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Significant Tax Amendments Made by Law No. 7420

Significant Tax Amendments Made by Law No. 7420

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Law No. 7420 has made significant amendments related to tax legislation. These amendments cover: the introduction of a new tax treatment on capital reduction, a time extension for conversion to a currency-protected deposit account, an extension of the deadline for the tax benefits granted to individual participation investors (angel investors), income tax exemption for the portion of the meal costs paid in cash to employees that do not exceed TRY 51, and amendments to the tourism share rates.

New developments

Law No. 7420 on Amendments to Income Tax Law and Certain Laws and Statutory Decrees (“Law No. 7420“), which was published in the Official Gazette No. 32008, dated 9 November 2022, introduces various amendments related to tax legislation. This alert covers the significant amendments made by Law No. 7420.

What does Law No. 7420 introduce?

1. Tax treatment of capital reduction

The tax treatment of capital reduction has been one of the most controversial tax issues for many years due to the absence of a clear legal regulation in tax laws on this issue.

In fact, there is no provision in the tax legislation stipulating that in the event of a capital reduction, capital elements that are funded from internal resources such as share capital and profit reserves will be considered as distributed dividends, or from which source the reduction will be deemed to have been made first. However, in the Revenue Administration’s rulings, there has been an understanding that a capital reduction is made from the related accounts in the following order and withdrawn from the business: (i) accounts subject to corporate income tax and withholding tax due to profit distribution (such as inflation adjustment positive difference, revaluation fund, revaluation fund of subsidiaries, cost increase fund, etc.); (ii) accounts subject to withholding tax related to profit distribution (previous year profits, extraordinary reserves, etc.); and (iii) in-kind and cash capital that will not be taxed in the event of withdrawal from the business. Due to the absence of a legal explanation on this issue, the Revenue Administration’s approach has caused many disputes between the administration and taxpayers.

In order to eliminate the legal gap and prevent disputes, Article 32/B titled “Taxation in Capital Decrease” has been incorporated into Corporate Income Tax Law No. 5520 (CITL). Pursuant to the aforementioned article, taxation on capital reduction differs depending on whether the equity items added to the capital are subject to capital reduction within five full years from the date of capitalization. As per the new regulation, the principles of the taxation in capital reduction are as follows:

  • In the event that the capital reduction is realized after five full years, the breakdown of the reduced capital amount will be determined by proportioning each of the capital elements to the total capital and taxation will be carried out accordingly.
  • In the event that the capital reduction is realized within five years, it will be accepted that the capital reduction has been made from the following capital elements respectively and taxation will be as follows:
    • Capital elements whose transfer or withdrawal are subject to corporate income tax and withholding tax based on the profit distribution or the amount remitted abroad. These items will be subject to corporate income tax and income tax withholding.
    • Capital elements that will be subject to withholding tax based solely on dividend distribution or the amount remitted abroad. These items will be subject to income tax withholding.
    • Non-taxable cash and in-kind capital. This part of the capital decrease is not subject to any taxation.
  • If the capital includes some elements that are added to the capital within the five-year time frame and some elements that were added more than five years ago, the elements whose date of addition to the capital has not exceeded five years will be considered withdrawn from the capital.
  • In the event of a capital decrease by offsetting retained losses, the capital elements subject to the decrease will be determined as explained above, but withholding tax will not be applied on these amounts based on the profit distribution or the amount remitted abroad.

2. Corporate income tax exemption applied on the income generated within the scope of currency-protected deposit accounts

According to Temporary Article 14 of the CITL, if taxpayers convert their foreign currencies and gold account balances into Turkish lira at a conversion rate/price within the scope to support the conversion to Turkish lira deposits and participation accounts before the end of 2022, the interest and dividends to be accrued on the deposits within this scope and other earnings are exempted from corporate tax.

This time, with Law No. 7420, the deadline for the conversion of foreign currency and gold balances into Turkish lira has been extended until 31 December 2023 within the scope of the application of the corporate tax exemption on the interest, dividends and other earnings of taxpayers who convert their foreign currency and gold account balances into Turkish lira deposits and participation accounts.

In addition, Law No. 7420 authorizes the president to apply the exemption separately or jointly for foreign currencies included in the balance sheets of corporations at the end of each advance corporate tax or annual accounting period until 31 December 2023.

3. Individual participation investor (angel investor) deduction

According to Temporary Article 82 of the Income Tax Law No. 193 (ITL), full taxpayer individual participation investors (angel investors) may deduct 75% of the share price from their earnings and revenues subject to their annual returns in the period in which the shares were acquired, provided that they have held the participation shares of full taxpayer joint stock companies they acquired before 31 December 2017 for at least two full years. However, the annual deduction amount cannot exceed TRY 1 million in accordance with this exemption.

In addition, the mentioned deduction rate is applied as 100% for personal participation investors participating in enterprises whose projects have been supported in the last five years within the scope of research, development and innovation programs.

This time, the effective period of this exemption, which was to on 31 December 2022, has been extended to 31 December 2027 with Law No. 7420 and the maximum deduction amount has been increased from TRY 1 million to TRY 2.5 million.

4. Other significant amendments

  • According to Article 23/8 of the ITL, benefits provided by employers to employees by means of food are exempt from income tax. In addition, in cases where employers provide meals outside the workplace or its outbuildings, if the cost of one day’s meal for the days worked does not exceed TRY 51 and the related payment is made to taxpayers providing the catering service, these payments were also considered within the scope of the exemption. Law No. 7420 removed the condition that “the payment should be made to the taxpayers providing the catering service.” In that sense, the employers can also benefit from the exemption if the payment, which does not exceed the mentioned threshold, is made to the employee in cash.
  • Benefits provided by employers for the payment of electricity, natural gas and heating expenses of employees up to TRY 1,000 are exempt from income tax until 30 June 2023. In addition, it is regulated that the payment is not included in the earnings based on the insurance premium.
  • Salary payments made to employees working in construction, repair, assembly works and technical services abroad, in return for their work abroad, which are covered by the employer’s foreign earnings, are exempt from income tax.
  • Tourism share is the share/shares taken from the total net sales and rental income obtained by real or legal persons who are investors or operators of commercial enterprises as a result of their activities in these enterprises. Law No. 7420 redefined the tourism share taxpayers and certain tourism share rates, and terminated the collection of tourism share from marine tourism vehicles with a tourism business certificate obtained from the ministry.


Law No. 7420 introduced important amendments to the tax laws. Among these amendments, the amendment on capital reduction is particularly important because through this amendment, a new provision titled “Taxation in Capital Decrease” has been added to the CITL to permanently eliminate disputes regarding taxation in capital reductions, which is one of the most controversial tax issues, and to eliminate the legal gap. We recommend that companies consider the new regulation on capital reduction within their capital movements (capital increase/capital decrease) and evaluate its effects before making transactions.

By Erdal Ekinci, Partner, Orhan Pala, Partner, Ozge Kisacik, Associate, Esin Attorney Partnership

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