Recent developments in Turkish tax regulations carry substantial implications for both corporations and foreign investors. Turkey has undertaken substantial measures to fortify its fiscal position and tackle economic challenges. Among the notable changes is the elevation of the general corporate income tax rate to 25%. The financial sector faces an even higher rate of 30%. This tax rate adjustment is rationalized by the government as a means to aid the country's recovery efforts following recent earthquakes.
The amendment to Article 32 of the Corporate Income Tax Law outlines these alterations. Corporate income tax is now set at 25% on corporate profits, while banks and other specific entities fall under a 30% corporate income tax rate category.
Additionally, the revision to paragraph (7) of Article 32 introduces a 5-point discount on the corporate income tax rate for corporations exclusively engaged in export-related profits.
The heightened corporate income tax rate of 30% in the financial sector warrants scrutiny due to its potential effects on the profitability, lending practices, and overall stability of financial institutions. While the motive behind this adjustment may be to augment tax revenue, its repercussions on the financial sector necessitate careful consideration.
As of July 15, 2023, the Turkish government has eliminated the exemption on 50% of gains resulting from the sale of immovables listed under corporate assets. This translates to corporations now being subject to full taxation on gains from such sales.
Nonetheless, a temporary provision exists, permitting corporations to maintain a 25% exemption on gains from the sale of immovables recorded under their assets before the regulation's effective date. This allows corporations holding immovables for an extended period to continue benefiting from a substantial tax advantage upon sale.
The government has also terminated the Value Added Tax (VAT) exemption on immovable sales by corporations, requiring them to pay VAT similar to individuals.
These regulatory changes are likely to significantly influence the Turkish real estate market. Corporations intending to sell immovables must now factor in higher taxes when making decisions, potentially leading to reduced sales and downward price pressure.
Foreign investors might also feel the impact of these new regulations. The erstwhile allure of investing in Turkish real estate, stemming from tax exemptions on immovable sales, has diminished. Consequently, foreign investors could display reduced enthusiasm for Turkish real estate investments.
The repercussions of the new regulations on the Turkish real estate market are yet to fully unfold. However, it is evident that corporations and foreign investors will experience a substantial impact.
By Onur Cagdas Ozgur, Tax Senior Manager, Nazali Tax & Legal