Turkey: Newly Introduced Investment Incentive Regulation

The main features of the new investment incentive regulation have officially started to rise to the surface with the press conference held on 4 June 2009 by the Prime Minister.

Below, we will summarize the main features of the presentation made by the Prime Minister related to "Subsidies on Investment, Empowerment of Active Labor Force and Loan Guarantee Support" in accordance with the recent information reflected in the press in connection with the new investment incentive regulation.

Please note that, the below information and explanations have been totally gathered from the presentation made in the press conference of the Prime Minster and the recent information reflected in the press related to the aforesaid regulation. Please be informed that no legal arrangement has been made in relation to the subject and along with that, the draft regulation has not been introduced to the public yet.

1. Overview and The Expected Regulation

According to the explanations and the points stated in the presentation made by the Prime minister, it is understood that the regulation related to Subsidies on Investments is totally being renewed.

In this respect in the following period the legislation related to Subsidies on Investment is expected to change substantially.

2. The Components of New Incentive Regulation

According to the explanations made, it is anticipated that there will be 6 main components of the new investment regulation which are:

• Reduced Corporate Tax Rate

• VAT exemption

• Exemption on Social Security Premium (Employer's Portion)

• Customs duty Exemption

• Interest support

• Allocation of land for investments.

3. The Main Elements on Application

Vat and customs duty exemption, out of the six main components are defined as common incentive components and are foreseen for all the investments regardless of sector and region under the framework of general conditions (with the updates on the limits and restrictions in the current legislation).

The other components in the new investment incentive regime;

• Shall differ depending on the region and sector of investment

• and increased rates of incentive shall be applied on investments made on big projects on 12 areas of operation

It is anticipated from the explanations that the investments that exceed a predetermined size are regarded as "Big Project Investment" and some increased incentive rates shall be applied for these "Big Project Investments".

The following are regarded as Big Project Investments:

• Production of Chemical Materials

• Production of Refined Petroleum Products

• Transportation Services made through transit pipeline

• Production of Motor Vehicles (only for those function on land )

• Production of railway and tramway locomotive or carriage

• Port and port services

• Electronics Industry investments

• Production of medical equipment and sensitive and optical equipments

• Medicine Production

• Production of Air and Space Vehicles

• Investments related to Machine Investment

• Mining Investments

In order to qualify an investment as "Big Project Investment", the investment amount should be higher than the predetermined investment threshold amounts which shall be determined by the council of Ministers. The relevant thresholds have been provided in the presentation of the Prime Minister however the exact amounts shall be official after the decision of the Council of Ministers.

Below, the incentive rates and the general explanations related to the application of the proposed regulation are summarized.

4. Incentives

a) Reduced Income/Corporate Income Tax Rate

The Requirement to hold an Investment Incentive Certificate

As a rule, the incentive shall apply on the investments to be made in the regions and sectors specified by the Council of Ministers.

Some companies/investments are kept out of the scope of the reduced Corporate Income Tax rate incentive which are:

• The companies operating in finance and insurance

• Joint Ventures

• Contracting Businesses

• The investments made under the Law Numbered 4283 related to the Build- Operate Model and Law related to the building and operating of Electricity Energy Production facilities

• The investments made under the Law Numbered 3996 regarding the Build Operate Transfer Model

• The investments made related to contracts that involve the royalty payments to be made to the landowner for the materials extracted out of the land

The Incentive amount to be benefited in connection with the Reduced Corporate Income Tax Rate

The incentive amount that will be benefited related to the reduced corporate income tax rate is related to the amount participated in investment, investment participation rate and reduced corporate income tax rate that shall be determined by the Council of Ministers per each sector and region.

The Council of Ministers will determine the investment participation rate and amount for each group of cities. The revenues gathered from the investments shall be subject to reduced Corporate Income Tax rates starting from the accounting period that the investment starts operating until the forgone tax amount reaches the determined investment participation amount (the investment participation amount equals the tax amount forgone and borne by the State in connection with the application of reduced corporate income tax rate).

According to the presentation made by the Prime Minister, the investment participation rates and reduced Corporate Income Tax rates per each region are as flows:

The Beginning and the Duration of Reduced Corporate Income Tax rate Application

According to the provisions of the recent amendment made in the article 32/A of the Corporate Tax Law, the reduced Corporate Income Tax rate application will start in the accounting period when the investment starts operating, either partially or completely. The reduced rate shall be applied until the forgone tax amount due to the applied reduced rate reaches the determined investment participation amount.

The Revenue on which the reduced Corporate Income tax rate shall apply

The reduced corporate income tax rate shall only apply on the revenues generated through the new investment. Accordingly, the standard corporate income tax will apply on the revenues generated from operations other than the new investment.

The application of reduced rate only on the revenues generated through new investments will not only reduce the efficiency of the incentive but also requires the calculation of the revenue generated through investments separate from other operations which makes it substantially difficult to apply.

b) Social Security Premium Support (Employer's Portion)

According to the information provided by the Prime Minister in the press conference, for a limited period of time, the employer's portion of the social security premium limited with the premium amount calculated over the announced minimum wage shall be borne by the Turkish Treasury.

The time limits for the relevant incentive per each region are stated as follows:

It is not yet clear what kind of a legal arrangement will be made related to the support on the employer's portion of the social security premium. Currently, there are a number of regulations related to social security premium which are independent of each other. Therefore, it is possible to either partially or completely combine all of the regulations under one regulation or introduce a new regulation related to the new incentive.

c) VAT Exemption

In the presentation made by the Prime Minister, it is understood that this will be a general incentive regardless of sector and region, however no other detail was provided related to this incentive.

It is anticipated that, the application related to the exemptions stated in article 13 of VAT Law will stay in effect after the introduction of new regulation

d) Customs Duty Exemption

In the presentation made by the Prime Minister, it is understood that this will be a general incentive regardless of sector and region, however no other detail was provided related to this incentive.

Similar to VAT exemption, it is anticipated that the current application of this incentive will stay in effect after the introduction of new regulation.

e) Interest Support

similar to VAT and customs duty exemptions, interest support is currently stated in the Subsidies on Investment legislation and is being applied by the taxpayers.

The following table states the proposed interest support rates in the new regulation according to the presentation made by the Prime Minister:

f) Allocation of Land for New Investments

In the presentation made by the Prime Minister, it is explained that some land will be allocated for the big project investments and for regional and sector-specific investments. However no further detail is provided related to this topic.

The application of land allocation for investments have been in the legislation for a long period of time with Laws numbered 5425 and 5084 and no major change related to this legislation is anticipated. The only change that might be expected is related to the number of cities to which the investments will be allocated. This incentive currently covers 54 cities and it is understood that with the introduction of the new legislation the number of cities to which the land allocation will be made might increase to 58.

5. Other Issues related to Incentives

The other main issues related to aforesaid topics are summarized below:

• The incentives shall only apply on the investments that are subject to an investment incentive certificate

• It is explained that the new investment incentive system shall apply on the investments that start prior to 31 December 2010. However, considering that the laws that cover the investment incentive legislation are not temporary ones, it is not difficult to conclude that at the end of the specified timeframe, the incentives will stay in effect with some changes in their content.

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.