Turkey: New Income Tax Brackets

Last Updated: 6 July 2011

On October 15, 2009 the Constitutional Court issued a verdict with far-reaching influence over income tax payers. The verdict includes a provision of Income Tax Law (Official Gazette January 6, 1961 No. 10700) regulating the top tax tranche of 35%.

Considering that the Court granted a six-month grace period prior to enforcement as of the publication of the verdict in the Official Gazette as of January 8, 2010 - leaving room for Parliament to enact a new regulation on the issue by July 8, 2010 - annual income of TL50,000 minimum will still be subject to 35% taxation starting from the TL11,250 threshold until the end of the grace period.

On the other hand, the good news for both individuals and their employers is that within 30 days of filing their monthly payroll taxes (from October 15, 2009 onwards), they can reclaim the 8% difference between the annulled 35% bracket and the next bracket of 27% which in return leaves the door open for the chance of a refund by the IRS. Although Parliament may still scupper expectations with an immediate regulation moving the income tax brackets, we suggest that taxpayers consider filing their payroll tax returns (for periods after October 15, 2009) by annotating their right to reclaim the said difference (by way of a separate petition as e-filing annotations is not possible) and file a tax lawsuit within 30 days from filing.

Carried forward investment allowances – Valid post-2008

The Constitutional Court has reviewed the investment allowance tax incentive scheme. Under Law No. 5479 (Official Gazette April 8, 2006 No. 26133), which removed the investment allowance tax incentive granted by Article 19 of the Income Tax Law, as a temporary exception only investment amounts carried forward from previous periods or which had a technical and economical integrity with investments started before January 1, 2006 could be deducted from the income tax bases of 2006, 2007 and 2008 (Temporary Article No. 69 of Income Tax Law). In addition, investment allowances that remained unused as of December 31, 2008 could not be carried forward.

The Constitutional Court has, however, ruled that the above mentioned provision contradicts the rule of law principle and has removed the time limit from the legislation by annulling the wording "2006, 2007 and 2008" (Official Gazette January 5, 2010 No. 27453).

Accordingly, taxpayers can also carry forward investment allowance amounts within the scope of the exception from their income tax bases in the years following 2008.

The IRS however, does not currently agree that taxpayers should continue to benefit from investment allowance carry forwards for 2009 (arguing that the Resolution was only published in 2010 and thus does not cover 2009) and can only begin deductions from the next (advance) corporate tax filing of February 15, 2010. We suggest that taxpayers consider filing their returns by annotating their objection (by way of a separate petition as e-filing annotations is not possible) and launch a tax lawsuit within 30 days from such filing.

Investment incentives – changes and advantages

Incentives injected into the Turkish business environment within the framework of Law No. 5084 regarding the Promotion of Investments and Employment (Official Gazette February 6, 2004 No. 25365) have been restructured by Law No. 5951 (Official Gazette February 5, 2010 No. 27484).

Income tax and energy support for companies employing at least 10 people are no longer applicable for most enterprises in the 49 Turkish cities previously boosted by Law No. 5084. However, investments completed as of the calendar year-end 2007, 2008 and 2009 will continue to enjoy the incentives for five, four and three years, respectively.

Furthermore, Parliament has opted to keep the social security premium incentive alive with a slight extension until December 31, 2012. Although the Treasury plans to compensate investors for 80-100% of social security premiums pursuant to Law No. 5084, another piece of legislation Law No. 5763 (Official Gazette May 26, 2008 No. 26887) continues to enhance options for investors with a social security premium incentive of 5%. Comparing the laws, the maximum premium savings provided by Law No. 5084 may reach TL1,743 per employee annually whereas Law No. 5763 would be more advantageous only if the net monthly salary of any one employee exceeds TL2,000.

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.

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