Law No. 7352 on Certain Amendments to the Tax Procedure Law and the Corporate Tax Law (“Law No. 7352”) postponed the inflation adjustment and provided an exemption from the corporate tax for income generated from the conversion of foreign currency and gold accounts into Turkish deposit accounts and participating accounts.
The application of inflation adjustment has been postponed until the end of 2023, in accordance with 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 Journal of January 29, 2022.
With Provisional Section 14 added to the Corporation Tax Law (CITL) No. 5520, it was regulated that corporate taxpayers who converted their account balances into foreign currency and/or gold on their balance sheet dated December 31, 2021 in Turkish lira will benefit and exemption from income tax for foreign exchange gains resulting from conversion and interest, profit sharing and other income to be derived from deposit and participating accounts in Turkish lira in a timely manner opened in this context.
What does this law say?
- Inflation adjustment changes
In the rationale for Law No. 7352, it is stated that taxpayers already have revaluation possibilities and taxpayers have suggested that there will be problems in applying inflation accounting, which has not not been used for a long time. These requests have been taken into account by the legislator and the application of the inflation adjustment has been postponed until the end of 2023.
- In this regard, taxpayers can use the TPL’s “Adjustment for inflation, revaluation rate and tax rate” in accounting periods 2021 and 2022 (for taxpayers using special accounting periods, taking into account accounting periods ending in 2022 and 2023) and in the early tax periods of the 2023 accounting year. They will not subject their accounts to inflation adjustments, that the inflation adjustment conditions under the recalled article 298 titled “revaluation” are fulfilled or not.
- The financial statements as of December 31, 2023, on the other hand, will be subject to an inflation adjustment, whether or not the inflation adjustment conditions are met. The retained earnings resulting from this adjustment (including the amounts for the 2023 accounting year) will not be taxable and the loss for the previous year 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 deferral and taxpayers within this scope will continue to make inflation adjustments.
- Changes regarding the corporation tax exemption
In accordance with provisional article 14 added to the CITL, institutions must convert their foreign currencies in their balance sheets as of December 31, 2021 into Turkish lira on the evening of February 17, 2022, the filing date of the fourth provisional tax period, and Turkish lira Assets thus obtained must be converted into Turkish lira with a maturity of at least three months. In case of conversion of Turkish liras into deposit and participation accounts, the following will be exempt from corporation tax:
- The share of foreign exchange gains resulting from the valuation at the end of the period of said foreign currencies corresponding to the period between October 1, 2021 and December 31, 2021
- Foreign exchange gains from January 1, 2022 to the conversion date; interest and dividends resulting from the end-of-period valuation; interest and dividends obtained at the end of the term; and other income (support payments to be made by the Central Bank
If the entities convert their foreign currencies in their balance sheet as of December 31, 2021 into Turkish lira deposit accounts or participating accounts from February 17, 2022 to December 31, 2022, will be exempt from corporation tax:
- Exchange differences relating to the period from the beginning of the early tax period, covering the date on which foreign currencies are converted on deposit accounts or participating accounts in Turkish lira, until the accounts are opened
- Interest income and stock earnings accrued at the end of the period and interest; sharing of profits and other income generated by these accounts at the end of the period
In addition, as part of the promotion of conversion to Turkish lira deposit accounts and participating accounts by the end of 2022, if entities convert the balances of their forged gold or scrap accounts opened after December 31 2021 and the balances present on the entities’ balance sheets as of December 31, 2021 in Turkish lira based on the indicated exchange rate, and if they keep these amounts in deposit accounts or participating accounts for at least three months, would be exempt from corporation tax:
- Income generated from the conversion of such assets into Turkish lira relating to the period from the beginning of the early tax period, covering the date on which foreign currencies are converted on deposit accounts or participating accounts into Turkish lira, until the accounts are opened
- Interest income and stock earnings accrued at the end of the period and interest, stock earnings and other income generated by these accounts at the end of the period
- Effects of Central Bank announcements
Although the text of Law No. 7352 stipulates 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 statements issued by the Central Bank of the Republic of Turkey. As such, accounts opened with a maturity of six months or one year may benefit from the aforementioned exemption. If the Central Bank adopts a new regulation allowing the opening of exchange rate protected deposit accounts with a maturity of three months in the future, these accounts will also be able to benefit from these exemptions.
- Expenses relating to exempt income and loss events
Article 5/3 of the CITL provides the following:Expenses of entities relating to their profits exempt from corporation tax or losses resulting from their activities within the framework of the exemption cannot be deducted from the non-exempt income of corporations.However, this does not apply to currency and gold accounts that are converted to Turkish lira or participating accounts based on the expected period and exchange rate, provided they are limited by this exemption. In other words, entities can deduct their expenses related to transactions falling within the scope of this exemption from their non-exempt corporate income, and if they suffer a loss due to protected exchange rate deposit accounts , they may consider this loss as an expense in determining the income of the corporation.
- Withdrawals from accounts opened before the due date
In case of withdrawals from the mentioned accounts before the due date, taxes not accrued in time due to the exemption will be recovered by applying a tax loss penalty and deferred interest.
Law No. 7352 postponed the implementation of the inflation adjustment and introduced a corporate tax exemption to avoid the adverse effects of exchange rate fluctuations for entities and to promote the use of the Turkish lira, thus ensuring financial stability. Meanwhile, since legal persons can open currency-protected deposit accounts with a maturity of at least six months as per the Central Bank announcements, the Central Bank should adopt additional regulations to extend the scope exemption from corporation tax so that it is possible for legal persons to open currency-protected deposit accounts with a maturity of three months.
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