On 2 April 2015, Turkey's Prime Minister Ahmet
Davudoğlu announced a 11-step new incentive package to secure
investment financing for the country. The incentive package aims at
promoting employment, industrial investments and real economic
growth.
Prime Minister Davudoğlu announced that in terms of investment
incentives tax deductions will be increased for investments in 2015
and 2016. Investments in advanced technology will be fully
supported, being considered preferential investment and benefiting
from higher tax deductions from their revenues.
Along with other incentives, Prime Minister Davudoğlu
announced that the government will strongly support companies'
access to funding and lower taxation for equity contributions in
companies. As a part of the economic incentive package, share
capital contribution will be introduced to the corporate taxation
system. Funding companies through equity contributions will be
fully supported. The government submitted an Omnibus Bill on 9
March 2015 to the Planning and Budget Commission of Turkey's
Grand National Assembly with the intention of incentivizing equity
contributions versus the funding of companies through
loans. The Omnibus Bill, which the Assembly accepted on 25 March
2014 and which was announced in the Official Gazette on 7 April
2015, also seeks to encourage foreign direct investment, as well as
to prevent local investment from exiting the domestic economy. The
share capital amortization is one of the fundamental elements of
the incentive package per se the certain amount of the capital
contribution made in case will be deductable from the tax payable.
This will promote equity contribution vs funding the companies
though loans.
Given that share capital amortization is one of the fundamental
elements of the incentive package, we would like to briefly
summarize how that matter is regulated under the Omnibus
Bill.
What is regulated under the Omnibus Bill?
The Omnibus Bill regulates an addition to Article 10 of Corporate
Tax Law, which regulated tax reductions. Pursuant to Article 11 of
the Omnibus Bill, capital depreciation will be made over the
paid-in or issued capital of the companies, which will be deducted
from the taxable income.
Who will benefit from the capital depreciation?
Capital depreciation will only be applicable to capital companies
such as limited liability companies and joint stock corporations
and other corporate taxpayers, namely cooperatives and corporations
of associations and foundations. However, it is not applicable to
individuals and corporations active in the finance (e.g. financial
leasing, factoring etc.), banking and insurance sectors, as capital
adequacy is a performance criteria for institutions in such
business areas.
How will the depreciation amount be calculated?
The capital depreciation will be applied to the paid-in or issued
share capital of the companies registered to the trade registry in
a fiscal year. Pursuant to the Omnibus Bill, the depreciation will
be calculated only from the cash contributions and therefore it is
not applicable to capital in kind contributions.
Pursuant to Article 11 of the Omnibus Bill, 50% of the interest
rate to be calculated will be depreciated from the taxable
corporate income. The interest rate will be determined based on the
annual weighted average of the interest rate applicable to
commercial loans announced by the Central Bank of the Republic of
Turkey on an annual basis ("IR").
Thus, the IR of the total amount of the capital increase in
cash/paid-in capital of the newly incorporated companies divided by
two will be deductable.
As per Article 12 of the Omnibus Bill, the Council of Ministers
("CM") is authorized to decrease the 50%
rate down to 0%, as well as increase it up to 100%, in certain
occasions. The CM is also authorized to increase the 50% up to 150%
for publicly traded companies.
Using its discretion, the CM will take into consideration the asset
volume of the companies, the number of persons they employee,
annual net turnover and where the capital contribution is utilized.
The CM may decrease the 50% amount down to 0% based on the regions,
field of industry, or business line.
What will happen if a company makes loss in fiscal year in
which a capital increase is exercised?
Pursuant to the Omnibus Bill, the depreciation amount may be
carried forward to the next fiscal year if a company makes loss in
the relevant fiscal year.
Is capital depreciation applicable to capital increases due
to merger, acquisition or demerger of the companies?
The Omnibus Bill explicitly regulates that capital increases made
on the basis of a merger, acquisition or demerger of companies will
not benefit from the capital depreciation.
What will happen to capital increases exercised before the
enactment of the Omnibus Bill?
The Omnibus Bill does not regulate whether the capital depreciation
will be applicable to capital increases exercised or to companies
incorporated before the enactment of the Omnibus Bill. Unless
explicitly referred to in the Omnibus Law to be enacted, it is
generally accepted that the capital depreciation will not be
applicable to capital increases exercised before the enactment of
the Omnibus Bill.
Summary
With the enactment of the Omnibus Law, companies' financing
model is expected to alter from loan financing to equity capital.
This development will see the economy's idle resources being
regained. Companies' capital structure will improve by way of
converting assets in kind to cash, while incorporating new
companies and public offerings will be encouraged.
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.