What is the "Additional Tax" introduced by Law No. 7440?

What is the "Additional Tax" introduced by Law No. 7440?

The "Additional Tax" introduced by paragraph 27 of Article 10, titled "Other Provisions", of Law No. 7440 on "the Restructuring of Certain Receivables and Amendments to Certain Laws" is calculated on the exemption and deduction amounts deducted from corporate earnings in the 2022 corporate tax return and on the tax bases subject to reduced corporate tax.

Who is liable for the Additional Tax?

The taxpayers of the additional tax are the taxpayers listed in Corporate Tax Law No. 5520. Accordingly, the following are liable for the additional tax:

1. capital companies,

2. cooperatives,

3. public economic enterprises,

4. economic enterprises owned by associations or foundations,

5. joint ventures.

Limited taxpayer entities that file a corporate tax return are also within the scope of the additional tax.

Entities with corporate tax liability in the provinces of Adana, Adıyaman, Diyarbakır, Elazığ, Gaziantep, Hatay, Kahramanmaraş, Kilis, Malatya, Osmaniye and Şanlıurfa and in the Gürün district of Sivas as of 6/2/2023 are exempt from the additional tax.

What is subject to the Additional Tax?

The subject of the additional tax is the exemption and deduction amounts taken into account in determining corporate earnings under Law No. 5520 and other laws, together with the tax bases subject to reduced corporate tax under Article 32/A of Law No. 5520.

The exemptions under Law No. 5520 and other laws that fall within the scope of the additional tax are:

1. Participation income exemption (Law No. 5520, Art. 5/1-a)

2. Foreign participation income exemption (Art. 5/1-b)

3. Exemption for gains on the sale of foreign participation shares (Art. 5/1-c)

4. Share premium (emission premium) exemption (Art. 5/1-ç)

5. Exemption for gains on the sale of real estate, participation shares and fund shares (Art. 5/1-e)

6. Exemption for gains on the sale of real estate or participation shares by entities indebted to banks, leasing or financing companies or the SDIF (Art. 5/1-f)

7. Foreign branch income exemption (Art. 5/1-g)

8. Exemption for income from foreign construction, repair, assembly and technical services (Art. 5/1-h)

9. Education and training income exemption (Art. 5/1-ı)

10. Exemption for management companies in the taxation of foreign fund income (Art. 5/A)

11. Exemption for gains on the sale of industrial property rights (Art. 5/B)

12. Exemption for gains on the disposal of product certificates issued under Agricultural Products Licensed Warehousing Law No. 5300 (Law No. 193)

13. Exemption for income from operating ships registered in the Turkish International Ship Registry (Law No. 4490)

14. Free zone income exemption (Law No. 3218)

15. Technology development zone income exemption (Law No. 4691)

16. Exemption for income of research infrastructures from R&D and innovation activities (Law No. 6550)

17. Other exemptions in special laws that must be included in the additional tax base

The deductions under Law No. 5520 and other laws that fall within the scope of the additional tax are:

1. Deduction for income from software, engineering, education and health services provided abroad (Art. 10/1-ğ)

2. Interest deduction arising from cash capital increases (Art. 10/1-ı)

3. Investment allowance exemption (for amounts not subject to withholding under provisional Article 61 of Law No. 193)

4. R&D and design deduction (Law No. 5746)

5. Techno-initiative capital support deduction (Law No. 5746)

6. Technopark capital support deduction (Law No. 4691)

7. Other deductions in special laws that must be included in the additional tax base

Exemptions and deductions under Law No. 5520 and other laws must be shown on the relevant lines of the corporate tax return. Those without a dedicated line may be shown under "Other deductions and exemptions" or "Other deductions" and taken into account in determining the taxable base. Exemptions and deductions claimed in this way are also subject to the additional tax.

For corporate taxpayers whose 2022 returns include bases subject to reduced corporate tax under Article 32/A of Law No. 5520, those bases are also subject to the additional tax.

Exemptions and deductions outside the scope of the Additional Tax

The provision excludes certain exemptions taken into account by corporate taxpayers in determining their earnings:

1. Exemption for portfolio management income of investment funds and trusts (Art. 5/1-d)

2. Patronage refund (ristourne) income exemption (Art. 5/1-i)

3. Exemption for sale-lease-buyback transactions (Art. 5/1-j)

4. Exemption for income from asset leasing (sukuk) transactions (Art. 5/1-k)

5. Exemption for income from FX-protected deposit and participation accounts (provisional Article 14)

6. Investment allowance exemption (for amounts subject to withholding under provisional Article 61 of Law No. 193)

Certain deductions taken into account in determining the taxable base are also excluded:

1. Deduction for sponsorship expenses (Art. 10/1-b)

2. Deduction for donations and aid (Art. 10/1-c)

3. Deduction for donations for education and health facilities and dormitory construction (Art. 10/1-ç)

4. Deduction for donations for culture and tourism purposes (Art. 10/1-d)

5. Deduction for donations to aid campaigns launched by the President (Art. 10/1-e)

6. Deduction for cash donations to the Turkish Red Crescent and the Green Crescent (Art. 10/1-f)

7. Deduction for amounts set aside as a venture capital fund under Article 325/A of Law No. 213 (Art. 10/1-g)

8. Sheltered workplace deduction under Law No. 5378 on Persons with Disabilities (Art. 10/1-h)

9. Donations and aid deductible from corporate income under special laws

No additional tax is calculated on amounts that are entered on the "Other deductions" or "Other deductions and exemptions" lines of the 2022 corporate tax return but are not, by nature, deductions or exemptions and are entered only to calculate the tax base correctly (for example valuation differences between Turkish Accounting/Financial Reporting Standards and the Tax Procedure Law, foreign exchange gains of the borrowing entity arising from the appreciation of the Turkish lira on borrowings treated as thin capitalisation, reversal of severance pay provisions, and the deduction right under repeated Article 121 of Law No. 193 offset against tax debts and recognised as income).

Under double taxation treaties in force, amounts included in corporate earnings and deducted on the "Other deductions" and "Other deductions and exemptions" lines because Turkey has no taxing right, or because the income must be exempt in Turkey, are not subject to the additional tax. Income exempt from corporate tax under other bilateral or multilateral international agreements in force is also outside its scope.

For corporate taxpayers classified as micro or small enterprises under the "Regulation on the Definition, Qualifications and Classification of Small and Medium-Sized Enterprises", income earned in technology development zones and R&D and design deductions calculated on R&D and design expenditure in their R&D and design centres are outside the scope of the additional tax. These taxpayers must still calculate additional tax on their other exemptions, deductions and reduced-rate bases within its scope.

Taxpayers that qualified as micro or small enterprises as of 12/3/2023, the publication date of Law No. 7440, must submit the supporting certificate obtained from KOSGEB (the Small and Medium Enterprises Development Organisation) to their tax office by the end of the month following the month in which the corporate tax return is filed.

Calculation, declaration and payment of the Additional Tax

The base of the additional tax is the amount of deductions and exemptions and the reduced corporate tax bases determined under Article 32/A of Law No. 5520.

The additional tax is calculated at 10% on these bases, shown in the 2022 corporate tax return.

A rate of 5% applies to participation income under Article 5(1)(a) of Law No. 5520 and to foreign participation income and foreign branch income under subparagraphs (b) and (g) that bear a tax burden of at least 15%.

For gains on the sale of foreign participation shares and income from foreign construction, repair and technical services under subparagraphs (c) and (h), the additional tax is calculated at 10%. If documents showing that this income bore a tax burden of at least 15% in the source country are submitted to the tax office, the portion of the 10% tax corresponding to 5% will be refunded.

For taxpayers with a special accounting period, the additional tax is calculated on the deductions, exemptions and reduced-rate bases in the corporate tax return for the accounting period ending in 2023.

Taxpayers with a commercial loss in the 2022 return, those with a current-year loss due to exemptions, and those with no taxable base must also calculate additional tax on the deduction and exemption amounts they used in that period.

No additional tax is calculated on prior-year losses deducted in the 2022 corporate tax return.

The additional tax is paid in two equal instalments: the first within the corporate tax payment period and the second within the fourth month following that period.

No additional tax is calculated on deductions and exemptions used in 2022 returns filed before 12/3/2023 (the publication date of the Law) due to liquidation, merger, transfer or full demerger.

A summary table of the additional tax described above is set out below.

Exemptions and deductions subject to the Additional Tax