Turkey: Application Of Interest Rate Deduction Resulting From Cash Capital Increase In Equity Companies

Last Updated: 25 January 2019
Article by Ömer Emen and Burcu Haci
Most Read Contributor in Turkey, February 2019

In order to meet their funding needs or to strengthen their capital, companies tend to increase their capital against increasing inflation. Companies increase their capitals as a cash or in-kind capital increase.

In addition to the capital increase of the companies that realize the capital increase in cash, the application of interest rate deductions in cash capital increases (added to our legislation with the Law No. 6637) also provides a significant benefit with the tax deduction.

1. APPLICATION OF INTEREST RATE DEDUCTION IN CASH CAPITAL INCREASE IN GENERAL

According to Article 10 of Corporate Tax Law No.5520, capital companies, except for the ones operate in the sectors of finance, banking, insurance institutions and public economic enterprises are allowed a deemed interest deduction that is equal to 50 percent of the interest calculated on the cash capital increase in the registered capital of the existing corporations or cash capital contributions of the newly incorporated firms based on the interest rate announced by the Central Bank Of The Republic of Turkey ("CBRT") for Turkish Liras ("TL") denominated commercial loans, from their corporate tax base of the relevant year.

It has been decided that the Council of Ministers is authorized to determine the discount rate by considering various criteria. Council of Ministers decree no 2015/7910 stipulates a rate of 0% for companies providing certain circumstances such as:

  • Capital companies with 25% or more of their income comprised of passive income (for instance; interest, dividends, royalties, capital gains on sale of shares),
  • Capital companies with 50% or more of its assets are comprised of long-term securities, shares of subsidiaries and participations,
  • The portion of the increased cash capital which is used as capital contribution or provided as loan to other companies,
  • -The portion of the cash capital increase used in land investments by capital companies investing in land,
  • If the company has decreased its capital in the period between 9th of March 2015 and 1st of July 2015, for the portion which was decreased.

According to the Communiqué on the Amendments (Serial No: 9) to the Corporate Tax General Communiqué (Serial No:1) ("Communiqué") it is stipulated that it is not possible to benefit from the application of interest rate deduction in the following capital increases;

  • Capital increases resulting from non-cash asset transfers to capital companies,
  • Capital increases resulting from capital companies becoming parties to merger, transfer and division transactions,
  • Capital increases arising from the addition of equity capital items to capital,
  • Capital increases through using credit or borrowing by shareholders or persons in relation of shareholders,
  • Capital increases by placing values such as stocks, bonds or bills, other than cash capital to the company,
  • Capital increases resulting from a deduction of the balance sheet items among itselves.

2. THE AMOUNT OF CAPITAL INCREASE TO BE PUT INTO ANOTHER COMPANY AS A CAPITAL OR ITS BEING MADE TO USE IT AS A LOAN

Especially in group companies, it is frequently seen in the recent periods that the companies which increase the capital have sent the amount put by the partner to the other group company as aiming to increase the capital of that company too.

In this application, the Council of Ministers considered that a single company should benefit from interest rate deductions. It made the amendment of 'the ratio is decided to be applied as 0% in the calculation of interest deduction on the amount sent as capital to another company'.

In the event that the said amount is made to be used as loan to another company after the capital increase, the interest rate deduction application arising from the cash capital increase will not be utilized.

3. CAPITAL INCREASES FROM THE PAYABLES ACCOUNT TO THE SHAREHOLDERS

The shareholders prefer the method of putting their receivables from the company as capital. It is clearly stated in the Communiqué that, if the shareholders of the Company mention of capital increase of the receivables from the company without realizing capital increase as cash, they cannot benefit from the application of interest rate deduction arising from cash capital increase. This is frankly stated in the provision of the Communiqué.

Even if there is an amendment in the Communiqué for the capital increases made through the accounts payables to shareholders, it is necessary to being able to benefit from the application of interest rate deductions arising from the cash capital increase.

Submission of corporate income tax return of the relevant period without prejudice and if the case is brought to litigation by the taxpayers experiencing mentioned situation, it is likely that it will affirmative consequence in front of the judiciary.

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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