TAX NEWS NO: 2016/1
March 18, 2016
The Corporate Tax General Communiqué pertaining to the incentive capital increase in cash.
The Corporate Tax General Communiqué serial number 9 which contains explanations on the incentive capital increase in cash has been promulgated in the Official Gazette dated 4 March 2016.
As you may remember, with the Law numbered 6637 which was published in the Official Gazette dated 7 April 2015 a new clause had been added to the article 10 titled "Other Deductions" of the Corporate Tax Law for the purpose of encouraging capital increase in cash and explanations on the regulation in question were provided for your attention in our tax news no. 2015/3.
Afterwards, The Resolution of Council of Ministers numbered 2015/7910 which amended 50% deduction rate to be applied to cash capital increases for companies publicly held and investments with incentive certificates was published in the Official Gazette dated 30.06.2015 and explanations on the regulation in question were provided for your attention in our tax news no. 2015/7.
The General Communiqué aims to clarify grey areas which need in cash capital increase application.
1. The requirement to increase the capital in cash
It is strongly emphasized in the communique that the incentive covers only the capital increases through cash. As such, the amounts not remitted to the company's bank account in cash by the shareholders will not be taken into account in the calculation of the deductible amount.
2. The Contribution of equity items to capital
In the communiqué, it has been stated that capital increase via contribution of equity items already existing in the balance sheet will not be subject to deduction.
Therefore, adding equity items such as; capital reserves, profit reserves, retained earnings to the capital are not covered under this scope.
3. Capital increases financed by “due to shareholders” account
In the communiqué, it has been emphasized that the capital increases where balance sheet items are offset against each other, will not be taken into account in the calculation of the deductible amount.
In analogy to the above statement, although it is not clearly stated in the communiqué, the capital increases via the contribution of the receivables of company shareholders without an actual cash payment would be not considered in the calculation of the deduction amount.
4. The capital increase financed by loans/debts
The increase of share capital deriving from loan/debt arrangements owed to shareholders or related persons as described under Article 12 of Corporate Tax Code will not be considered in the calculation of the deduction amount.
The example concerning the subject in the communiqué is presented below;
Example: Mrs. D is a 50% shareholder of company A. On 4th of May 2015, Company A has lent 1.000.000 to Mrs D and has booked it as “due from shareholders”.
On 15th July, it has been decided to increase Company A’s capital in cash by 2.000.000 TL and 25% of this amount (500.000 TL) has been extended to company’s bank account by the shareholders.
The decision regarding the capital increase in cash has been registered to trade registry on 22th July.
Mrs. D has completed her due by extending 750.000 TL more to company’s bank account on 31th of July. However Mrs. D has still not paid back the 1.000.000 TL loan that she received from the Company on 4th of May.
The amount of 1.000.000 paid by Mrs. D for Company A’s capital increase will not be considered as capital increase in cash; due to the fact that the increase of share capital deriving from loan/debt arrangements owed to shareholders or related persons can not be subject to the deduction amount untill the debt of Mrs D., which materialized on 4th of May, is not completed to Company A, it is not possible for the Company to benefit from this incentive.
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