Turkey: Are Mutual Termination Agreements Subject To Tax Exemptions?

The Income Tax Law numbered 193¹ (the "Income Tax Law") has been subject to important amendments pursuant to the Law Amending the Tax Related Laws and Other Laws and Decree Laws numbered 7103² (the "Amending Law"). Among other things, the Amending Law resolves doubts around whether termination payments received by employees under mutual termination agreements would be taxable.

Background

According to the Income Tax Law, earnings specified in Article 94 (Withholding) of the Income Tax Law which include wages, are subject to withholding. Article 61 of the Income Tax Law describes wages as any kind of payment made to an employee (i.e. regardless of such payment made as an allowance, compensation, premium, etc.).

The question of placing mutual termination payments with respect to the legal description of wages has been a point of discussion, leading to differences in interpretation between the Tax Administration (the "Administration") and the Turkish Council of State (the "Council of State").

Different views

The Administration was of the view that payments under a mutual termination agreement were comparable to mandatory severance payments which are exempt from income taxes and considered that the amount to be paid to the employee as a result of mutual termination should be held exempt up to the amount of severance payment the relevant employee would have been entitled under law. However, the Administration considered any excess as wages and as such, subject to income tax.

On the other hand, the Council of State adopted a different approach, considering payments under mutual termination agreements to be categorically outside the scope of the legal description of wages, since such payments intend to provide financial support to a person who no longer has an employment relationship.

The Amending Law

The Amending Law resolves this difference by adopting the Administration's view.

According to amended articles 25 and 61 of the Income Tax Law, termination payments under mutual termination agreements shall be regarded as an element of "wages" and as such, will benefit from income tax exemptions. However, such amount of termination payments that exceed the amount of mandatory severance payments the employee would have been entitled to on termination will not benefit from income tax exemptions.

It should be noted that the explained amendments have entered into force as of 27 March 2018.

Footnotes

1. Published in the Official Gazette numbered 10700 and dated 6 January 1961.

2. Published in the 2. Repeating Official Gazette dated 27 March 2018.

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.