Arzu AKÇURA, Director (YMM) – International Tax

FX Protected Turkish Lira Time Deposit and Participation Accounts was introduced with the Turkish Republic Central Bank (“TRCB”) Communiqué in December 2021, which was subsequently followed by the Law No. 7352 published in January 2022 with the relevant Corporate Income Tax (“CIT”) Communiqué published in February 2022 addressing the several corporate income tax exemptions attached to the conversion of foreign currencies in USD, EUR and GBP to TRY to be deposited in FX protected Turkish Lira Time Deposit and Participation Account ultimately by the end of 2022 by the corporate taxpayers. 

Reading through the TRCB Communiqué and the Law No. 7352 and the relevant CIT Communiqué;

  • According to the TRCB Communiqué, the banks and the other financial institutions specified by the TRCB are excluded from the said application.
     
  • TRCB Application Instruction refers to the foreign currencies in USD, EUR and GBP sitting in Turkish bank accounts or in foreign bank accounts of the corporate taxpayers on the balance sheet dated 31 December 2021, whereas the CIT Communiqué only refers to the foreign currencies owned by the corporate taxpayers in their balance sheets dated 31 December 2021. Additionally, it is stated that receivables and advances given will not fall within the scope of this application (exemption).
     
  • TRCB Communiqué states Turkish banks will open FX protected Turkish Lira time deposit  and participation accounts with a maturity of 6 months or 1 year for legal persons, whereas in the Law. No. 7352, the maturity is stated to be at least 3 months. Accordingly, given that in the relevant TRCB Communiqué, the banks can open TRY accounts with a maturity of 6 months or 1 year for legal persons, it is observed that currently it will not be possible to open a TRY account with a maturity shorter than 6 months by the legal persons. 
     
  • The CIT Communiqué provides several numerical examples for the determination of CIT exempted fx gains. 

Please find below the main takeaways with my brief explanations based on the TRCB and CIT Communiqués on the FX protected TRY time deposit and participation accounts. 

As per TRCBCommuniqué on Supporting the Conversion to FX Protected Turkish Lira Time Deposit and Participation Accounts (“TRY Accounts”), Turkish resident real and legal persons converting their foreign currency accounts and participation accounts to TRY Accounts will be supported. Accordingly;

  • Turkish resident real persons mean those whose legal place of residence is Turkey including Turkish citizens who are workers, independent service professsionals or independent business owners outside Turkey,
     
  • Turkish resident legal persons mean those whose legal place of residence is Turkey excluding banks and other financial institutions designated by TRCB.
     
  • The balances of foreign currency and participation accounts in USD, EUR and GBP as of 20 December 2021 and 31 December 2021 owned by Turkish resident real and legal persons respectively will be converted to TRY Accounts, if requested, based on the conversion rate.
     
  • The time deposits or participation accounts in foreign currency sitting in Turkish or foreign banks of Turkish resident real and legal persons will benefit from the application as per TRCB Application Instruction of TRY Accounts.
     
  • The Turkish banks will open TRY Accounts with a maturity of 3 months, 6 months or 1 year for Turkish resident real persons; while for Turkish resident legal persons TRY Accounts with a maturity of 6 months or 1 year will be opened.
     
  • If the rate at the maturity-end is lower than the conversion rate,  the account holder will receive the principal amount with interest/dividend.
     
  • If the rate at the maturity-end is higher than the conversion rate,
     
    • If interest/dividend amount>fx difference, the bank will pay the principal amount with interest or the participation account balance.
       
    • If interest/dividend amount<fx difference, the bank will pay the principal amount with interest/dividend  + “fx difference-interest/dividend”. The TRCB will pay the respective bank the “fx difference- interest/dividend”.
       
  • In case of withdrawal of the amount sitting in TRY Accounts prior to the maturity-end, TRCB will not make a payment with regards to fx difference.
     
  • The supports are provided only for one-time for TRY Accounts opened as per the said legislation.

Following the TRCB Communiqué, the Law No. 7352 was published in the Official Gazette dated 29 January 2022 and entered into force on the same date. Accordingly, a temporary Article has been added to CIT Code providing several CIT exemptions to the corporate taxpayers who will be converting their foreign currencies sitting in their balance sheets dated 31 December 2021 to TRY and opening TRY Accounts with a maturity of at least 3 months. Further explanations are provided in the CIT Communiqué No.19 which was published in the Official Gazette dated 11 February 2022 and entered into force on the same date. Accordingly;

CIT Exemptions for those who make the conversion to TRY and open TRY Accounts by 17 February 2022;

  • Taxpayers following a calendar year as their fiscal year;
     
    • FX gains resulting from period-end valuation for the period 1 October 2021 -31 December 2021 will be CIT exempted. 

  • If there are several movements in the foreign currency account, fx gains to be exempted will be determined on FIFO basis. 
     
  • If there are more than one bank account in same foreign currency, such accounts will be considered together (consolidated) in the calculation of the fx gains to be exempted.
     
  • If there are bank accounts in different currencies (USD, EUR or GBP), the fx gains that will be exempted will be considered in the aggregate.
     
  • If the foreign currencies are partially converted to TRY and deposited to TRY Accounts, the ratio of the amount of the converted foreign currencies to the amount of foreign currencies (in USD, EUR or GBP) sitting in the balance sheet dated 31 December 2021 will be taken into consideration in the determination of the CIT exempted fx gains.
     
    • FX gains between 1 January 2022 and conversion date will be CIT exempted.
    • Interest or dividend income accrued at quarter-ends  until the end of the last quarter prior to the maturity date will be CIT exempted.
    • Interest, dividend income and other income earned at the maturity date will be exempt from CIT.

  • Taxpayers following a special fiscal year;
     
    Regardless of their fiscal year, if these taxpayers will issue a balance sheet dated 31 December 2021 and convert their foreign currencies, if requested, to TRY and open TRY Account as aforementioned, will benefit from CIT exemptions. Accordingly;
     
    • FX gains resulting from period-end valuation for the quarter (advance CIT period) including the date of 31 December 2021 will be CIT exempted.
    • FX gains until the conversion date will be CIT exempted.
    • Interest or dividend income accrued at quarter-ends  until the end of the last quarter prior to the maturity date will be CIT exempted.
    • Interest, dividend income and other income earned at the maturity date will be exempt from CIT.

CIT Exemptions for those who make the conversion to TRY and open TRY Accounts after 17 February 2022 and until 31.12.2022;

    • FX gains between the beginning of the quarter (advance CIT period) including the date of the conversion and the conversion date will be CIT exempted.
    • Interest or dividend income accrued at quarter-ends  until the end of the last quarter prior to the maturity date will be CIT exempted.
    • Interest, dividend income and other income earned at the maturity date will be exempt from CIT.
       
  • The amount of the foreign currencies (in USD, EUR and GBP) that will be converted to TRY to be deposited in TRY Accounts and benefit from CIT exemptions cannot exceed the foreign currency amounts sitting in the balance sheet dated 31 December 2021.
     
  • The WHT rate applies at 0% on interest/dividend income on TRY Accounts.
     
  • F/X losses, if any, incurred will be deductible from CIT base.
     
  • Receivables or advances given will not benefit from the said exemptions. The foreign currencies sitting in bank accounts (foreign currency deposit accounts/participation accounts) in the balance sheet dated 31 December 2021 are eligible to benefit from the CIT exemptions. 
     
  • Besides corporate taxpayers, income taxpayers determining their earnings on balance sheet basis are also eligible to benefit from the said exemptions under the same conditions. 
     
  • If the conversion from foreign currencies to TRY is made prior to 29 January 2022, i.e. the date the Law No. 7352 was published in the Official Gazette, the said CIT exemptions will still be benefited provided that TRY Accounts are opened in accordance within the relevant regulations of TRCB.
     
  • In case the money is withdrawn from the said TL deposit/participation account prior to the maturity date, the CIT exemptions will be lost and will be collected with tax loss penalty and delay charge interest.