Significant tax amendments made by Law No. 7394

Law No. 7394 made significant amendments related to tax legislation. These amendments cover: an effective repentance mechanism for tax crimes and penalties; a successive offense mechanism in tax crimes and penalties; an increase of the upper limit on prison sentences for tax fraud crimes; VAT exemption for certain goods and services obtained within an investment incentive certificate; corporate income tax exemptions regarding investment funds and partnerships; and an increase of the corporate income tax rate applied to certain financing entities.

New developments

Law No. 7394 on Certain Amendments to Utilization of Immovable Properties Belonging to the Treasury and to the Law on Certain Amendments to Value Added Tax Law and to the Law on Amendments to Certain Laws and Statutory Decrees (“Law No. 7394“) introduced various amendments related to the tax legislation. This alert covers the significant amendments made by Law No. 7394.

What do the amendments made by Law No. 7394 mean?

Amendments regarding tax crimes and penalties 

• With the amendment made to Article 359 of Tax Procedural Law No. 213 (TPL), Law No. 7394 increased the upper limit of prison sentences for tax fraud crimes to five years for crimes with an upper limit of three years, and to eight years for those with an upper limit of five years.
• Meanwhile, an effective repentance mechanism was provided for tax fraud crimes to be applicable in the investigation, prosecution and execution stages as follows:

i. If a tax loss was incurred due to the actions covered under Article 359 of the TPL, the prison sentence would be written off by half if the following is paid during the investigation stage:

• All of the assessed tax, delay interest and late payment interest
• Half of the imposed tax loss penalty and late payment interest pertaining to it

If the indicated amounts are paid during the prosecution stage and before the decision is rendered, one-third of the prison sentence to be imposed will be written off.

The abovementioned repentance provisions would also apply to the cases in the investigation and prosecution stage at the date when Law No. 7934 was published. In that case, the amounts should be paid until the decision is rendered.

ii. If no tax is assessed or a tax-related penalty is imposed, the prison sentence to be imposed would be written off by half.

iii.Those who are sentenced and at the execution stage can benefit from the repentance provisions if they pay all of the assessed tax, delay interest and late payment interest, together with the half of the imposed tax loss penalty and late payment interest pertaining to it. The payment should be made within one year following the entry into effect of Law No. 7394 (i.e., until 14 April 2023). In that case, the prison sentence would be decreased by half.

iiii.The cases that were at the first or final appellate stage when Law No. 7394 was published should be reversed if they require favorable consideration due to the amendments made by Law No. 7394.

For the application of the repentance provisions, which rely on the taxpayers’ discretion to be availed of, no lawsuit should be filed for the assessed taxes and penalties. If a lawsuit was filed, the lawsuit should be withdrawn. In addition, no appellate application should be made; if an appellate application was made, this application should be withdrawn.

• Article 43 of the Turkish Criminal Code No. 5237 regarding the “successive offenses” would apply if a tax crime regulated under Article 359 of the TPL is committed within more than one calendar year or taxation period and is within the scope of the execution of the decision on the same crime. Accordingly, in the case of crimes committed within more than one calendar year or taxation period, separate sentences will not be imposed for each crime; instead, one sentence would be imposed and increased by one quarter to three quarters. Before the amendment, the successive offense provisions used to apply only to crimes committed within the same calendar year or taxation period.

• With the amendment made to Article 367 of the TPL, Law No. 7394 provided that if it is found during investigation or prosecution that another person committed the crime under Article 359 of the TPL, or that the crime was committed together with another person, no separate tax crime report or report evaluation committee opinion would be sought for them.

Amendments regarding VAT

       i. Exemption for investment incentive certificates regarding the manufacturing industry and tourism

• With Temporary Article 37 amended to Value Added Tax Law No. 3065 (VAT Law), Law No. 7394 introduced a VAT exemption for the goods and service deliveries for construction works within the scope of the investment incentive certificates related to the manufacturing industry and tourism.
• This exemption applies until 31 December 2025.

       ii.Exemption for engineering services provided for the manufacturing of electrical motor vehicles

• ​​With Temporary Article 42 amended to the VAT Law, Law No. 7394 provided a VAT exemption for the taxpayers who avail of the project-based incentives under Law No. 6745 and manufacturing electrical motor vehicles developed as a result of the R&D activities realized exclusively in Turkey in order to develop technologies for completely eliminating exhaust oscillation causing greenhouse gas.
• The exemption applies only to the engineering services provided for the development of the mentioned vehicles and that are included in the investment incentive certificate. The exemption applies until 31 December 2023.

Regarding both of the exemptions provided under the abovementioned Temporary Articles 37 and 42 of the VAT Law, if the investment subject to the investment incentive certificate could not be completed, taxes that are not collected in time would be collected as a tax-loss penalty imposed and delay interest applied. The statute of limitations for these taxes starts running as of the calendar year following the date when the event caused the imposition of the assessment and penalty (i.e., when the investment was not completed).

In addition, taxes incurred during the goods and service deliveries that are subject to the incentive can be deducted from the calculated taxes; it can also be refunded if it could not be deducted.

Amendments regarding corporate income tax

• With the amendment made to Article 32 and Temporary Article 13 of Corporate Income Tax Law No. 5520 (CITL), Law No. 7394 increased the corporate income tax rate to 25% for companies within the scope of Law No. 6361 on Financial Leasing, Factoring, Financing and Saving Financing Companies, electronic payment and money institutions, authorized currency entities, asset management companies, capital market institutions, insurance and reinsuring companies, and retirement companies. This amendment came into effect with the publishing of Law No. 7394. The amendment is applicable for returns to be filed as of 1 July 2022 and to the business income pertaining to the taxation period starting on 1 January 2022.
• With the amendment made to Article 5 of the CITL, Law No. 7394 provided that the following would be covered by the corporate income tax incentive:

1. Income generated from the refund of the participation shares from full taxpayer venture capital funds and other investment funds
2. Gains from appreciation of the investment fund participation shares as securities

• Income of funds and partnerships whose main fields of activity are management of real estate, real estate projects and rights depending on the real estate are excluded from the scope of the exemption for 2023.
• At that point, both the abovementioned funds and partnerships whose main fields of activity are management of real estate, real estate projects and rights depending on real estate, are excluded from the scope of the exemption. The increase of the corporate income tax to 25% for the mentioned financing institutions has given rise to various discussions as to their effective dates because, although these amendments were meant to be permanent, the wording of Law No. 7394 within the provisions on the effective dates thereof indicates that these provisions apply only for 2023.
• Meanwhile, sales of the investment fund shares are included in the scope of the exemption provided for the income generated from the sales of participation shares, promoters’ stocks, dividend shares and rights of priority that are held for at least two years. Accordingly, 75% of the income generated from the sale of the investment fund participation shares that are held for two years would be exempt from the corporate income tax.

Conclusion

Law No. 7394 includes an effective repentance mechanism for the implementation of tax crimes and penalties, successive offense practice regarding tax crimes and penalties, an increase in the upper limit of the prison sentence subject to tax fraud crimes, VAT exemption for certain goods and services purchased based on an investment incentive certificate, corporate tax exemptions for some investment funds and partnerships, and an increase in the corporate income tax rate applied to certain financial institutions. We are of the opinion that Law No. 7394 — which has given rise to discussions regarding the effective dates of some of its articles — should be carefully evaluated and tax practices should be guided by it accordingly.