Thanks to the Law regarding Amendments to Certain Laws and Decrees numbered 6495 ("Bundle Law") passed by the Turkish Parliament on August 2, 2013 which granted value added tax ("VAT") and corporate income tax ("CIT") exemptions to sale and lease back of real property, industry officials are expecting an increase of 100% in the 2014 sale and lease-back transaction volume. The Bundle Law amended Article 17 of the Value Added Tax Law numbered 3065 ("VAT Law") by including "sale and lease back of real property" in the list of exempt transactions on the condition that ownership of the property is returned to the seller at the end of the lease term. In addition, subject to the same condition, the Bundle Law amended Article 5(1)(e) of the Corporate Tax Code numbered 5520 ("CTC") by granting full exemption to such transactions and waived the 2-year holding-on principle applicable to the proceeds of sale of real property.
Despite the recent VAT and CIT exemptions, financial leasing companies are still prejudiced due to lack of specific financial leasing legislation that allows for deduction of the general and special provisons set aside by financial leasing companies in a given year from their corporate tax base. Unlike the Law regarding Financial Leasing, Factoring and Financing Companies numbered 6361 ("Financial Leasing Law"), Article 53 of the Banking Law numbered 5411 ("Banking Law") allows deposit and participation banks (both can engage in financial leasing transactions) to deduct 100% of the special provisions set aside in a given year from their corporate tax base. General provisions set aside by banks are listed among Excluded Deductions by CTC Article 11(1)(ç) and, therefore, not allowed. With respect to special provisions, banks and financial leasing companies follow similar criteria to set aside such provisions and in a nutshell, a special provision can be set aside for the receivables based upon three main aging categories:
Banks: (i) third tier loans and receivables (limited collection capability): receivables aged more than 90 days but less than 180 days, (special provision allowed is 20%), (ii) fourth tier loans and receivables (doubtful collection capability): receivables aged more than 180 days but less than 1 year, (special provision allowed is 50%), and (iii) fifth tier loans and receivables (loss provision): receivables overdue more than 1 year (Special Provision allowed is 100%).
Financial Leasing Companies: (i) principal and interest receivables aged more than 150 days but less than 240 days (special provision allowed is 20%), (ii) principal and interest receivables aged more than 240 days but less than 1 year (special provision allowed is 50%), and (iii) principal and interest receivables overdue more than 1 year (special provision allowed is 100%).
As a general rule, in the absence of an industry specific law allowing for special provision deductions, tax payers would utilize amortization provisions of the Tax Procedure Law numbered 213 with respect to their doubtful receivables. Article 323 of the Tax Procedure Law defines "doubtful receivable" as one being related to deriving commercial and agricultural revenue, and that is either (i) subject to a pending litigation or an execution proceeding, or (ii) despite more than one payment notice is served, it is not worth initiating legal proceedings. It is important to note, however, that a "financial leasing special provision" does not in and of itself qualify for a "doubtful receivable" as defined under article 323 of the Tax Procedure Law and therefore, is not allowed to be deducted under this general rule.
In a recent private opinion1 (özelge), the Turkish Revenue Administration ("TRA") stated that financial leasing companies cannot utilize the 323 deduction for the special provisions they set aside under the financial leasing legislation, which does not allow for any deduction. TRA further stated that deduction under Tax Procedure Law Article 323 is not allowed for financial leasing companies because the "323 deduction" is only allowed for commercial and agricultural enterprises which recognize revenue on an accrual basis which, in turn, has a direct effect on the final accounts and/or profit of the respective year. Given the nature of the financial leasing receivables, financial leasing companies are also not allowed to utilize the 323 doubtful receivables deduction for the leasing receivables that had not been recognized as revenue in the respective year.
In view of the foregoing, despite the recent tax exemptions, financial leasing companies are still prejudiced due to lack of specific leasing legislation allowing for deduction of special provisions being set aside against leasing receivables. Further, Article 53 of the Banking Law creates an uneven playing field that favors the banks by allowing them to make such deduction. The situation could be remedied either by allowing the deduction of financial leasing special provisions under the Financial Leasing Law or by introducing financial leasing special provisions as a new deduction item among Deductible Items from corporate tax base listed under Article 8 of the Corporate Tax Code.
1 Turkish Revenue Administration Private Opinion No. 11395140-105.
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