The Law on Amendment to Certain Laws and Decree Laws" (Law No: 6637) has been promulgated in the Official Gazette dated 7 April 2015.
According to Article 8 of the Law numbered 6637, capital companies except for those that operate in the sectors of Finance, Banking and Insurance such as financial leasing, factoring, financing companies, asset leasing companies; and Public Economic Enterprises are allowed a deemed interest deduction that is equal to 50% of the interest calculated on the cash capital increase in the registered capital of the existing corporations or cash capital contributions of the newly incorporated corporations based on the average interest rate announced by the Central Bank of Turkey for TL denominated commercial loans, from their Corporate tax base of the relevant year.
The deduction will be allowed starting from;
- the fiscal year in which the resolution regarding the share capital increase has been registered for the existing companies, or
- the fiscal year in which AoA has been registsred for the newly incorporated companies
and will be available for utilization for each subsequent fiscal year.
The amount of decrease in share capital is not considered in the calculation of the deduction in case of a share capital reduction in the subsequent years.
The deemed interest deduction will be calculated on qualified cash equity that satisfy the below conditions;
- the interest deduction amount will be calculated for the period starting from the month (inclusive and where the month is considered as a full-month) in which the cash contribution is realized until the end of the relevant fiscal year,
- the interest amount that cannot be deducted from the relevant corporate tax base due to insufficient amount of tax base will be carried forward to the subsequent fiscal year,
- the increase of share capital deriving from the below sources will not considered in the calculation of the deduction amount;
- in-kind share capital contributions,
- mergers, take-over and spin-off,
- injection of other equity accounts into share capital,
- cash share capital contributions financed by loan/debt arrangements owed to shareholders or related persons as described under Article 12 of Corporate Tax Code
The Council of Ministers is given the authority to amend the percentage of deduction between 0% and 100% for all companies and increase up to 150% only for publicly trading Companies by considering the free float rate based on the below criteria;
- Size of assets,
- The legal personality of shareholders,
- Number of employees,
- Annual net sales revenue,
- Whether or not the income derived from this cash equity financing is in nature of passive income such as interest, dividend, rental income, license fee, capital gains derived from sales of marketable securities,
- Whether or not the cash equity financing is utilized for investments that are provided with Investment Incentive Certificate ( IIC),
- The use of cash equity financing such as machinery and equipment or land investments,
- Regions, industries, activities
For instance, suppose that the company has made a capital increase at an amount of £ 1.000.000 in July 2015. Assume that the interest rate announced by the Central Bank of Turkey for TL denominated commercial loans is % 16.
In line with the above data our calculations will be as follows;
The amount to be deducted from the corporate tax base
= Increased Capital Cash Amount x Central Bank Interest Rate x Period (Months) x Discount Rate
The annual deduction that the company would benefit;
= 1.000.000 x 0.16 x 50%
= £ 80.000
Pro-rata calculation for the above mentioned period:
(80.000 / 12 months) x 6 months = £ 40.000.
The net effect of this methodology to corporate tax return will be 40.000 x 20% = £ 8.000.
Please kindly note that the Law has been published in the Official Gazette, however, the Article will enter into force as from 1 July 2015.
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