Transcript Exceptions

CORPORATE INCOME TAX
(Law No:5520)
M. Çağrı BAYAR
State Revenue Expert
Turkish Revenue Administration
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CORPORATE INCOME TAX (CIT)
CONTENTS
1- Subject
 Exceptions
2- Taxpayers
 Exemptions
3- Tax Base
4- Payment
5- Liquidation and Restructuring of Companies
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1- SUBJECT OF CIT
Subject of CIT is net corporate income earned in
one fiscal year.
Corporate income consist of income elements
which are counted in Personal İncome Tax (PIT) law.
The provisions of the PIT Law regarding
commercial income shall be applied in calculating
the net corporate income.
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 Exceptions
A. Exceptions in CIT Law:
The following gains are excepted from corporate tax if
specific conditions are met:
Dividends from a resident subsidiary.
Dividends from a foreign subsidiary.
Profits derived from foreign branches.
Gains derived by international holding companies from
the sale of participation shares.
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 Exceptions
Premium on shares issued by joint stock companies during
establishment or capital increase.
Gains concerning mutual funds and trust companies, realestate investment funds and trusts, venture capital funds and
trusts, retirement funds, housing funds provided that these
institutions are established in Turkey.
Revenues derived from the sale of immovables and
participation shares under legal prosecution due to their
debts to banks, to be credited from such debts to these
banks or; 75% of gains derived from the sale of such assets
which the banks acquired by these means.
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 Exceptions
 75% of gains from the sale of immovables and participation
shares.
 Profits derived from construction, maintenance and
assembly works abroad.
 Returns derived from cooperatives.
 Gains derived from the pre-school education, primary
education, special education and private secondary schools
as well as those derived from rehabilitation centers operating
under foundations which are recognized for tax exception by
the Council of Ministers or societies working for public interest
are except from corporate tax for five taxation periods.
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 Exceptions
B. Exceptions in other laws
Free Trade Zones Law No.3218
 Only, the earnings generated from manufacturing activities are
excepted from the PIT and CIT until the end of the taxation period of
the year Turkey becomes a full member of the EU.
 Users who obtained operating licences before February 6, 2004;
are exempted from PIT and CIT within the validity period of their
operation licence,
shall pay income tax on the wages paid to workers and indirect taxes
generated from their activities related to their free zone operations
beginning from 2009. However, if the duration of users’ existing
operation licence ends earlier, this exemption applies until the end of
duration of the operation licence.
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 Exceptions
Technology Development Zones Law No.4691
Earnings from software and R&D activities carried out in
the determined zones are excepted from PIT and CIT until
31.12.2023.
Wages paid to researchers, programmers and R&D staff
employed in these zones are excepted from PIT until
31.12.2023.
Earnings derived by administrator companies of
technology development zones within the scope of this Law
are excepted from PIT and CIT until 31.12.2023.
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2- TAXPAYERS OF CIT (Art.2)
a. Capital Stock Companies (Joint Stock Companies, Limited Companies, foreign
corporations of the same nature, Investment funds)
b. Cooperatives (Cooperatives founded under Cooperatives Law or their special law and the
foreign cooperatives of the same nature)
c. Public Economic Enterprises (Commercial, industrial and agricultural
undertakings belonging to the State, to provincial administrations, municipalities and other public
administrations and establishments which have continuous activity and are not included in paragraphs a
and b)
d. Economic Enterprises of Foundations and Associations
(Commercial, industrial and agricultural undertakings belonging to societies and foundations and foreign
investments of the same nature having continuous activity, and are not included in paragraphs a and b)
e. Joint Ventures (Among the corporations above, those who have founded among
themselves or personal partnerships or natural persons with a view to undertake and realize a given work
together and share the profit and requested from the tax office to establish tax liability in this manner are
joint ventures.)
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Types of Liability (Art.3):
1. FULL LIABILITY (Residents): Among the corporate bodies
indicated in the Law, those whose legal or business centers are
located in Turkey are taxed over worldwide profits.
• Legal center means the center of the taxpayer corporations denoted
in their foundation law or contract.
• Business center is the place where the transactions are actually
conducted.
2. LIMITED LIABILITY (Non-Residents): Among the corporate bodies
indicated in the law, those whose legal and business centers are
both located outside Turkey shall only be taxed over the profits
received in Turkey.
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 Exemptions
Corporations specified in the law are exempted from
corporate income tax. Most of the exemptions are related
to economic enterprises of public administrations and
economic enterprises of foundations and associations.
There are also other exemptions regarding cooperatives,
exhibitions and fairs, social security institutions, scientific
R&D institutions, etc.
Establishments operated by public administrations and establishments
with a view to teach, disseminate, improve and foster agriculture, cattle
breeding, science and fine arts (schools, conservatoires, libraries,
theaters, museums, etc.),
Establishments operated by public institutions and enterprises for
social purposes and to protect general human and animal health (such
as hospitals, libraries, workshops of the day nurseries, home for the
elderly, dormitories, dispensaries, boarding home for animals, etc.),
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 Exemptions
 Establishments
operated
by
public
administrations
and
establishments for social objects (charity, pawning and assistance
funds, kitchens for the poor, prison and penitentiary workshops, social
insurance institutions, student homes etc.),
Local, national or international exhibitions and fairs opened by public
administrations and establishments with the permission of the
responsible administrations,
Baby nurseries, guest houses and canteens at military zones owned
by the departments of general budget serving only the members of
public administrations and operated for a non-profit seeking purpose
without being rented to third parties,
Retirement funds and social security institutions established by law,
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 Exemptions
Public establishments that charge levies and duties in consideration of
the work or services rendered,
 Privatization Administration and Fund, Housing Development
Administration, National Lottery Administration,
 Mint and Stamp Printing House, military factories and workshops,
Following enterprises and establishments operated by local public
administrations:
water supply facilities,
passenger transportation enterprises within municipal boundaries,
slaughter houses,
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 Exemptions
 Agricultural enterprises of village or village unions; public baths,
laundries and mills operated by these for common needs of villagers
as well as qualifying passenger transportation enterprises thereof.
 Enterprises of sports clubs carrying on training and sports activities.
 Qualifying cooperatives.
 Institutions established solely for the purpose of providing guarantee
for SME loans.
 Associations and institutions engaged in scientific research and
development activities.
 Enterprises established jointly by public organizations and other
persons for the construction of infrastructure in organized industrial
zones and respond to the common needs therein.
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3- TAX BASE
•Corporate Income Tax is calculated on the
net corporate profit earned in the course of
one fiscal year. The provisions of the PIT
Law regarding commercial income shall be
applied in calculating the net corporate
profit.
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 Deductible Expenditures
PIT Law No.193 (Art.40)
The following expenses can be deducted from gross
income to determine the net business income. According to
CIT Law (Art.6) this provision is also applied upon
calculation of corporate profit.
•Overhead expenses for the derivation and continuation of
business income,
•Following expenses of the workers:
Treatment and medicine expenses,
Insurance premiums and pension contributions,
Lodging and food expenses in the work place,
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 Deductible Expenditures
PIT Law No.193 (Art.40) (Cont’d)
•Provided that they are related to the business; losses,
damages and compensations paid in accordance with a
contract, court decision or legal order,
•Travel and accommodation expenses related to business,
•Expenses of vehicles which are leased or already included
in the business and used for business purposes.
•Taxes, fees and duties in kind such as building taxes,
stamp duties, municipal taxes etc.; provided that they are
related to the business,
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 Deductible Expenditures
PIT Law No.193 (Art.40) (Cont’d)
•Depreciations,
•Contributions of employers to unions,
•Contributions by employers to private pension funds on
behalf of their employees,
•Donations to associations and foundations working for the
purpose of aiding the poor people.
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 Deductible Expenditures
CIT Law No.5520 (Art.8)
The following expenses are also deductible.
 Expenses of issuing securities,


Start-up costs and incorporation expenses,


In commandite companies, share of profit of active partner,

For the insurance and reinsurance companies, suspended
claim and amend reserves related to insurance contracts in
effect on the balance sheet date.
Expenses incurred for the general meetings and expenses in
connection with merger, liquadition and division,
Share of profit paid in return for profit and loss sharing
account by the participation banks,
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Deducting Losses (Art.9)
 When establishing the corporate income, taxpayers may
also deduct the following losses provided that the
amount of each year is shown separately on the
corporate tax return:
The losses indicated in the past years’ returns can be
carried forward up to five years,
The losses suffered as a result of the activities abroad
can be carried forward up to five years (excluding
those related to income excepted from corporate tax
in Turkey).
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Deducting Losses
Loss Carry Forward on Merger And Division
• On a merger or division, losses of transferring company
not exceeding the equity capital of transferring company
as of the date of transfer may be carried forward by the
receiving company. (Art.9/1-a)
• Conditions for loss carry forward;
 Limited to 5 years,
 Corporate Tax Returns should have been filed in due
time for the last 5 years,
 Operations of transferring company shall be carried on at
least for 5 years.
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Allowances (Art.10)
• Research and Development expenditures realized inside
the business in search of new technology and information,
• 100% of sponsorship expenses for amateur sport
branches and 50% for professional branches,
• The amount of donations and aids to public
administrations, foundations which are qualified for tax
exemption by the Council of Ministers; societies working for
public interest and institutions engaged in scientific R&D
activities,
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Allowances
• Expenses as well as aids and donations in respect of
activities which are realized by the above mentioned
institutions or supported by the Ministry of Culture and
Tourism for the promotion, development and
preservation of cultural, artistic and historical values,
• Donations and aids made through the Prime Ministry in
respect of natural disasters for which the Council of
Ministers adopts a resolution of aid.
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Non Deductible Expenses (Art.11)
• Interest paid or calculated on equity capital,
• Interest, foreign exchange losses and such
expenses paid or calculated on thin capital,
• Hidden profit distribution through transfer pricing,
• Reserve funds,
• Corporation tax, all fiscal penalties and default
interests,
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Non Deductible Expenses
• Losses resulting from the sale of securities
below their nominal values and expenses paid
related to these securities,
• Depreciations and expenses of motorized
seacrafts and aircrafts leased or registered in
the corporation and not related to the main field
of operations of the enterprise,
• Advertisement of alcoholic drinks and tobacco
products.
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Tax Security Institutions in CIT
CONTROLLED FOREIGN COMPANY (CFC) LEGISLATION
Pursuant to Article 7 of CITL No. 5520, foreign corporations in
which resident corporations and individuals directly or indirectly
hold at least 50% of the capital or dividends or voting rights by
means of separate or joint participation are considered as CFC.
In the determination of a CFC, the highest ratio of participation
held in that corporation at any time during the relevant fiscal
year will be taken into account as the control ratio.
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Conditions to be subject to tax in Turkey
CFC’s profit, regardless of whether it is distributed or not, will be
subject to corporate income tax in Turkey provided that following
conditions are fulfilled together:
1. 25% or more of the total gross income of the CFC should consist of
passive income,
2. Total tax burden (of the taxes which are similar to PIT and CIT) on
the CFC’s balance sheet profit should be less than 10%,
3. Total gross income of the CFC in the relevant fiscal year should
exceed the equivalent of 100.000 Turkish Lira in a foreign currency.
 CFC’s profit will be included in the corporate income tax base of the
controlling resident corporation in proportion to its shares in the CFC as
of the fiscal year which covers the closing month of the CFC’s fiscal
year.
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Treatment of taxes paid by the CFC
Pursuant to Article 33 of CITL No. 5520, taxes paid by the
CFC in the country where it resides can be credited against
the corporate income tax which is calculated on the CFC’s
profit subject to tax in Turkey.
However, taxes paid by the CFC in the countries other than
the country it resides cannot be credited against the
corporate income tax which is calculated on the CFC’s
profit subject to tax in Turkey.
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 THIN CAPITALISATION
Pursuant to Article 12 of CITL No. 5520;
If the total of the borrowings of a corporation, which are obtained
directly or indirectly from its shareholders or persons related
to the shareholders and used in the business, exceeds
three times of the equity capital of the corporation at any time
within the fiscal year, the excess part of the borrowings will
be considered as thin capital for the relevant fiscal year.
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In other words, to consider the borrowing of a corporation as
thin capital;
 It must be obtained directly or indirectly from its shareholders
or persons related to the shareholders,
 It must be used in the business (e.g. to be used in operating
expenses or investment expenditures),
 It must exceed three times of the equity capital of the
corporation at any time within the fiscal year.
Pursuant to Article 11(b) of CITL No. 5520, interest, foreign
exchange losses and similar expenses paid or calculated on
such a thin capital are non-deductible in the determination of
corporate income.
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Borrowings which are not deemed to be Thin Capital

Loans borrowed from third parties based on non-cash guarantees
provided by the shareholders or persons related to the
shareholders;

Loans obtained by related parties from banks and other finance
institutions or capital markets, and then transferred to the
corporation with the same conditions (e.g. with the same interest
rate);

Loans borrowed by the banks;

Loans borrowed by; financial leasing companies, financing and
factoring companies and mortgage financing institutions from the
banks which are deemed as related party due to these activities.
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Secondary Adjustments
Except for the foreign exchange losses; interest and similar
payments made or calculated on the thin capital will be treated
as;
1. Constructive dividend if the related party is a resident; or
2. Remittance if the related party is a non-resident.
Those amounts calculated on the thin capital will be subject to a
witholding tax.
However, pursuant to Article 5(1)(a) of the CITL No. 5520,
if the related party (creditor) is a resident corporate taxpayer,
this amount will be evaluated within the context of “participation
exemption”. Accordingly, no witholding tax will be imposed and
adjustment will be made on the tax return.
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Example for the calculation of thin capital
Corporation (Y)’s equity capital at the beginning of 2011 is 100 TL.
Borrowings during 2011;
1. Direct borrowing from Shareholder (A); 100 TL
2. Loan borrowed from Mr. (Z) based on the non-cash guarantee
of Shareholder (B); 250 TL
3. Direct borrowing from Shareholder (C); 150 TL
4. Borrowing from Shareholder (D) Bank; 1.000 TL
5. Associated Company (T) obtained from (E) Bank and wholly
lent it to Corporation (Y) with the same conditions; 300 TL
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In the light of above-mentioned explanations, 250 TL loan borrowed from
Mr. (Z) and 300 TL loan borrowed from Associated Company (T) are not
deemed to be thin capital. Therefore, they are not taken into account in
the calculation.
In addition to this, 50% of the borrowing from Shareholder (D) Bank is
considered in the calculation.
Total Debt:
Direct borrowing from Shareholder (A);
Direct borrowing from Shareholder (C);
Half of the borrowing from Shareholder (D) bank;
100 TL
150 TL
500 TL
750 TL
Corporation (Y)’s equity capital at the beginning of 2011 is 100 TL. Thus,
total debt amount exceeds three times of the equity capital [300
(=3*100)].
750 – 300 = 450 TL is thin capital for the fiscal year of 2011.
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4- PAYMENT
Corporate income tax rate is 20%,
Tax is calculated on the basis of self assessment (Tax
return includes the results of the related fiscal year).
Taxpayers do not file separate tax returns for branches,
agencies, purchase and sale offices and stores, factories or
other business sites attached to themselves even if they
have separate bookkeeping or allocated capital.
Every three-month terms of the year taxpayers pay
advance tax at corporate tax rate. At the end of the relevant
fiscal year, they offset it from the corporate income tax.
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Payment
Taxpayers must file their annual tax return until
the 25th of the fourth month after the end of fiscal
year and pay the tax until the end of that month.
Advance tax returns must be filed until the 14th
of the second month after the end of three-month
period and tax must be paid until the 17th of that
month.
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Offsets From CIT (Art.33-34)
CIT withholdings,
Advance taxes (must have been paid),
Corporate tax or similar taxes paid abroad and
entered into general final accounts in Turkey, can be
credited against the corporate tax calculated over these
earnings in Turkey,
The amount to be credited against the income
received abroad from the tax which is calculated in
Turkey can not exceed the amount found by applying
the corporate tax rate applied in Turkey to income
earned abroad, under no circumstances.
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5- LIQUIDAITON AND RESTRUCTURING
OF CORPORATIONS
1- Liquidation
2- Merger
3- Division “Split-Up”
4- Partial Division “Split-Off”
5- Exchange of Shares
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Liquidaiton
 A company in liquidation is a company in the process of
being dissolved.
If any assets remain, after the payment of the debts, they
are distributed to the shareholders. (Art.17)
 When taxing a company in liquidation, liquidation period
shall be taken into consideration instead of fiscal year.
 Liquidation period begins with the registration of the
general meeting’s decision on liquidation.
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Merger
Merging of one or more corporations with another corporation is
considered as liquidation for the corporation dissolving due to the
merger. (Art.18)
On a merger if the below conditions are met, only the profits of
dissolving company accruing until the date of merger are taxed.
But gains arising from the merger are not taxed.
Both transferring and receiving corporations must be full liable.
Assets and liabilities at the date of transfer must be transferred
exactly and as a whole.
Changing type of corporations under above-mentioned
conditions is also deemed as merger.
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Division “Split-up”
 A full-liable capital stock company transfers all of its
assets and liabilities at book value to two or more
existing or new full-liable capital stock companies, and in
exchange for this, the shareholders of the transferring
company acquire the share representing the capital of
the receiving company. (Art.19/3-a)
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Partial Division “Split-Off”
Partial division is an operation whereby a full liable
capital stock company or a permanent establishment or
permanent representative of a foreign capital stock
company transfers as capital in kind at book value its
participating shares with a minimum holding of two years
and fixed assets or branch of production or service activity
to another existing or new full-liable capital stock
company. (Art.19/3-b)
Shares in exchange for the capital in kind are either kept
by the transferring company or issued to its shareholders.
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Exchange of Shares
Exchange of shares is an operation whereby a full
liable capital stock company acquires a holding in the
capital of another capital stock company such that it
obtains the majority in the management and capital
stock of that company, in exchange for the proportional
issue to the shareholders of the latter company
securities representing the capital of the former
company. (Art.19/3-c)
Gains arising from the exchange of shares shall not
be taxed. (Art.20/3)
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M. Çağrı BAYAR [email protected]
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