Türkiye: Major Tax Developments in 2023

In this tax bulletin we summarize important recent tax developments and legislative changes in Türkiye.

1. Law No. 7456 on an Additional Motor Vehicle Tax to Address Economic Losses Caused by the Earthquake on 6/2/2023 and on Amendments to Certain Laws and Decree Law No. 375 (Law No. 7456)

Law No. 7456 on an Additional Motor Vehicle Tax to Address Economic Losses Caused by the Earthquake on 6/2/2023 and on Amendments to Certain Laws and Decree Law No. 375 (Law No. 7456) was published in the Official Gazette dated 15/07/2023 as No. 32249. The significant tax amendments included in Law No. 7456 are summarized below:

• Law No. 7456 provides for a one-time additional motor vehicle tax (MVT) to be levied on vehicles such as cars, minibuses, buses, trucks and motorcycles which are included in the relevant tariffs of Motor Vehicle Tax Law No. 197 and are already registered as at 15/07/2023 or are registered for the first time between 15/07/2023 and 31/12/2023. The amount of the one-time tax should be equal to the amount of MVT charged in 2023. The additional tax will be collected in two installments. For vehicles already registered on 15/07/2023, the first installment of the additional tax is to be paid by 31/08/2023 and the second installment by 30/11/2023. For vehicles registered for the first time between 15/07/2023 and 31/12/2023, it is provided that the additional tax will be paid in advance together with the MVT for the vehicles in question. Taxes collected will be recorded as revenue of the general budget. Pursuant to Articles 2, 10 and 73 of the Constitution, the additional MVT will be reviewed for compliance with the principle of the legality of taxation, the principle of certainty in terms of the non-retroactivity of tax laws and the principle of taxation according to ability to pay. Indeed, the Constitutional Court annulled the additional MVT regulation introduced after the 1999 earthquake after examining that tax in light of those principles. Taxpayers planning to initiate a tax litigation case should be aware that the additional MTV will be taken to have been charged and notified as of the promulgation date of the Law and the litigation term should be calculated accordingly.
• The general corporate income tax (CIT) rate has been increased from 20% to 25%. For banks and financial institutions, the CIT rate has been raised to 30%. At the same time, exporting organisations will receive a 5% discount on the CIT rate in place of the current 1% discount. This regulation applies to income received by corporations during FY 2023 and ensuing tax periods starting with declarations due on 01/10/2023.
• The value added tax (VAT) exemption applicable to transfers and deliveries of immovable properties which a company has held as assets for at least two full years has been abolished. On the other hand, pursuant to a provisional article added to Value Added Tax Law No. 3065 (the VAT Law), the VAT exemption will continue to be applied to transfers and deliveries of immovable properties which a company held as assets before 15/07/2023.
• The 50% CIT exemption for capital gains from the sale of immovable properties which a company has held as assets for more than two years has been abolished. Under a provisional article added to Corporate Income Tax Law No. 5520 (CITL), the CIT exemption will continue to apply to the sale of immovable properties which a company held as assets before 15/07/2023. However, the CIT relief applicable to income from the sale of immovable properties after 15.07.2023 will be 25%, not 50%.
• Immovables are to be excluded from the scope of the tax-free partial spin-off provided for in Article 19/3-b of the CITL. This amendment will enter into force on 01/01/2024. It is therefore of the utmost importance for corporations which are considering transferring their immovable assets through a partial spin-off to take this amendment into consideration. It is also important that challenges previously raised by the Revenue Administration regarding the transfer of immovables through a partial spin-off should be considered with respect to tax-free partial spin-off transactions due to be completed before 31/12/2023.
• The CIT exemption for income derived from investment funds and partnerships other than venture capital funds and partnerships is abolished. This applies to investment fund participation shares acquired as of 15/07/2023.
• Changes are made to the powers granted to the President to tax goods included in Lists I and III attached to the Special Consumption Tax Law No. 4760 (the SCT Law) in accordance with possible price fluctuations. In addition, changes have been made in relation to the lump-sum tax amounts specified for goods in List I attached to the SCT Law.
• Under Article 9 of this Law, deliveries and services made to professional organizations classified as public institutions for the construction of houses to be donated to disaster victims under the terms of the Protocol signed with the Disaster and Emergency Management Presidency in the earthquake region are exempted from value added tax until 31/12/2024. Taxes incurred on deliveries and services falling within the scope of this provision will be deducted from the tax calculated on taxable transactions. Taxes that cannot be recovered through deduction will be refunded upon the request of the taxpayer who makes transactions falling within the scope of the exemption in accordance with the provision of Article 32 of the Law.

2. Revision of VAT Rates Applicable to Goods and Services

Under Presidential Decree No. 7346, the standard VAT rate has been increased from 18% to 20% while the 8% reduced VAT rate has been increased to 10%. The reduced VAT rate of 1% which applies to certain basic foodstuffs has not changed. On the other hand, the decree amends item 37 of List II, for which the reduced VAT rate of 8% applies.

As a result, the VAT rate for soap, shampoo, detergents, disinfectants, wet wipes (whether or not impregnated with soap, detergent or solution), toilet paper, paper towels, tissue paper and napkins has increased from 8% to 20%.

3. Changes to Value Added Tax Practices

The Communiqué Amending the Value Added Tax General Implementation Communiqué (Serial No: 47)" was published in the Official Gazette dated 7/9/2023 as No. 32302. In summary, the Communiqué makes the following changes.

• Article 7 of Law No. 7456 abolished the VAT exemption for transfers and deliveries of immovable properties that institutions have held as assets for at least two full years. At the same time, Article 8 of the same Law provides that the VAT exemption will have effect for transfers and deliveries of immovables which institutions held as assets for at least two full years before 15/7/2023.
• Article 1/2 of Council of Ministers Decree No. 2007/13033, which sets VAT rates, provides that the VAT rate for supplies of goods will be applicable to financial leasing transactions, except for transactions listed in the 16^th and 17^th rows of List I. Accordingly, deliveries or services under financial leasing agreements will be subject VAT at the rate in force on the date of delivery or service.
• Regulations are laid down regarding the VAT exemption applicable until 31/12/2024 for deliveries and services to professional organizations classified as public institutions in connection with the construction of houses to be donated to disaster victims.

4. Inflation Adjustments

Under the revised version of Article 298 of Tax Procedure Law No. 213, if the conditions for inflation adjustment are met, financial statements must be adjusted for inflation in the accounting periods in which those conditions are met.

Inflation adjustment was applied in 2003 and 2004. Since that time, no inflation adjustment has been made since the relevant conditions have not been met until now, except for those covered in subparagraph (9) of paragraph A of the aforementioned article.

However, under the provisional Article 33 added to Tax Procedure Law No. 213, financial statements dated 31.12.2023 will be subject to inflation adjustment regardless of whether the inflation adjustment conditions are met. The profit/loss difference arising from the adjustment made will be shown in the previous year’s profit/loss account; the previous year's profit determined in this way will not be taxed, and the previous year's loss will not be considered as a loss.

5. Digital Service Tax and OECD Two Pillar Solutions for Tax Challenges Caused by the Digitalization of the Economy

Law No. 7194 on Digital Services Tax was published on 7 December 2019 and the General Communique on the Implementation of the Digital Services Tax was published on 20 March 2020. According to the Communiqué, the rate of the digital services tax has been set at 7.5%. The tax applies to revenue generated from all kinds of advertising services offered in the digital environment, including such services as user-related data transmission and data management, technical services relating to the presentation of advertising and advertising control and performance measurement services. The tax is payable by companies with revenue of more than 20 million Turkish lira in Türkiye or worldwide revenue of more than 750 million EUR. This means that virtual stores have started to be treated as permanent establishments and internet trade has become subject to taxation.

The Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, adopted on 9 July 2021 and signed by 130 member countries of the Organization for Economic Co-operation and Development (OECD), introduced new regulations regarding source country taxation with two main pillars. The Statement provides for an amount of the profits of companies with a global turnover exceeding 20 billion USD and profitability above 10% (before tax) to be allocated to countries where activities are carried out using the method set out in "Pillar One" to achieve a fair distribution of the share of source countries in taxation. Furthermore, the OECD has established a global minimum corporate tax rate of 15%, dubbed "Pillar Two".

In its meeting on 10-11 July 2023, the G20/OECD Inclusive Framework on BEPS made further progress on the remaining elements of the two-pillar project. As one of the key points, it was confirmed that the final agreement on and the signature of the multilateral convention are expected to take place by the end of 2023.

Currently, both Pillar 1 and Pillar 2 entail significant changes in international taxation regimes. In this regard, Türkiye is expected to take steps to publicize a legislative proposal and implement strategies to transpose relevant provisions into domestic legislation. As far as we are aware from our communication with Turkish tax authorities, the Turkish tax administration is working on the potential incorporation of Pillar 1 and Pillar 2 into domestic law in line with OECD recommendations and arrangements.

6. Resource Utilization Support Fund Relief for Loans Obtained From Abroad

Under Presidential Decree No. 6657 published in the Official Gazette dated 10.01.2023 (Decision on the Resource Utilization Support Fund Relief), the RUSF rate for loans obtained from abroad by financial leasing companies has been set at 0%.

7. Cash Capital Increase: Communiqué on Amendment of the Corporate Tax General Communiqué (Serial No: 21)

Regarding the application of a tax deduction in connection with a cash capital increase, matters previously regulated by Law have been added to the Communiqué and explained in detail. The changes made by the Communiqué include the following:

• For the portion of the cash capital increase covered by cash brought from abroad, the deduction rate will be 75%.
• A 5-year limitation period has been added to the Law for the right to claim a corporate tax deduction in connection with a cash capital increase.
• According to subparagraph (i) added to the first paragraph of Article 10 of the Corporate Tax Law No. 5520 by Law No. 7421, for institutions operating in the Istanbul Finance Center Zone by obtaining a participant certificate in accordance with the provisions of the Istanbul Finance Center Law No. 7412 of 22/6/2022, 50% of income derived from the sale of goods purchased from abroad without being brought to Türkiye or from intermediation in the purchase and sale of goods abroad may be deducted from declared corporate income.