The significant public financing need caused by the earthquakes centered in Kahramanmaraş and Hatay on 6 February 2023 continues to lead to various tax-related regulations. The first of such regulations was a one-time additional tax imposed on certain corporate taxpayers with Law No. 7440 on the Restructuring of Certain Receivables and Amendments to Certain Laws published in the Official Gazette dated 12 March 2023.
Subsequently, on 5 July 2023, "Draft Law on Additional Motor Vehicles Tax and Amendments to Certain Laws and Decree Law No. 375 for the Compensation of Economic Losses Caused by the Earthquakes Occurred on 6/2/2023" ("Draft Law"), which includes certain regulations and amendments aiming to meet the financing needs caused by the earthquake, was submitted to the Planning and Budget Committee of the Turkish Grand National Assembly. The regulations and amendments to be made by the Draft Law cover various matters, including the increase in the corporate income tax rate, the repeal of corporate income tax and VAT exemptions for real estate sales, and the repeal of corporate income tax exemptions for investment funds.
Lastly, the regulations published in the Official Gazette dated 7 July 2023 introduced certain measures to increase public revenue, such as increasing the VAT rates and fixed charge amounts together with the changes in banking and insurance transactions tax (BITT) and withholding tax rates on certain transactions.
What do the New Regulations Mean?
Tax Regulations Implemented on 7 July 2023
- Presidential Decree No. 7346 increased the general VAT rate from 18% to 20%; VAT rate on goods included in List No. (II) from 8% to 10%; and from 8% to 20% for soaps, shampoos, detergents, sanitizers, wet wipes (regardless of being saturated with soaps, detergents or solutions), toilet papers, paper towels, paper tissues and tissues.
- Presidential Decree No. 7344 increased all the fixed charges by 50%, except for the driving license charge, and increased the phone registry charge for the phones imported by passengers from TRY 6,091 to TRY 20,000.
- Presidential Decree No. 7345 increased the BITT rate from 10% to 15% on consumer loans. The new rate is applicable for consumer loans obtained as of 7 July 2023.
- Presidential Decree No. 7343 provided that withholding tax at 0% will only apply to the full taxpayer capital companies listed on the Istanbul Stock Exchange on the amounts deemed as distributed dividend in case of share buy-backs. Accordingly, withholding tax has been reset as 15% for non-listed full taxpayer capital companies on the amounts deemed as distributed dividend in case of share buy-backs. The amendment is applicable to the shares acquired by 7 July 2023.
Regulations to be Implemented with the Draft Law
Corporate Income Tax Rate Increase
The Draft Law increases the general corporate income tax rate from 20% to 25%, and from 25% to 30% applicable to the banks, companies subject to the Law on Finance Lease, Financing and Saving Finance Companies; electronic payment and money institutions; authorized foreign currency institutions; asset management companies; capital market institutions; insurance and reinsurance companies; and pensions companies.
Moreover, the Draft Law increases the corporate income tax rate deduction from 1 point to 5 points, which applies to the income of the exporting companies generated exclusively from the export transactions.
The amendments to the corporate income tax rates will apply to the tax returns to be filed by 1 October 2023, and to the income generated in 2023 and within the subsequent taxation periods. For taxpayers using special accounting periods, the periods starting in 2023 and the following taxation periods will be taken into account.
Repeal of the Corporate Income Tax and VAT Exemptions on Real Estate Sales
Except for those carrying out real estate sales as a business, 50% of the income generated from the sale of real estate, kept in an entity's assets for at least two years, is exempt from the corporate income tax (as long as certain conditions are met). Likewise, the sale of real estate kept in the assets of an entity that does not carry out real estate sales as a business for at least two years is exempt from VAT.
The Draft Law repeals the mentioned corporate income tax and VAT exemptions on real estate sales. Meanwhile, if a real estate included in an entity's assets before the enactment of the Draft Law is sold later on, the sale will be exempt from the VAT while only 25% of the income generated from the sale will be exempt from the corporate income tax.
Repeal of the Corporate Income Tax Exemptions Regarding Investment Funds and Partnerships Except for Venture Capitals
Regulations implemented in 2022 provided corporate tax exemptions for the corporate income generated from the dividends received from the full taxpayer investment funds and the refund of these funds' participation shares. The Draft Law repeals the exemptions on the income generated from investment funds, except for those generated from the dividends received from venture capital funds and partnerships and the refund of their participation shares.
This amendment will apply to the investment fund participation shares acquired as of the publishing of the related provision in the Official Gazette. Income from the investment funds acquired before the publishing of the provision will remain exempt from the corporate income tax.
Exclusion of Real Estate from the Scope of Partial Demerger
According to Article 19 of the Corporate Income Tax Law, real estate, shares, and production and service businesses can be, under certain conditions, subject to partial demerger. The partial demergers made within that scope are exempt from the corporate income tax, VAT, stamp tax and title deed fee. The Draft Law excludes real estate from the scope of a partial demerger. Accordingly, transfer of a real estate alone would not benefit from the tax exemptions under the partial demerger. This provision is envisaged to enter into force by 1 January 2024.
Additional Motor Vehicles Tax
The Draft Law introduces an additional motor vehicles tax for once in the amount of the motor vehicles tax accrued for 2023.
Earthquakes centered in Kahramanmaraş and Hatay on 6 February 2023 caused significant public financing needs. This has led and continues to lead to the implementation of many new regulations to generate more public revenue by increasing taxes. As a result, careful financial planning by taxpayers, who would be affected by these regulations, thereby increasing their tax burden, becomes increasingly important. We recommend that taxpayers closely follow the new regulations to avoid adverse consequences.
By Erdal Ekinci, Orhan Pala, Partners, and Huseyin Eren Akarca, Associate, Esin Attorneys Partnership