The Communiqué Amending the Corporate Tax General Communiqué (Serial No. 1) (“Communiqué“), explaining the implementation of the financing expense deductions limitation (“Limitation“), was published in the Official Gazette No. 31491 on 25 May 2021.
What does the Communiqué mean?
The Communiqué added explanations to the principles and procedures on the implementation of the Limitation to the Corporate Tax General Communiqué (Serial No. 1), as follows:
- Corporate taxpayers whose utilized foreign liabilities exceed their equity should consider 10% of the total of expense and cost items, except those added to the expense of an investment, related to the foreign liabilities made under the title of interest, commission, dividend and exchange rate difference as non-tax-deductible expenses within the calculation of their business income. The Limitation only applies to amounts that exceed the equity.
- Foreign liabilities refer to the sum of the short-term liabilities and the long-term liabilities of the balance sheet.
- The Limitation only applies to taxpayers taxed on a balance sheet basis and it does not apply to taxpayers subject to the operation account method. In addition, the following are not subject to the Limitation:
- retirement enterprises
- deposit banks, participation banks, development and investment banks established in Turkey, and branches and financial holding companies in Turkey belonging to similar enterprises established abroad
- insurance and reassurance companies
- financial leasing, factoring and financing companies, savings finance companies and enterprises carrying out capital markets activities
- When implementing the Limitation, the following should be considered:
- For advance tax, the balance sheet should be prepared as per the provisions of the Tax Procedural Law No. 213 (TPL) on the last day of each advance tax period.
- For annual taxation, the balance sheet should be prepared as per the provisions of the TPL on the last day of the financial year.
- Taxpayers utilizing the calendar year as accounting period should consider the Limitation as of the first advance taxation period of 2021 in the first application of the Limitation. Taxpayers utilizing a special accounting period should consider the Limitation for the special accounting period that starts in 2021.
- Costs and expenses that are related to the foreign liabilities provided after 1 January 2013 and of which the nature and amount are finalized by 1 January 2021 should be subject to the Limitation.
- The following costs and expenses do not fall within the scope of the Limitation:
- items added to investment costs
- commissions for guarantee letters and expenses made independently from the use of foreign sources, such as costs like printing bond issuances and mortgage costs
- expenses incurred independently from the period of use of the foreign sources, such as stamp tax paid for loan agreements or banking and insurance transaction tax paid for bank transfer fees
Similarly, early payment deductions or anticipations that are not a financing cost but are in the nature of a decrease in the financing income do not fall within the scope of the Limitation.
Nevertheless, expense and cost items, such as banking and insurance transaction taxes calculated over loan interests incurred from the period to use the foreign source in the business, fall within the scope of the Limitation.
- The expenses of the exchange rate difference incurred from the valuation of the amounts, under TPL provisions, included in the accounts, such as vendor accounts regarding the payment of the sales price at the end of a certain due date, should be subject to the Limitation.
- Financing expenses incurred by the international trading companies or sectoral foreign trade companies from the sales of the goods that they purchased domestically on their own behalf should be subject to the Limitation.
- If an entity transfers the loan, which is obtained from institutions such as banks, to a group company without bearing any financial burden, the financing expenses related to that loan should be considered by that company as the transferee of the loan and as the company that actually uses it.
- The Limitation applies to taxpayers carrying out years-long construction and restoration work in the year when the final profit and loss is determined. If there is more than one ongoing years-long construction and restoration work or if other work is undertaken, the financing expenses made should be subject to the Limitation in the year when the financing costs incurred are considered in the determination of the profits and losses.
- Taxpayers that derive financing income and financing expenses cannot settle the income and expenses with each other within the implementation of the Limitation. The total of the financing expenses should be subject to the Limitation.
- Income and expenses of the exchange rate differences incurred pertaining to the same liability and within the same or different advance tax accounting periods should be offset with each other. After such offset, if there would be a net expense amount incurred from the exchange rate difference related to that liability as of the transaction date or at the end of the accounting period, that amount should be considered within the Limitation. Despite being within the same period, income and expenses arising from different foreign liabilities should not be offset with each other.
- Income of the exchange rate difference incurred from utilizing a foreign liability by means of depository accounts, etc., should not be offset with any expense arising from the exchange rate difference related to that liability because that income is incurred from the appreciation of an asset in the company’s balance sheet.
- Since expenses such as interest and exchange rates related to foreign sources are already considered non-tax-deductible expenses due to hidden income distribution through transfer pricing or the expense limitation on cars, the part considered the non-tax-deductible expense should not be considered in the calculation of the amount subject to the Limitation.
- An ordinary partnership’s financing costs are not included in the partners’ own financing costs. If the foreign source amounts exceed the equity of the ordinary partnership, when preparing their returns, the partners must consider 10% of the total of the expense and cost items related to the foreign liabilities made under the title of interest, commission, dividend and exchange rate difference as non-tax-deductible expenses. The partners should consider 10% of the mentioned expense and cost items as non-tax-deductible expense on a pro rata basis based on their shares in the ordinary partnership. The Limitation only applies to the amounts that exceed the equity.
- The Communiqué will enter into effect as of its publication in the Official Gazette.
The Communiqué clarified certain matters on the financing expense deductions limitation. It is important to take the explanations in the Communiqué into account in order to implement the Limitation accurately and not to face any tax assessments.