax increase will be applied until 31 May 2023. The calculated tax can be paid on the spot or in a maximum of 12 installments. If taxpayers fail to pay the taxes as stated under the Law, default interest will be calculated for the delay period, and the right to benefit from the tax base and tax increase will be forfeited.

A ten per cent discount will be applied if the tax accrued over the tax base or tax increase is paid by the due date of the first installment.

The correction of business records

Corrections regarding commodities, machinery, equipment, fixtures, cash and receivables from shareholders that are present in the business but not booked; or commodities, machinery, equipment, fixtures, cash, and receivables from shareholders that are booked but not present in the business can be made until 31 May 2023. The following applies:

• the assets shall be declared and recorded over their market value, which shall be determined by the taxpayers or the business organisations they are affiliated with;

• VAT will be calculated at half of the applicable rate multiplied by the declared value of the product, machinery, and equipment. Calculated VAT will be declared separately via the reverse charge mechanism and paid within the declaration period;

• the VAT incurred on machinery, equipment and fixtures shall not be deductible against the output VAT. While the VAT paid on commodities can be deducted according to the general principles, but cannot be refunded;

• if the declared commodities are subject to the special consumption tax, the special consumption tax must be calculated over the imputed value as of the date of declaration and paid with a separate declaration; and

• for the assets that have been booked, a provision account must be set up. The provision for commodities will be regarded as an equity account, while the provision for other assets will be regarded as accumulated depreciation.

In the event that business records pertaining to the booked but not present commodities, machinery, equipment, and fixtures are corrected through the issuance of an invoice and all the tax-related obligations are met by 31 May 2023, the VAT due shall be paid in three equal installments, provided that the first installment is paid within the declaration period.

For the balances of the cash account and receivables from the shareholders account, which are recorded on the balance sheet but not available in the business as of 30 December 2022, if these balances are declared to the tax office and the records are corrected, three per cent of the tax will be calculated and paid over the corrected amount.

The common provisions

The amounts calculated within the scope of the Law can be paid on the spot or in installments. In the case where payment is made on the spot, the coefficient shall not be applied and an additional discount of 90 per cent will apply to the amount calculated based on the D-PPI. If preferred, payments can be made in 12, 18, 24, 36, or 48 equal installments.

For payments in installments, the amount determined under the relevant articles shall be multiplied by the following coefficients:

• 1.09 for 12 equal installments;

• 1.135 for 18 equal installments;

• 1.18 for 24 equal installments;

• 1.27 for 36 equal installments; and

• 1.36 for 48 equal installments.

Additional corporate income tax for 2022

Article 10/27 of the Law provides an additional corporate income tax for the 2022 corporate tax return.

The additional corporate income tax shall be calculated as ten per cent over: (i) the exemption and deduction amounts benefitted from in the relevant declaration; and (ii) the tax base subject to the reduced corporate tax within the scope of Article 32/A of the CIT Code.

A reduced rate of five per cent will apply to the participation exemption that applies to participation income from resident companies and dividends received from abroad, provided that the taxpayer proves that the dividends received from abroad have been subject to at least a 15 per cent effective tax rate.  

The first installment of the tax is due to be paid by 30 April 2023, while the second installment is due to be paid by 31 August 2023.

Certain exemptions and deductions apply to the additional corporate income Tax.

Even if the tax base was increased for 2022, a tax inspection can be conducted for the additional tax.

The CIT amendment allows for debt-push down in mergers

Article 19 of the Law, amends paragraph 3 of Article 5 of the CIT Code titled ‘Exemptions’ as follows:

‘(3) Expenses related to the earnings of corporations exempted from corporate tax or losses arising from the activities exempted are not allowed to be deducted from non-exempt corporate income. However, financial expenses arising over the purchase of participation shares, including those incurred after the acquisitions realized within the scope of Article 19 of the CTL, may be deducted from the corporate income.’

In this context, the abovementioned Article allows the financing expenses related to the acquisition of participation shares to be deducted from the corporate tax base of the transferee company, even where the shareholder company merges with the acquired subsidiary under Article 19 of the CIT Code.