New Developments
With the Presidential Decree No. 3490 ("Decree") published in the Official Gazette on February 4, 2021, the limitation on financing expense deductions regulated under Article 41/1-(g) of the Income Tax Law No. 193 and Article 11/1-(i) of the Corporate Income Tax Law No. 5520 has become effective.
What Does the Decree Mean?
As per the Decree, the limitation on financing expense deductions is regulated as follows:
- Income taxpayer businesses whose utilized foreign liabilities exceed their equity are unable to deduct 10% of the total expense and cost items related to the utilized foreign liabilities made under the title of interest, commission, delay interest, dividend, F/X differences, etc. as an expense. The limitation applies only for the amounts that exceed the equity. Costs and expense items recorded within investment expenses do not subject to that limitation.
- Corporate income taxpayer businesses whose utilized foreign liabilities exceed their equity, except for credit institutions, financial institutions, financial leasing, factoring and financing companies, are unable to deduct 10% of the total of the expense and cost items related to the utilized foreign liabilities made under the title of interest, commission, delay interest, dividend, F/X differences, etc. as an expense. The limitation applies only for the amounts that exceed the equity. Costs and expense items recorded within the investment expenses do not subject to the limitation.
The Decree on the limitation on financing expense deductions has entered into effect by the publishing date (February 4, 2021) for all income derived within the taxation period starting as of January 1, 2021.
Conclusion
The new regulation about the limitation on financing expense deductions promotes the use of equity from tax perspective (also taking into account the tax incentive for cash capital contributions) by reducing debt usage and related expenses such as interest, commission, and F/X differences. We recommend that income and corporate tax payers utilizing foreign liabilities in their businesses determine whether they fall within the scope of the mentioned financing expense limitation, and to take actions accordingly also considering the secondary legislation that would be published in coming days.
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.