Law No. 7491 on Amendments to Certain Laws and Statutory Decrees ("Law No. 7491"), which was published in the Official Gazette no. 32413 on 28 December 2023, has made significant amendments related to tax legislation.
New Developments
The amendments expand the scope of income tax exemption for social media content production and mobile application development, introduce new tax exemptions for dividends received from abroad, increase the deduction rate applied to income received for services provided abroad, apply inflation adjustment to banks and financial institutions, abolish the lump-sum expense application in exports, and extend the deadlines for the submission of VAT Return No. 2 and payment of reverse-charge VAT.
This alert covers the significant amendments made by Law No. 7491.
i. New Regulations Enacted on Income and Corporate Income Tax Exemption for Dividends Received from Abroad
Law No. 7491 provides that the participation income exemption is applied at a rate of 50% to companies that participate in foreign joint stock and limited liability companies whose legal and business center is not located in Türkiye, without fulfilling the conditions specified in Article 5/1-(b) of the Corporate Income Tax Law No. 5520 ("CITL"), provided that at least 50% of the paid-up capital of the foreign subsidiary is held and the dividends are transferred to Türkiye by the filing date of the corporate income tax return for the accounting period in which the income is generated.
It is also envisaged that half of the dividends received by real persons will be exempt from income tax, provided that they own at least 50% of the paid-in capital of joint stock companies and limited liability companies whose legal and business center is not located in Türkiye, and that the dividends are transferred to Türkiye by the filing date of the income tax return for the accounting period in which the dividend is received.
ii. Increased Income Deduction Rates for Services Provided to Foreigners
Pursuant to Article 10/1-(ğ) of the CITL, corporate taxpayers may deduct 50% of the corporate income that is shown separately in return, derived from certain services provided abroad. These include architecture, engineering, design, software, medical reporting, bookkeeping, call centers, product testing, certification, data retention, data processing, and data analysis provided in Türkiye and exclusively used abroad to persons who are not resident in Türkiye or whose place of business, legal or business center is located abroad. The higher rates also apply to education and health services provided to foreigners who are not resident in Türkiye.
With Law No. 7491, the deduction rate for corporate income generated from such activities has been increased to 80%, provided that all of the income is transferred to Türkiye until the filing date of the corporate income tax return for the accounting period in which the income is generated.
In parallel, the deduction rate applied to income from the same activities listed in Article 89/1-(13) of the Income Tax Law No. 193 ("ITL") has been increased to 80% for real persons, provided that all of the income is transferred to Türkiye until the filing date of the income tax return for the accounting period in which the income is generated.
iii. Expanded Scope of Income Tax Exemption for Social Media Content Production and Mobile Application Development
According to Article 20/B of the ITL, social media content producers who generate income by sharing content such as text, image, audio, video, etc. through social network providers on the internet are exempt from income tax.
With Law No. 7491, the scope of this exemption has been expanded. More specifically, the income that real persons derive by sharing text, image, audio, and video content on their websites or any digital platform; sharing training videos, recipe videos, and product promotion videos over the internet or any similar electronic medium; and sharing content such as data processing and development over these media have also been included in the scope of the exemption.
iv. Abolished Lump-Sum Expense Application for Exports
According to Article 40/1-(1) of the ITL, taxpayers may deduct expenses incurred in connection with export, construction, repair, installation and transportation transactions abroad, for which they cannot obtain documentation, provided that they do not exceed 5% per thousand of the income generated from the aforementioned activities, in the determination of commercial income.
Law No. 7491 abolished the lump-sum expense application to be applied to income derived as of 1 January 2024.
v. Corporate Income Tax Applied With a Discount of 5 Percentage Points to Export Activities Carried Out on the Basis of an Intermediated Export Contract
According to Article 32 of the CITL, corporate income tax is reduced by 5 points for income that exporting corporations derive exclusively from exports.
The Law No. 7491 stipulates that this discount shall be applied to the income of manufacturing or supplying institutions derived from the export activities carried out through foreign trade capital companies or sectoral foreign trade companies under an intermediary export contract.
vi. Inflation Adjustment Application for Banks and Financial Institutions
In Provisional Article 33 of the Tax Procedural Law No. 213 ("TPL"), it is regulated that: (i) the financial statements as of 31 December 2023 shall be subject to inflation adjustment regardless of whether the conditions are met; (ii) the profit/loss difference arising from the inflation adjustment shall be shown in the retained earnings/loss account; and (iii) the retained earnings determined in this way shall not be subject to tax and the retained losses shall not be accepted as losses.
Through Law No. 7491, it is regulated that banks, companies within the scope of Law No. 6361, payment and electronic money institutions, authorized foreign exchange institutions, asset management companies, capital market institutions, insurance and reinsurance companies, and pension companies cannot take into account profit/loss differences arising from the inflation adjustment to be made in the 2024 and 2025 accounting periods, including the temporary tax periods, in the determination of commercial income.
vii. New Deadlines for Tax Returns and Payment of Reverse-Charge VAT
With Law No. 7491, it has been regulated that those who are responsible for making tax deductions shall submit their VAT Return No. 2 by the evening of the 21st day of the month following the tax period and pay the deductible VAT by the evening of the 23rd day of the month following the tax period.
In addition, the deduction of VAT declared by those who are responsible for tax deductions is subject to the condition of payment.
viii. Deliveries to Free Zones Declared as Not Within the Scope of Export Exemption in terms of Special Consumption Tax
Article 5 of Special Consumption Tax Law No. 4760, regulates export exemptions. Previously, nothing under this law mentioned that deliveries to free zones are within the scope of the exemption, though in some cases, deliveries made to free zones outside the Customs Territory of Türkiye were treated within the scope of the export exemption. With Law No. 7491, it has been legally clarified that deliveries made to free zones that are outside the Customs Territory of Türkiye are not covered by the export exemption.
ix. Amendments to Stamp Tax After the Constitutional Court's Annulment Decisions
- Stamp tax exemption for public investments
The phrase "and in which foreign companies also bid" stated in the definition of "International tender" in Additional Article 2 of the Stamp Tax Law No. 488 ("STL"), which regulates stamp tax exemption for export and foreign currency income services, was annulled by the Constitutional Court's decision numbered E. 2020/15 K. 2020/78 and published on 24 December 2020, on the grounds that it is contrary to the principles of legal predictability and certainty. Following the annulment decision of the Constitutional Court, regardless of whether foreign companies bid or not, the papers issued by the contracting authorities in all tenders open to domestic and foreign tenderers in relation to public investments within the scope of the article are exempt from stamp tax.
Pursuant to the amendment made by Law No. 7491, the exemption application for investments listed in the aforementioned subparagraph has been abolished in respect of international tenders that do not serve the general purpose, and the stamp tax exemption is envisaged to continue only in respect of investments financed with foreign currency that support foreign currency inflow to the country.
- Stamp tax refund in cases of tender cancellation
Regarding the tender cancellations of public offices and institutions with public legal personality, the Constitutional Court decision numbered E. 2022/125 K. 2022/162 and published on 13 December 2022 cancels the sentence stating that stamp tax related to an issued contract will not be refunded.
Law No. 7491 takes the Constitutional Court's decision into account. In the event that the tender is cancelled due to a complaint to the institutions and organizations in accordance with the Public Procurement Law, an objection to the Public Procurement Authority, or a judicial decision; the contracting authority may refund the stamp tax for the part of the cancelled tender that does not benefit from the provision in the contract issued, as in the case of stamp tax on tender decisions.
Conclusion
Law No. 7491, which entered into force after it was published in the Official Gazette on 28 December 2023, made significant amendments to tax legislation in Türkiye. While some of the amendments aim to encourage the flow of foreign currency into the country, some amendments were made to reflect the will of the legislator in the relevant articles, which is important considering the annulment decisions of the Constitutional Court.
The most important of these amendments is the regulation on non-treatment of the profits or losses arising from the inflation adjustment to be made by banks and financial institutions in the determination of commercial income for the 2024 and 2025 accounting periods. This regulation will undoubtedly lead to higher corporate tax payments in the 2024 and 2025 accounting periods for financial institutions with high equity capital amounts, which will incur inflation adjustment losses. Therefore, it would not be a surprise if this regulation is challenged before the Constitutional Court based on the "principle of equality."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
