Law No. 7417 made significant amendments related to tax legislation. These amendments cover: introduction of new asset peace, a time limitation for notional interest deduction, increase in special irregularity penalties to be applied to certain acts, authorization of the Ministry of Treasury and Finance to determine the procedures and principles on the ultimate beneficial ownership notification; clarification of the effective date of the increased corporate income tax rate applied to certain financing entities.
New Developments
Law No. 7417 on Certain Amendments to Civil Servants Law and Certain Laws and Statutory Decree No. 375 (“Law No. 7417“), which was published in the Official Gazette dated 05.07.2022 and No. 31887, introduces various amendments related to the tax legislation. You may find the details of the asset peace introduced by the Law No. 7417 in our bulletin here. In this bulletin, the time limitation for notional interest deduction and other important amendments are summarized.
What does the Law No. 7417 introduce?
i. Implementation Period of Notional Interest Deduction Has Been Limited
As per Article 10/1-(ı) of Corporate Income Tax Law, Turkish resident companies are able to deduct 50% (this rate is applied as 75% if the capital is paid with cash brought from abroad) of the interest to be calculated over cash capital increase amounts and cash part of initial capital for newly established entities from their corporate income tax base. The deductible interest amount is calculated through the application of the latest “annual weighted average interest rate applied to loans provided by banks’ that is announced by the Central Bank of Turkey to the capital increases paid in cash and cash part of initial capital for newly established entities.
No time limitation has been envisaged to benefit from the interest deduction incentive since the effective date of the provision, i.e. 2015.
However, pursuant to amendment made with the Law No. 7417, the implementation period of the notional interest deduction has been limited to the accounting period in which the decision on the capital increase or the articles of association is registered at the establishment stage, and for the following four accounting periods.
Through the provisional Article 15 added to Corporate Income Tax Law, it is envisaged that notional interest deduction may also be benefited for the cash capital contributions made before the publication date of the Law No. 7417 and for the companies established for the first time before this date for 5 accounting periods, including 2022.
ii. Special Irregularity Penalties Has Been Increased
The amounts of special irregularity penalties applied in case of the failure to issue and receive invoices, expense slips, producer receipts, self-employment receipts that set outs in Article 353 of Tax Procedural Law and if the amounts different from the actual amount are included in these issued documents, and these documents are issued as paper instead of electronic documents have been increased based on amounts valid for 2022 as follows:
- The minimum amount of special irregularity penalty to be applied for each document was increased from TRY 500 to TRY 1,000.
- The upper limit for special irregularity penalties for each document type in a calendar year was increased from TRY 250,000 TL to TRY 500,000.
The amounts of special irregularity penalties applied in case of the failure to issue, use and keep retail sales receipt, receipt given to payment recording devices, entrance and passenger transportation ticket, delivery note, transport waybill, passenger list, daily rooming list etc have been increased based on amounts valid for 2022 as follows:
- The minimum amount of special irregularity penalty to be applied for each document was increased from TRY 500 to TRY 1,000.
- The upper limit of the special irregularity penalties that can be applied for each determination has been increased (i) from TRY 25,000 to TRY 50,000, and (ii) from TRY 250,000 to TRY 500,000 for a calendar year.
Special irregularity penalties to be applied in case of non-compliance with the reporting obligations to real or legal person service providers that carry out commercial activities in the electronic environment and/or real and legal person intermediary service providers that provide the electronic commerce environment for the economic and commercial activities of others regarding their commercial activities are as follows:
- As five fold in terms of first-class traders and self-employed (TRY 3,400 TL for the 2022) and second-class traders, farmers who keep books and taxpayers which are subject to single entry bookkeeping. (TRY 1,700 for 2022).
- As two fold in terms of other real or legal persons (TRY 880 for 2022)
Besides, in case of non-compliance with the reporting obligations for beneficial ownership, a special irregularity penalty will be applied to first-class traders and self-employed (TRY 3,400 for 2022) as three fold.
In addition, the special irregularity penalty applied to first-class traders and self-employed (which is TRY 3, 400 for 2022) will be applied as three fold in case of non-compliance with the reporting obligations for beneficial ownership.
The amendments made to special irregularity penalties will enter into force on August 1, 2022.
iii. Ministry of Treasury and Finance has been authorized to regulate the ultimate beneficial ownership notification
Tax Procedural Law General Communiqué Serial No. 529, published in the Official Gazette dated 13.07.2021, introduced an obligation for corporate tax taxpayers and other certain persons to file ultimate beneficial ownership notification. The amendment made to Tax Procedural Law by Law No. 7417 authorized the Ministry of Treasury and Finance to determine the scope of the ultimate beneficial ownership, to oblige to declare those falling within the scope of it, to determine the content, format, standard, period and method of filing, to make amendments on that, to determine the obligation to make the filing as per industries, taxpayer types or taxpayer status, to introduce and implement obligation to keep and submit information and notifications within this scope and to determine other procedures and principles.
iv. Effective date of the amendment to corporate income tax rate applicable to certain financial institutions has been clarified
Law No. 7394, published in the Official Gazette dated 15.04.2022, determined the corporate income tax rate applicable to the business profit of the companies within the scope of the Law No. 6361 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 as 25%. However, Law No. 7394 stated that it is effective “to be applicable to business profit in the 2023 accounting period” and this statement caused hesitations as to the amendment’s application to the periods following 2023.
Law No. 7417 provided that the amendment to corporate income tax rate is applicable not only for 2023 but also for the following years and it clarified the hesitations.
Conclusion
In addition to the new asset peace and limitation on notional interest deduction, the amendments made by Law No. 7417 not only clarified certain hesitations on the current legislation but also increased the special irregularity fines to ensure the taxpayers’ tax compliance. It would be helpful to follow-up the Ministry of Treasury and Finance’s communiqués to ensure to the compliance with the amendments.
