Law No. 7352 on Certain Amendments to Tax Procedural Law and Corporate Income Tax Law (“Law No. 7352”) postponed the inflation adjustment and provided a corporate tax exemption for the income generated from the conversion of foreign currency and gold accounts to deposit accounts and participation accounts in Turkish.
The application of the inflation adjustment was postponed until the end of 2023, pursuant to the Provisional Article 33 added to Tax Procedure Law No. 213 (TPL) with Law No. 7352, which entered into force after being approved by the president and published in the Official Gazette dated 29 January 2022.
With Provisional Article 14 added to Corporate Income Tax Law No. 5520 (CITL), it was regulated that corporate taxpayers who have converted their foreign currency and/or gold account balances in their balance sheet dated 31 December 2021 into Turkish lira, will enjoy corporate and income tax exemption for the foreign exchange gains arising from the conversion and the interest, profit share and other income to be obtained from the timely Turkish lira deposit and participation accounts opened in this context.
What does this law say?
- Inflation adjustment changes
In the justification of Law No. 7352, it is stated that taxpayers already have revaluation opportunities and there have been suggestions made by taxpayers that there will be problems in the application of inflation accounting, which has not been used for a long time. These demands were taken into account by the legislator and the application of the inflation adjustment was postponed until the end of 2023.
- In this respect, taxpayers can use the “Inflation adjustment, revaluation rate and tax rates” of the TPL in the 2021 and 2022 accounting periods (for taxpayers using special accounting periods, taking into account the accounting periods ending in 2022 and 2023) and in the advance tax periods of the 2023 accounting period. They will not subject their financial statements to inflation adjustments, regardless of whether the conditions for inflation adjustment within the scope of the reiterated Article 298 titled “revaluation” have been met or not.
- Financial statements dated 31 December 2023, on the other hand, will be subject to inflation adjustment regardless of whether the inflation adjustment conditions are met. The retained earnings resulting from this adjustment (including the amounts for the 2023 accounting period) will not be taxable and the previous year’s loss will not be considered a loss.
- Taxpayers who are exclusively engaged in the purchase, sale and manufacture of gold and silver will not be able to benefit from the postponement and the taxpayers within that scope will continue to make inflation adjustments.
- Changes regarding corporate tax exemption
- Scope of exemption
Pursuant to Provisional Article 14 added to the CITL, institutions must convert their foreign currencies in their balance sheets on 31 December 2021 into Turkish lira by the evening of 17 February 2022, the date of submission of the fourth provisional tax period, and the Turkish lira assets thus obtained must be converted into Turkish lira with a maturity of at least three months. In the case of converting Turkish lira to deposit and participation accounts, the following will be exempt from corporate tax:
- The portion of the exchange gains arising from the period-end valuation of the said foreign currencies corresponding to the period between 1 October 2021 and 31 December 2021
- Exchange gains from 1 January 2022 to the conversion date; interest and dividends arising from the period-end valuation; interest and dividends obtained at the end of the maturity; and other earnings (support payments to be made by the Central Bank
If the entities convert their foreign currencies in their balance sheet on 31 December 2021 to deposit accounts or participation accounts in Turkish lira from 17 February 2022 to 31 December 2022, the following will be exempt from the corporate income tax:
- Exchange rate differences related to the period from the beginning of the advance tax period, covering the date when the foreign currencies are converted to the deposit accounts or participation accounts in Turkish lira, until the opening of the accounts
- Interest income and share profits accrued as of the end of the period and interest; share profit and other income generated from these accounts at the end of the period
In addition, within the scope of promoting the conversion to deposit accounts and participation accounts in Turkish lira by the end of 2022, if the entities convert the balances in their wrought or scrap gold accounts opened after 31 December 2021 and the balances present on the entities’ balance sheets as of 31 December 2021 to Turkish lira based on the indicated exchange rate, and if they keep these amounts in the deposit accounts or participation accounts for at least three months, the following would be exempt from the corporate income tax:
- Income generated from converting these assets to Turkish lira related to the period from the beginning of the advance tax period, covering the date when the foreign currencies are converted to the deposit accounts or participation accounts in Turkish lira, until the opening of the accounts
- Interest income and share profits accrued as of the end of the period and interest, share profit and other income generated from these accounts at the end of the period
- Effects of the Central Bank’s communiqués
Although the text of Law No. 7352 states that the deposit to be converted must be kept in a currency-protected deposit account with a maturity of at least three months, legal entities can open a currency-protected deposit account with a maturity of at least six months, according to the communiqués published by the Central Bank of the Republic of Turkey. In this respect, accounts opened with a maturity of six months or one year will be able to benefit from the above-mentioned exemption. If the Central Bank makes a new regulation allowing the opening of currency-protected deposit accounts with a maturity of three months in the future, these accounts will also be able to benefit from these exemptions.
- Expenses regarding the exempted income and the case of making a loss
Article 5/3 of the CITL, states the following: “The expenses of entities regarding their earnings exempted from corporate tax or the losses arising from their activities within the scope of the exemption cannot be deducted from the non-exempt corporate income.” However, this does not apply to foreign currency and gold accounts that are converted to Turkish lira or for participation accounts based on the provided period and the exchange rate, provided that it is limited with this exemption. In other words, entities can deduct their expenses related to transactions within the scope of this exemption from their nonexempt corporate income, and if they make a loss due to currency-protected deposit accounts, they will be able to consider this loss an expense in the determination of corporate income.
- Withdrawals from opened accounts before the maturity date
In the case of withdrawals from the mentioned accounts before the maturity date, the taxes not accrued on time due to the exemption will be recovered by applying a tax loss penalty and delaying interest.
Law No. 7352 postponed the implementation of the inflation adjustment and introduced a corporate income tax exemption to avoid the adverse effects of the fluctuations in currency rates for entities and to promote the use of Turkish lira, thus providing financial stability. Meanwhile, since legal entities can open currency-protected deposit accounts with a maturity of at least six months in accordance with the Central Bank’s communiqués, the Central Bank should make additional regulations to expand the scope of the corporate tax exemption so that it would be possible for legal entities to open currency-protected deposit accounts with a three-month maturity.